Hilton Grand Vacations Inc. (HGV) Earnings Call Transcript & Summary

Good morning, good afternoon, everyone. Thanks for being here. We are going to kick off our timeshare segment here with Hilton Grand Vacations. We're thrilled to have Dan Mathewes here, CFO of Hilton Grand. Thanks for being here, Dan.

No. Thanks for the opportunity. It's great to be here.

Awesome. So let's open up with your transformation. HGV has [ on ] from a single brand vacation ownership company into a much broader platform following the Diamond and Bluegreen acquisitions. And so as you think about the biz today versus, let's say, 5 years ago, excluding COVID, of course, what do you believe has changed the most meaningfully about HGV and what's still underappreciated?

That's great. I think HGV has really transformed over the past 5 to 6 years. It's a different organization than it was when I joined the organization back in 2019. We've gone from a timeshare company that had 60 properties to a timeshare company that has over 200 properties. Most of that growth has been inorganic through those acquisitions of both Diamond and Bluegreen. But also most notably, it's a change in the consumer base as well. Both the acquisition of Diamond and Bluegreen expanded the breadth of our product, created a more entry-level product, if you will, and the opportunity for us to better harvest leads from our Hilton Honors relationship with, obviously, Hilton Corp. When you think about the organization today, we've tried to make it very simple from a consumer standpoint. We effectively sell 3 products. The vast majority of what we sell is 3 products. It's Hilton Vacation Club, which is an entry price point; Hilton Grand Vacations, which is the legacy business before any of the acquisitions. Most of the acquisitions fit into the Hilton Vacation Club. And then we also sell Hilton Club, which is more of a luxury product. So we've added more scale and more breadth to what we offer the consumer. We've also -- from an investor standpoint, I think it's a material shift, most notably in the cash flow story of the business. Back in 2018, as an organization that was doing circa $400 million in EBITDA, we made inventory commitments of close to $1.8 billion. And that translates into a very low, if positive, if even positive adjusted free cash flow conversion rate. Today, we're doing close to $1.2 billion in EBITDA with an EBITDA conversion rate target in the range of 55% to 65%, where we expect to be this year as well. So it's much less focused on building new inventory and much more focused on capitalizing on more efficient just-in-time inventory from reacquired inventory. So a complete change in both the offerings, the reach, the cash flow story. It's really expanded the product offering, not just from price points. The average interval before the acquisitions was roughly $50,000 with the acquisition of Diamond and Bluegreen. That's just an average interval and median interval, if you will, of $25,000. But we've really enhanced the product offering by expanding upon experiences with our Ultimate Access platform, where we offer our guests the opportunity to participate in once-in-a-lifetime experiences. Most notably, we kick off the LPGA tour event in early January. We also sponsor the F1. We also host a number of events with NASCAR. And if you talk to our Ultimate Access team, they'll tell you the thousands of events we host annually to give our owners more than just simple room and a vacation destination. It is also about experiences today.

Okay. Before I get to some of the specific initiatives on your docket here, I do want to take a step back and ask about the general volatility we're seeing in the geopolitical environment and how you're feeling about the consumer, given gas prices that are kind of back to the highs of the year, inflation pressures weighing on consumers' wallets, airfare prices and the like. What are you seeing there?

I was saying this earlier. I find it very interesting that we sit here today and we're in a literal shooting conflict with Iran and the consumer has held up well. Travel domestically, travel, even in Europe and Japan -- to Japan, rather, is still fairly robust. Not trying to be the dismissive, gas going from $4 to $5 a gallon is meaningful to anyone. But at the same time, I think the structure of our organization has mitigated that risk to some degree. I mean, well in excess of 75% of our owners live within a 4-hour drive of one of our resorts. So gas going from $3 or $4 to $4 to $5 a gallon, does that change the decision to take a vacation with us? I don't think so. From a credit standpoint, we've taken a number of actions to derisk our mortgage portfolio. And what I mean by that is it dates back to as early as 2022. Post the Diamond transaction, we eliminated heavy-risk credit opportunities. Diamond had a program where they had a low down payment program where you could literally come in, pay 1%, get access to the system. And ironically, by the time you use the system, you probably defaulted right after [ we paid exact ] their commission. So we've eliminated that program to enhance the credit underwriting. And also, what we've seen from that is a material decrease in the default on the Diamond side. The defaults have improved by almost 700 basis points. Some of it is actions like that. Some of it is also sales practices and hinge the product that we offer, capital investment in the various resorts. In addition to that, most recently, as recent as Q2 last year, we changed the underwriting practice, most notably on Bluegreen. But system-wide on Bluegreen, they had a practice that was very similar, something that you see throughout the industry. You could come in and put 0 down as an existing owner when you're upgrading as long as your combined equity on the new ownership was in excess of 10%. Today, we've eliminated that program. So you are required to put in an additional 10% down. It's kind of derisked that portfolio. So when we look at the leading indicators for defaults, which, in our case, is early-stage delinquencies now 30 to 60 days. We've seen improvement on the Bluegreen portfolio outpaced the improvement that we've seen on Diamond. And we've seen HGV always required, well, always, always in recent years required the 10% down, incremental down, hold steady. So we're really pleased with that.

