Hilton Grand Vacations Inc. ($HGV)

Well, that's going to be the last fireside of the day and who better to round it out than Hilton Grand Vacations, President and CFO, Dan Mathewes, Dan. Thanks for doing this.

Thanks for having me. Really appreciate it.

Just from a long-term standpoint, you've articulated an algorithm, people always use algorithm for consistent top line growth, EBITDA growing faster and strong free cash flow conversion, what are some of the major puts and takes to think about within that as we look in 2026 and the guidance that you've outlined, I think it's 8% at the midpoint after you raised your expectations after 1Q versus the kind of typical algorithm? Or is this -- is 2026, would you say a kind of normal year?

No. 2026 is definitely not a normal year. I think when you roll into '27, that's when we get to a more normalized algorithm. I think when you think about Hilton Grand Vacations, I think it's a very interesting time for us. This year, we're lapping the launch of HGV MAX to the Bluegreener -- the Bluegreen organization that we launched November 8 of 2025. So relatively tough comps the first 3 quarters and then returning to growth into Q4 when we think about it from a VPG perspective, but also just from an organization standpoint, over the past 5 or 6 years, we've acquired two organizations had a very robust inventory spend and coupled with a heavy level of integration work. So when you think about the organization today, the company is almost tripled the size, more stable environment. We're in an environment where the inventory spend is down materially from the neighborhood of $400 million to closer to $300 million. In addition to that, integration spend, which last year was roughly $200 million is coming down to $150 million. Next year, we'll drop to $75 million and then completely disappear. So this return to algorithm as well as a substantial source of cash flow less investment in both inventory and integration, I think is pretty meaningful. And I think it's a good time to look at HGV.

Yes. inflection in free cash flow sounds good. What -- when you think outside just the financials, what are some of the core differences that you would describe -- or ascribe to Hilton Grand Vacations versus others in the timeshare industry or even if you look maybe more broadly at the lodging ecosystem?

Sure. Look, I would like to think about it more of the vacation space in general. And when you think about our product, I think we're uniquely positioned people constantly or at least in the last year, I mean, the rhetoric about the [ K-shaped ] economy has been fairly robust, and our product is uniquely positioned to allow you to modulate between the high mark or the low mark. If it's a great year, you have the ability to fly lay flat all the way to Hawaii today and the great resort go out every night to spend money on every short [ excursion ] you possibly can think of and spend that $40,000 family vacation. At the same time, if it is not that robust of a year for you and you're an existing owner, you drive to Myrtle Beach use the kitchen, 90% of our units have kitchens, use the kitchen, have a very economical stay, sit by the swimming pool or the beach, have a great time, and you can do that year after year without changing your ownership whatsoever. So the value proposition and the flexibility and the optionality that our product provides, I think, puts us in a unique perspective within the industry itself, vacation industry. Within the industry, I think we're able to capitalize on our ultimate access, our experiential programs that we have out there to really provide a unique offering to our owner base.

So that sounds is we went through the algorithm free cash flow inflection, sitting at the top of the K-shape, we can kind of pivot between different brands. what keeps you up at night? Or what do you think are the general risk or competitive threats that you try to think about facing the business and work around?

So naturally, I mean, I think people think about sales, right? I think as investors naturally look what the sale is going to do. And I would tell you that our sales force is the best in the -- and it's amazing what they can produce. When people ask me what keeps me up at night, it's really more tour flow than anything else. Where are those leads going to come from. And we have an amazing partnership with Hilton. The partnership is a 100% variable. So what is good for us, it's good for them. So when we come with an idea that will help drive tour flow from that partnership, they are all there. We are also looking to expand partnerships with the acquisition of Bluegreen, we acquired a JV with Bass Pro. We also acquired a sales and marketing agreement with Bass Pro. We're in virtually every Bass Pro store out there that provides us another touch point with the consumer this one, not a call transfer program, which is very much akin to what we have in Hilton, but an opportunity to see people face-to-face and sell them a package. Which is also very consistent with the program that we run with Hilton. If you go to a Hilton in a location where we're not located, in some cases, it's locations that we do have product. If you go to the concierge, it's not unlikely that at some point during that conversation after they help you getting a dinner reservation or whatever it might be, that they will attempt to sell you a package. That's because that's a Hilton Grand Vacation employee sitting in Hilton Hotel driving another touch point with... We have other partnerships that are meaningful Japanese airlines, Hawaii airlines through Alaska Airlines now also Great Wolf, but really expanding the opportunity to drive tour flow, in particular, new buyer tour flow to get more people into the system. That's a real focal point that we kind of in our DNA, so to speak.

