Hilton Grand Vacations Inc. (HGV) Q3 2026 Earnings Call Transcript

Good morning, and welcome to the Hilton Grand Vacations 3rd Quarter 2026 Earnings Conference Call. 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. If you would like to ask a question, please press star 1 on your telephone to enter the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. If you should require operator assistance, please press star zero. If using a speakerphone, please lift your handset to allow the signal to reach our equipment. Please limit yourself to one question and one follow-up to allow the opportunity for everyone to ask questions. You may then re-enter the queue to ask additional questions. I would now like to turn the call over to Mark Milnick, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator, and one of the 2026 earnings this morning will include four looking statements. These statements are effective only as of today. We undertake no obligation to publicly update or discuss some of the factors. Please see the risk factors, reported results for all periods were updated in 2018, and then hold off on recognizing those revenues. The aggregate of these in any given period and recognitions, we've uploaded slides to our investment.hgv.com for our Kahaku project. The receipt of that certificate triggered the recognition of previously deferred revenues and direct expenses associated with prior sales of the project's inventory, resulting in a net recognition for the adjusted metrics that we'll be referring to on today's call. Reported results for this quarter reflect $536 million of net contract sales recognitions under AFC 6 of increasing reported gap revenue. Also shown on slide 2, $3 million of directs would decrease the adjusted I'm going to turn the call over to our CEO, Mark Wang.

It's a challenging quarter for us, and our results in Q3 fell short of our exit provided on our level. Although the underlying business model, recurring revenue streams, and cash flow generation, 11% for a mid-single, we implemented a series in August before gaining traction. With this outcome, return to sales growth, our closing rates, and rate softness, along with a more dynamic headcount environment in certain markets requiring enhanced recruiting and retention programs. And while they have taken longer to ramp, our initiatives are designed to address those underlying drivers. From a macro perspective, while travel and tensions remain resilient, elevated pressure has more impact on the purchase of the final phase, Although those were headwinds that we implode for the quarter with consistency levels and strongest value proposition, product, and inventory that we've ever had across the system to take advantage of those. Producing our guidance to reflect a more realistic view, we discussed targets along with organizational initiatives with the goal of improving our execution and conveyor some of the direct action growth in September. We also made leadership changes that stabilize the business, and while it will take time to ramp, we're encouraged by their progress. And we tested plans that generated a positive outcome, and we're in the process of delivering them to other key markets based on these early results. As I mentioned earlier, the cadence of the quarter demonstrated some early signs of positive traction from those initiatives. August marked the low point for sales, and in September, we narrowed the gap considerably with several of our key sales centers returning to positive growth for the month that continued into October, and controlling for the effect of those tougher year-over-year comparisons each month of the quarter on a two-year. So, while the monthly trends give us confidence, our results make it clear that we still have more work to do in key markets. We brought additional sales to HEV improvements in October as a result. And in a separate release this morning, including 15 years of innovation at HEV across multiple markets and brands, he's the right leader to renew our sales momentum and oversee our next phase of long-term value creation With the opportunity to further focus our resources on channels with the highest profitability, as well as the customers need to close. By improving our channel efficiencies, we'll generate higher from a smaller set of, we've identified areas with additional value and enhanced accessibility, which will enable us to continue to adapt our product while preserving their additional actions or about making efforts five to ten years of ownership. That represents well over half of the quarter. Our financing business revenues grew 16% while expanding margins, and our Clever Resort business continues to demonstrate consistent growth while producing our highest margins. We've been aided by the 20% growth of our HVMAX member base, which has now surpassed 300,000 members. These are high-margin, predictable earnings flow generation, despite, and they diminish million shares, for optimistic about early signs of how quickly these changes resolves. Our confidence in the business model, products, inventory position, and the quality of our brand and level of service remains unwavering. And our current priorities are clear. Improve our sales execution by increasing our conversion rates. I'll turn it to Dan for more details on the numbers.