So you're improving delinquencies on the Bluegreen side based on direct action. Diamond side is steady. Just thinking about the overall portfolio, how sensitive are delinquencies to the geopolitical events that we're kind of going through now? And how are you feeling about the portfolio overall?

So when we look -- I think a good litmus test for that is when you take a step back and you look at the acquired portfolio, the most recent acquired portfolio that we have of material size is Bluegreen. And that acquired portfolio at this point is well in excess of 2.5 year season. And when we compare that to the originated portfolio of the Bluegreen Trust product that we sell, that's any sales post January of 2024, so 2.5 years or less. We see the originated portfolio outperforming the acquired portfolio, which I think just speaks volumes not only to the changes that we've made from a product delivery standpoint, but also the enhancement to the credit risk.

Okay. Back to the top of the funnel. You are in a large new owner tour/sale [ still ] right now. We all know that new owners are tomorrow's upgrade high-margin sales, so that's important, of course. How do you think about this from a longer-term operational or financial planning perspective? And I guess asked another way, should we kind of expect sort of these waves of new owners and then waves of harvesting those new owners with repeat sales? Or are you trying to get this new large integrated business into something more algorithmic and balance between new owners and sales -- and repeat sales going forward?

Over the past few years, you've seen us introduce HGV Max to two unbranded timeshare companies, both Diamond and Bluegreen. And that comes with some ups and downs, so variability, obviously. As a reference point, our VPGs to our Bluegreen existing owner base were up 45% in Q2 of 2025. So obviously, a tough comp. To your point -- and I think it's really embedded in our DNA. We -- I think we're the ones who coined the phrase net owner growth, and we've been very focused on growing new buyers for a long time, ever since even the great financial crisis. And one of our key aspects today is to drive new buyer transactions. Both Q1 and Q2, we had high single-digit growth in new buyer transactions. And that's critical for the long-term success for the business. It is ultimately translating into the high-margin future sales. But how do we drive that? We're trying to get into a more algorithmic cadence. So we've talked about this for some time. But the introduction of HGV Max obviously introduces a level of variability. But as we move in and transition into 2027, it's -- in our mind, it's a more normalized comp year where we expect that long-term growth model to come into fruition. So low single-digit tour flow growth. VPG growth probably modestly trailing that, which will translate into low single-digit to mid-single-digit contract sales growth, allowing us to leverage off the fixed cost side of the business for EBITDA growth to be mid-single digits plus. That all, coupled with cash flow inflection points. I talked about the heavy inventory spend that the company has had over the past few years, $400 million plus this year. We're on track for $375 million in inventory spend. Next year, that drops to a high watermark of $300 million. So a compression in inventory spend. And also, over the past few years, we've had material integration spend. 2025, we've spent $200 million, '26, we'll spend $150 million. Next year, that will drop by $75 million to $75 million. And then in 2028, it becomes more of a finalization, a rounding [ error ]. So though the combination of that more steady growth, combined with the cash flow inflection points, I think, presents an interesting opportunity.

Okay. Okay. That's helpful. And then I want to go a little more near term. We're 1 month on from the second quarter print. You highlighted execution issues at Bluegreen in just 2 markets, but 2 of your larger markets, and you said those issues have been identified and fixed. And it was implied to us that those issues were mostly on the personnel side. Would you characterize those as operational missteps by local leadership leaving, rank and file leaving, a combination of all of the above? How would you sort of give us a little bit more description on what exactly is going on in those 2 markets?