I think you're a little over 70% existing owners in terms of contract sales. Currently, what is the right mix? And as you're thinking about that or flow, should we anticipate you're going to go after more of these partnerships? Or is it more about monetizing what you have?

Combination of both. So when you think about the mix, we're looking -- we would be happier with a mix of new buyers approaching 35% versus the 30% that we sit today. From a tour flow growth perspective, we are always looking for opportunistic partnerships that make sense on both ends. But again, still look to monetize our existing owner base where it makes sense. And a great example of that is the recent transaction that we did with Blackstone, where we acquired Elara that came with owners who had a lot of equity in that project itself. In Elara, there was $1.9 billion worth of equity in that fee-for-service deal with the closing of that transaction, those owners now have the ability to upgrade out. And just as importantly, we have owners outside of that ecosystem that can upgrade in. So holistically, it creates environment for us. So that's just another focal point.

Do you generally view that as kind of a better return profile than greenfield development. Now there are other opportunities that look like that, that are out there that you could...

So that particular relationship, we had structured the deal to always allow us to step in and buy the tail of that inventory. That transaction -- we stepped into that traction back in 2011. We own 25% of the entity, they own 75% and as you can imagine, Blackstone is while they were in the business of timeshare using our name as a brand name, being in timeshare and perpetuity is not their core business. So naturally, it makes sense for us to step in and buy that. Are there other opportunities like that? We do have other fee-for-service partners that we would probably look to buy out just given where they are in their life cycle. It's probably 5, 7 years away before we cover it. So there's a little bit of runway. A lot of runway. Yes. But I mean, today, fee-for-service makes a dramatically smaller piece of our business than it did pre-COVID. Pre-COVID was closer to 50% today, prior to the Elara transaction it was just under 20%, post Elara transaction it will be in the low double digits.

Are there opportunities to improve costs or even conversion rates as we think about existing versus new buyers?

Yes. No, absolutely. I mean that's part of some of the initiatives that we've kind of owned since the acquisition of Diamond in particular. But I think this speaks heavily to ultimate access, ultimately access is the experiential platform that we are using the curate and drive higher owner demand. Effectively, we provide an opportunity for owners to have a great experience. And when people come and stay with us and have a great experience, they tend to buy more. And the VPGs on owners of tour that have experienced an ultimate access, significantly outperform owners who or who have not come on parent platform.

Is there an upper bound in terms of how much -- how many upgrades you could have in the system or how to think about where you are in that life cycle of upgrades?

Sure. There's always a balancing act. I mean, at some point, you can sell timeshare to someone to the point where it just doesn't economically make sense. So we try to be very cognizant of that. We're trying to sell a balance. When you come in, we cannot dictate what you're going to buy. We trying to analyze what your position is and our particular ecosystem, what your likes are, what your dislikes are, and we tell you what you believe is the most opportune product for you? Or in many cases, an owner -- experience owner, they know exactly what they want to buy and happy to provide that.

How would you characterize the demand environment today, there's a lot of questions and concerns around fuel prices, interest rates, et cetera. Is that spilling over? I realize it's the higher end of the cash, there's probably some exposure to, as you said, higher airfare, but what are you seeing from a demand environment now? And then how might that compare as you think about it longer term?