Mark, and good morning, everyone. As Mark mentioned, our sales performance this quarter fell short of the outlook provided on our last call and were not satisfied with the results. The corrective actions taken in the summer produced some improvement in results late in the quarter, but the pace of that progress was slower than expected. Despite a meaningful benefit of our provision for BADDAD stemming from an accounting methodology change and the continuation of our Thank you. Thank you. VPG declined 12% to approximately $3,400 in the quarter, reflecting continued execution challenges. Looking at the makeup of the quarter, we did see sequential improvements in the year-over-year VPG growth as we progressed through the quarter, but the initiatives were slower to take hold than originally anticipated. In the quarter was 12.5% of own contract sales, compared to 16.8% in the prior year. The quarter benefited from both improving credit performance The methodology update reflects a meaningful improvement in our credit performance that we've been highlighting for over a year now, and our view that future owner performance will be representative of the combined portfolio and resulted in a prospective reduction in our loan loss allowance and provision expense. As a result, the reported provision rate was below our long-term target. Although the provision will continue to fluctuate based on financing propensity, owner-new buyer mix, and other underwriting factors, the combination of the consolidation in our provision methodology as well as the continuation of the strong credit performance gives us increased confidence in our expectation around the mid-teens. Cost of product in the period was 9.4%, owing to a higher mix of trust product sales of recaptured deeded inventory. Real estate sales and marketing expense for the quarter was $408 million, or 51% and 40 basis, substantially driven by operating deleverage from lower contracts to $182 million, with margins expanding 150 basis points to 28%, as the provision benefit more than offset the sales deleverage. In business, revenue grew 16% to $149 million, and profit was $94 million. Excluding the amortization items associated with our acquired receivables portfolios, financing margins were 64%, portfolio metrics are weighted 14.2%, combined gross receivables for the quarter were $5 billion, our total allowance for bad debt was $1.37 billion on that $5 billion receivable balance, or 27.2% of the portfolio. We're in great shape overall, with delinquencies stable to last quarter and down from year end. 60-day delinquency trends remain stable for all three portfolios, most notably for Diamond and Blueberry. The 60-day delinquencies were at 2022 levels, and Diamond remains at a five-year low. In our resort and club business, our consolidated member count was $716,000, as we continue to add new HEV MAX members, balanced by additional inventory recapture. to $196 million for the quarter, and profit was $136 million with margins of 69%. Rental and ancillary revenues were up 4% versus the prior year to $194 million. Revenue growth for the quarter was driven by slightly lower available rental growth to $7 million loss following the close of our disposition transaction, and we continue to expect that it will reduce the fee burden on our EBITDA by $10 to $12 million on a run rate basis, although with minimal I also highlight we now expect $185 million on inventory this year, which is This is $90 million lower than our prior estimate. And despite our reduced outlook, we continue to expect our conversion rate for this year will remain in the lower half of our long-term target range of 55 to 65 percent, demonstrating the resilience of our cash flow in different operating environments. $10 million, $50 million per quarter, although, as Mark mentioned, we fully intend to meet our annual goal of repurchasing $600 million. As of October 22nd, We had $617 million of remaining availability under our Consolidated Share Repurchase. To our outlook, as you saw in today's release, we are reducing our EBITDA guidance for the year to $1165 to $1180 million from our prior $1225 to $1265 million. As I mentioned, the driver of today's guidance reduction is our weaker-than-expected sales performance, coupled with the slower ramp of our initiatives to improve low-to-mid-sync, despite the channel mark mentioned. That initiative will focus on driving lower overall volume of tourism, particularly as we look to 2027. Regarding VPG, we now expect VPG for the year to decline in the high single digits. We expect VPG to decline in the mid single digits. As a result, we now expect contract sales for the year to be down in the mid single digits, which implies fourth quarter sales down in the low $54 million, $57 Our debt balance at the quarter, corporate debt of $4.9 billion, and a non-recourse debt balance of the remaining capacity on our $1 billion warehouse facility. We also had $1.3 billion of notes that were current on payments but unsecuritized. Of that figure, approximately $851 billion could be monetized through the combination of a warehouse borrowing and securitization. $383 million will become available following certain customary milestones such as first payment, deeding, and recording.