Well, I would start by saying going into Q2, we were very aware of the tough comp that we had ahead of us. As I already alluded to, HGV Max on the Bluegreen owner side had VPGs up 45% prior year. But going into Q2, I think there are a couple of missteps. One, we could have executed better, just generally speaking. So we underperformed our expectations when it came to even going up against that comp. In addition to that, we definitely had some execution specific related issues related to Myrtle Beach and Orlando. Some self-inflicted where we had to make a leadership change, and some probably more attuned to the competitive nature of the existing market and timeshare today. I don't think there's any need to point specific fingers. I think it's -- in my mind, we could have executed better. We've made leadership changes specifically in those markets. Unfortunately, whenever you make a leadership change, it's not turning on a light switch. These things take time. And we said on the call, we reported late July. So I think that gives you a direct reference for Q3. We talked about the revenue side coming down for the full year. We were able to maintain EBITDA guidance for the full year, but that was on the back of cost-saving initiatives, most notably bad debt and cost of product. So do we have a fix identified? Yes. Is it fixed? No. It's an evolution. It's a process. So obviously, disappointing for Q2. And clearly, Q3, I mean, Q2, our VPGs down 8.6%. And I would tell you to expect similar, if not more decrease in Q3.

Okay. Your only branded competitor -- I guess that we all know that would be -- is executing against a pretty steep operational turnaround in some of your markets. Has there been a fundamental shift in the competition over talent in some of those larger markets? And what steps have you taken against that? Are other markets at risk that haven't shown up yet, from what we can see?

That's a great question. I would tell you this. Any given year, it's not uncommon for there to be a lot of back and forth, especially in the sales executive side between timeshare companies. It's not uncommon. You can walk through any of our sales distribution centers today and find people who have a resume that's filled with Holiday Inn, Marriott, Travel and Leisure, et cetera. And I'm sure the same is for their sales distribution centers. Before there was a change in leadership at our branded competitor down the street, last year, we lost 4 of our top salespeople in the New York market to that competitor. And within 90 days, 3 of those individuals came back. So going back and forth is not unusual. What I'd say is a little bit different about 2026 is you do have someone who worked at one of the acquisitions that -- one of our acquisitions now as a senior leader at that competitor. So I'd say it's probably more robust. These things tend to have a way of playing out over 6 to 18 months. I think we're halfway through it. Are we sitting by and just letting things happen? Absolutely not. It's not unusual for us to change comp plans on a regular basis. But in situations like this, we'll obviously take action where it's merited.

Okay. Okay. Great. And then maybe taking a step back. For guidance this year, not dependent on any one specific factor, but what hinges the top end versus the bottom end of your top line implied guidance? Just sort of normal close rate variability? Or would you say you've built in cushion for other factors?

I'd say it's normal close rate variability.

Okay. That's helpful. Maybe moving on to HGV Max. You mentioned that earlier in your comments, one of the headwinds -- and this is well known for everyone in '26 is the lapping of the rollout of HGV Max. But I do want to understand the mix dynamics of sort of lapping that? And is it really more selling less Max or more about you selling less repeat guests and more new owner? And is that really one of the same things? So maybe you could break that out for us.

Yes. No, absolutely. So HGV Max, I think an important thing to take into consideration is the way we rolled it out under the Bluegreen acquisition into contrast with how we rolled it out under the Diamond acquisition. So Diamond was the first acquisition the company had made in its 30-year history. And the process was a little bit more systematic, a little bit more methodical in the sense that as we rebranded sales centers, they were done not necessarily one at a time, but throughout the course of a 12- to 15-month period. Part of that is a function of us wanting to get things right, part of it is a function of Hilton. Obviously, we use Hilton's name under a licensing. They were approving each sales center as we were rebranding it. And also, a function of what Diamond was. The culmination of multiple roll-ups, there was a lack of consistency across our sales centers. So we also wanted to make it more organic in nature. Now contrast that with Bluegreen. And given the results of our sales rebranding of Diamond, Hilton was comfortable with us rebranding all sales centers on day 1 of the HGV Max launch. So it was more of a big bang, if you will. So from that standpoint, I think it really emphasizes what the comp comparison is, and it's really close rate associated with existing owners on the Bluegreen side where you see most of the pressure. Now that being said, HGV Max is still selling extremely well. Today, that is all we sell. If you come into any of our sales centers and you do not own in your new buyer, you will be sold HGV Max. And if you're an existing owner, you will be sold HGV Max. The other thing to take into consider is HGV Max is not a membership that you buy online, you do not log on to hgv.com and buy HGV Max. It is a process. You go through a tour, your average transaction price is the equivalent of an upgrade, so circa $25,000, and -- but it is selling well. To date, north of 20% of the existing Bluegreen owner base has upgraded into HGV Max. And when you contrast that compared to HGV and Diamond, they're well north of 40%. Will we ever get 100% of everyone? No. High watermark is probably about 2/3. But it is a multiyear process, and I think we've got a good trajectory on that front.