Sure. So from a demand environment, what I would tell you is I think the acquisitions of both Diamond and to a lesser degree, Bluegreen have been very helpful from a risk perspective, in particular, on oil price. When I think about it and I think about oil going pick your mark $3 gas going from $3 a gallon to $5 a gallon. Is that impactful? I think it is. I'm not trying to be tone-deaf to it. But I do -- I am a big believer in the fact that if prices go up $2 per gallon, does that change your decision to take a vacation in particular to a drive through market. I think the answer is we're fortunate that about 70% of our owners live within a 4-hour drive of one of our properties, which I think is very helpful. Does it change your perspective? Does it allow you to modulate to get back to that first comment that we were talking about change your perspective on. Do I go to Hawaii versus do I go to Gothenburg or Virginia Beach or Little Beach, maybe. But it's all about optionality. And that's why we think [indiscernible].

One of the other announcements that you had was around inventory optimization, and this is something that one of your peers has also talked to -- and I guess there's a little bit of a back and forth that I think about. One is that this has been a segment we think about Club management that has been viewed as high visibility recurring -- then at the same time, we're removing some of these from the base, but it seems like it's a positive from an EBITDA standpoint. So help us understand kind of what drove that review and how you think about maybe the ideal portfolio composition from here?

Well, I think when you look at Hilton Grand Vacations over the last 5 years, we've been dealing with a lot of integration with the two acquisitions, right? One of -- part of that narrative that we've had since the beginning of the acquisition in Diamond is acquired 92 resorts. Diamond was a culmination of, I believe, roughly 12 acquisitions. Not all of those resorts were of the same statute. Not all of the resorts were going to be rebranded. We've always talked about almost a couple of dozen not be being rebranded. Some of those due to the fact that they just need the investment required to put the Hilton brand on that just did not make sense financially from our perspective. So when we have a chance to breathe, doing a little bit more focal work on the inventory portfolio. And the first thing we did was, okay, let's look at properties that from a cash flow perspective, negative. Rental cannot offset -- rental combined with the resort management fee cannot offset the developer maintenance fees. We have any of those negative property. Are they branded Hilton or are they not branded Hilton? If they are not, move up the chain on a decision point. Is there a potential for a special assessment for those who actually do own those properties? Because in that kind of scenario doesn't really behoove them as well, those individual owners. Is it a property that is highly utilized by our owner base? None, you also move up that decision. So we identified eight resorts that were kind of talk of a better term, low-hanging fruit, the easy ones to identify. And we've entered into an agreement with a third party to step into our shoes and ultimately sell those. Now avoiding confusion, this is not a growth strategy. This is truly an inventory optimization strategy. Cash flow beneficial to us, ultimately, beneficial to owners, no special assessment. They're not being heavily utilized. So trying to maximize the experience for everybody involved. And again, these are properties that were not rebranded already and had no plans for future. It's a specific subset when it comes to our particular business.

You talked about having some of the best sales folks in the industry. There's been some commentary back and forth about, a, is there peers that are trying to get -- be more aggressive of getting salespeople. And are you seeing that impact your retention metrics? Or are you seeing any change in compensation structure associated with sales folks in the industry?

So are they in the room here because they are here somewhere at the conference, there has been one competitor has been very vocal about it. And look, what I would tell you is you can walk through any of our sales centers and you'll find individuals who've worked for travel and leisure who worked for Marriott vacation and I'm sure the same is if you walk through our. We want to protect and do we want to retain our best salespeople without a doubt. Will we take initiatives to do so? Of course we will. But at the end of the day, ultimately, you see movement across the spectrum in any given day. So something that we focus on, of course, but it's normal for us.

You talked to trying to drive incremental new tour flow, new owner flow. How distribution channels changed over time? And are there new ways that you're thinking about trying to go after the new owners or that you see the biggest opportunities to improve?

So I think that goes back to our earlier conversation around driving new partnerships, et cetera. Now if you want to focus on one of the most important partnership we have, which is with Hilton. If you go back to 2008 and progressed nicely, time frame, but just all transfer program with Hilton was very robust, a game changer in the industry without a doubt. But I'd also with the wage or I would imagine everybody in this room when is the last time we actually called a hotel. It's probably a lot fewer today than it was 5 years ago, definitely 10 years ago, et cetera. . So how do you capture those call transfers some of those methods are going to new forms or digital, focused on that. And another way, looking at different ways to attack the same footprint. Back in 2015, we were not doing field package sales with Hilton. That's where we sit as their concierge. So you enhance programs like that to maximize package sales as well as the partnership pro.

A follow-up to the -- making a call to a hotel, which is when the last time anybody is call the hotel and not have to say representative almost immediately to try to get a human on the phone very quickly. Maybe turning to margins. What are the primary opportunities both near term and long term to improve the real estate contribution margins as we think about cost of product versus marketing versus other costs?

Well, I think when you think about our inventory strategy going forward and you contrast that sharply to where we were in 2017 and 2018, at that point in time, we were in an organization that did about $400 million in EBITDA. And we had an inventory program that at the time in 2018, we made a commitment to about $1.4 billion in inventory, all in construction and conversion. What you see us focus on very much today is looking for very capital efficient. It doesn't mean that we're going to focus only on recaptured inventory, although that will be a very large component. We still do new builds or conversions. One excellent example of that is a property that we've entered into an agreement with in Nashville. We structured it as a just-in-time transaction where we can match cash inflows and outflows based on demand that we see for the product. In this particular instance, we've also built in additional flexibility in where we inventory as early as 2028, but defer it all to 2033. So having that kind of flexibility, I think, is again, focus on the recaptured inventory also drives a lower cost of product. Recaptured inventory, generally speaking, will have cost of product in the neighborhood of 5%, depending on certain nuances, it could be just at the 10%, but it's in that ballpark versus new construction, which typically speaking, our experience has been closer to 25% to even as high as 30%.

What's like the natural turn of the owner base at this point?

Well, if you look at our annualized default rate, it's meaningfully higher than it was prior to acquisition, but that's very consistent with what the acquisitions were meant to accomplish. We have entry price point now, which is clearly geared towards a lower net worth of lower household income demographic. That also comes with a higher delinquency and the higher default rate. So it's part of the business. But when you think about the natural churn, I think about the annualized default rate and prior to any acquisition, it was as high as 6%. And today, it's slightly over 10%.

That -- a large percentage of your owners who have already paid off.

Including total natural attrition. It's the natural attrition with legacy HGV in the neighborhood of 2% to 3%, and it's probably north of 5% plus with the acquisitions that you get to recapture. And on that front, just to remind the audience, I mean, we are in a period of accelerated capture right now just because during COVID, both Diamond and to a lesser degree, Bluegreen pause their recapture. So we are catching up on those that were halted. .

That's helpful. Since you're talking about default, let's turn to the financing portfolio a little bit. There's been some debate, it seems like over the trend line of delinquencies, even investors might be reading the Wall Street Journal and hearing about delinquencies of credit cards moving higher. What are you seeing in your portfolio that helps you think about the health of the consumer who -- and the health of the financing receivables?

When you look at the environment today, I think you see a lot of strength in the consumer more so than I think you would have assumed you would have seen given all the dynamics that are going on today. But construction is strong. Unemployment is still low. We -- as we talked about on our last call, we saw delinquencies typically, what we look for to be a leading indicator of future performance is that 30- to 60-day bucket. We saw those stable to even improving year-over-year. We saw our annualized default rate year-over-year improved honestly, but an improvement nonetheless. So we see strength. We also are very focused on improving the underlying dynamics of that portfolio. So during the course of the last 12 months, we've actually changed our underwriting practices to enhance the equity at the table. One of the more -- It's been more. Yes. So not uncommon in the industry, but there was a program that Bluegreen was running where they allowed people to upgrade without any additional equity out. We eliminated that late last year, Q2, and we're now requiring additional equity down.

It's a slippery slope, with no equity down.

It's a slippery slope. You definitely see an increase in default. You'll see optics on the contract sales, but -- and will pay for it later.

EBITDA and no free cash flow, potentially.

Really requiring that extra equity down has helped us. And in fact, the cash down at the table for Bluegreen is 50% higher than where it was in 2024.

So with that all in mind, I guess there's the legacy portfolio, the new portfolio where you're changing things versus where it was before. What was the implication then for what the right kind of provision is for this combined portfolio and how that might evolve over time?

I think if you looked at the three companies separately and just did the math that what was the weighted average loan loss provision be on a quarterly basis or on an annualized basis, rather, you would have seen that the combined entity would probably be close to 20%, plus or minus. Given the changes in the underwriting practices that we've made at both Diamond and Bluegreen, coupled with some enhancements from a sales practice standpoint, we feel that the appropriate loan provision is that mid-teens.

Great. You also articulated a financing optimization program where you're going to be targeting a 70%, 80%, and I believe securitization of receivables just remind us of how that structure works. What drove the change there and how it impacts liquidity and access to cash?

Yes. No. We historically at Hilton Grand Vacations, not been as robust of an ABS issuer as some of our competitors. That started to change at the time of spend, and we've got a very robust platform now even today, we've been one of the innovators in particular, which you probably saw last year, we introduced timeshare securitizations to the Japanese financial markets. It was effectively creating a new financial instrument in Japan. And it was a healthy offering, JPY 9.5 billion or USD 85 million. It sounds better when you said in Yen. But the interest rate is extremely favorable to the U.S. The interest rate on that deal was 1.4%, the most recent transaction that we did in the U.S., the $500 million deal in April, and that was at 5.1%. So clearly, the interest rate arbitrage is on that front. I'm sorry, I think I dodged your question completely.

No, no, then so how does that live?

The finance business optimization. So we're much more of a serial issuer today than we were, and we're actually at 70% -- a little north of 70% of receivables securitized today. And it was really trying to annualize that where we're consistently at that level. And we've used that cash to fund integration as well as share repurchases. And we're effectively at that run rate. And by the end of the second quarter, we'll have that fully finally. .

When we think about -- so clearly, you can get a little bit more consistency in terms of tapping that cash flow, is there any change in terms of how to think about the cyclicality of your free cash flow then because of this? Like does this actually reduced cyclicality in the long term, it ultimately will. In the short term, you still have a nuance in between timing. Is there any cost differential for this relative to just tapping the...

Yes, there is. And that's why we indicated when we originally launched the process around [ $25,000 ]

And going back to the Japan count because that's a lower cost wanted to hedge that? And two, is that something that you'll pursue simultaneously with this and there's still opportunity to continue to build on it?

There's still an opportunity to build on it. We have about 75,000 owners in Japan. So we're well positioned to do that. What I would tell you is it's a bit of a competitive advantage today being able to tap that market, but that's not what we want it to be. We really want our peer set and group issue securitizations in Japan. The more liquidity, the more knowledge about the product, healthier it will be for all of us. Now that being said, we recognize we have to be the pioneers just given our structure versus our competitive set. So we'll be back in the Japanese market this year. We're changing the structure of the original transaction, the original transaction with Japanese owners and borrowers for -- with Japanese asset backing that facility. The next deal will be Japanese owners that Japanese collateral as well as U.S. collateral. And ultimately, we're looking to bring in U.S. borrowers and U.S. collateral into that mix, too. And by the time we do the third or fourth deal, hopefully, some of our competitors will the market too. The more liquidity, the better. So we're very excited about the opportunity.

Great. We haven't touched on the rental side of the house yet, still running at a loss on that segment specifically. It used to be positive, but I know there's been some changes in terms of the dynamics there. So what should we be thinking about in terms of the trajectory of that business? What could profitability look like we're even getting to breakeven?

Yes. No, I mean we're focused on getting to breakeven at this point. Most of the loss is associated with the development things like asset dispositions will help optimize that. But the true driver of that is really selling through the available inventory that we have available for that lowers obviously our obligation and becomes the owners obligation. That's what will drive that. Other elements that will help that is rebranding some of the properties. We're still in the process of rebranding some of the diamond properties to Hilton, both predominantly European based. But when we put the Hilton name on a property, we see an ADR lift. We also see a benefit from the cost side. we'll move away from OTAs and typically move towards Hilton.com that has a lower cost structure for us. It all goes through the rental side of things. And we acquired 50 properties with Bluegreen. To date, we've only rebranded 11. I think we're now. So there's still a lot of work to do on that front, too. I would look for the rental business to still run at a loss this year and probably next as well. But it's really the developer I mean its obligation that -- what is that loss more so than anything.

What's the potential timing on additional conversions? Or how many conversions do you think you have left? And what's the decision process conversions from -- sorry, converting to Hilton brand?

We will continue to convert to the Hilton brand through all of 27 and a few properties will slip into 20. There's several dozen.

And that sounds like that's one of the big swing factors for the rental well.

I guess one of the swing practice. The biggest swing factor is the amount of inventory we have. Look, when we acquired Diamond, we walked in with eyes open and we knew we acquired excess inventory, 4 years of excess in. So it takes selling through that and optimizing the inventory to...

What is your current owner occupancy and rental occupancy?

So when you look at our annualized occupancy rates, generally speaking, to a resort has occupancy of 85 points. owners will account for about 50 points of that 85 point. Out of the 35 points left, oversimplify it a bit, but roughly half are going to be associated with marketing packages, assuming it's property with the sales center and the other half is basically FIT, typical hotel. .

What do you think is like optimal occupancy for both?

No, I think that is where we're running -- you are the you could tweak it perhaps to a little bit more owner to drive owner sales, but it adds inflows between 45 and 50. . But it depends on the market. Some markets without a call center, you'll have more opportunities to rent rooms, but at the same time, if it's a desired location, you want to make sure the utility of the owner is there as well.

You just talked about this reduction in inventory or selling through the inventory over time. What's the right level? I kind of talked about it at the very beginning, but thinking about an inventory spend, we look long term?

So we believe to support $3.5 billion in contract sales and Boeing that $300 million mark on average probably where we would expect it. Which again is obviously materially lower than where we were in 2018. And with a dramatically smaller entity at the time and really lower than where we've been in the past few.

So turning to artificial intelligence has been a topic across this entire conference. How do you think about what the implications are for your business? And what are the ways that you're trying to leverage AI to either drive revenue, drive margins and which is a bigger opportunity?

I think there's opportunities on both fronts. Which one to talk about first? Part of it is also just lowering the friction with our owners, maintaining maximum utility of the product. What I would tell you is we're making a lot of investments. Part of the integration that we're doing, a lot of that investment is associated with technology infrastructure. And while this -- this is an example, I've probably given about a year because I think it's very meaningful. But a year ago, if you logged into our website and you wanted to go to Orlando, we July 15, type it in to say, okay, well, [indiscernible] and then you would have to randomly find a location. Today, you do the same thing. It gives you Slide 15, you have x number of points. Here's your top 3 suggestion. The next opportunity is going to be, hey, we also have access to your Hilton Honors database. We have where you travel. We should be able to ascertain what is for vacation, what is for work travel. Those start to populate recommendation. And then at some point in time, assuming people opt in will have access to social media, even lots to go. That will properties with golf courses start to populate. So it's elements like that to help drive utility for the owner, which I think will help decrease default rates, which will be hugely meaningful. There's clearly the opportunity on the cost side as well. What does the chatbot do today versus what next week, how can you maximize that? I think it will be a bit of an evolution because I think, to your point, I mean you mentioned it earlier, how many people call and immediately say agent. Try to get a real person, right? Now with AI handling some of the calls where you may very well be able to tell the operator is an agent, but they're actually being productive and solving a problem. I think the evolution you'll see is people being more willing to call in because their answers are being responded to, which will drive demand for that call, which will allow real people to handle the more complicated problems until such time AI can handle it all. So there will be efficiencies over time. I think it's an evolution.

Awesome. We're just about at time unless anybody wants to throw in a question? Brave Souls. All right. Please join me in thanking Dan and all these insights on Hilton Grand Vacations. Thank you.

Thanks. Appreciate for coming.