Thank you. If you would like to ask a question, please press star 1 on your touchtone phone to enter the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. As a reminder, please limit yourself to one question and one follow-up to allow the opportunity for everyone to ask questions. And our first question we'll hear from David Katz with Jeffries. Please proceed with your question.

Thanks, and good morning, everyone. Dan, I have and I heard the commentary with respect to the change in provision, and I apologize for sort of leading off with a very specific question, but if we could have just a bit more historical context for where the provision sort of sits today, And again, I heard your comment about looking for a mid-teens target level over time, but just a little more maybe backward-looking on that would be helpful, please.

Hey, David. Yeah, no, it's an important question. So when you look at our static pools that have been driving our provision rate over the course of, you know, for a long time now, we've been running three disparate static pools. Starting with the acquisition of diamond and subsequently with blue green. So each static pool operated off of a different look back period. Only one of those static pools took into consideration FICO scores and actual equity down at the table. So we've been making changes over the course of the past few years in the back of Powell from a collections perspective and also from a consolidation of the underwriting methodology. And the most recent and material change that we made was, as we've talked about, I think, a litany of times now, Last year, where we eliminated the no down, no incremental down payment for upgrades on the blue green side. And now that that has been in excess of a year old, we had a lot more data points and we took the opportunity to consolidate the methodology. And what we did was now we have one static pool with a 10-year look-back period across all of the products that we sell, and they all take into consideration FICO and equity. Now, there's a number of variables that are going to come into play that impact the ultimate provision, the least of which is not the propensity to borrow or the equity down, But this change better underwrites the risk that we are taking as we issue loans. Going forward, we do believe it's going to sit around mid-teens. It could be as low as 14 percent. It could be as high as 18 percent. Again, propensity to borrow has a meaningful impact on that. The good news is if the propensity to borrow goes up, that means long term will recognize interest income, greater interest income than we originally expected. But you take the provision up front. If you were to look at this item, we talked about a $55 million number being the change from a provision perspective, but if you were to apply the new methodology to this quarter in particular, the rate would have been just under 18%. If you just adjust for the $55 million, you'll get to a provision rate of 20%, and that just underscores the fact that we were not getting credit for the additional equity that we were taking down. Now, that's at the higher end of what we would expect the range to be, but that is also underscored by some financing promotions that we ran during the quarter that drove a sequential increase in the propensity to borrow by over 400 basis points in the quarter. So, there's a lot of variables that come into play, but ultimately, the end game is on a perspective basis, we expect to be centered around that mid-teens range, and we are better provisioning for the actual risk that we are underwriting as we issue loans to the consumer. Hopefully, that's helpful. I know that's a lot of data.

It is. Thank you very much.

Next, we'll move to Patrick Scholes with Truist Securities.

Hi, good morning. Mark, can you talk a little bit more with granularity about what specifically are these initiatives you put in place over the summer to improve execution? And with the change in the sales leadership, what improvements would you hope to see come out of that? Thank you.

Yeah, so, Patrick, I think, number one, we've been actively investing. We've taken action to ensure that we're competitive in the market, and so we've improved incentives to meet market norm. At the same time, you know, we've been taking actions to find costs in other areas of the business to offset that. So net-net, you know, we're better off now, and staffing levels are in a much better position than they were when we started the quarter. And so just to give you, you know, a few data points here, we brought in over 430 new salespeople over the last four months, all experienced. We had an additional, you know, 350 that came in that had real estate experience. And of those, 165 were HCV, previous HCV sales representatives. So, importantly, we have really done a great job ramping up our recruiting. Our teams have done a really good job with that. And so, look, at the end of the day, tour flow matters in this business. Salespeople move where their tour flow is. We're generating significant tour flow. And, you know, we've talked about this before, and I talked about it on the last call. In any given quarter, there's a certain amount of

turnover within a sales organization, and we experienced turnover levels that were above the historical norms.

So the good news is the trend is stabilized as we exited the third quarter, and we started seeing material improvements in our execution as we went through September, and we're also seeing that in October.

Thank you. And then just follow up, can you remind us, you know, when you're taking in new, you know, replacing, taking in new sales staff, is it fair to think it'll take three to six months to get them up to, you know, with training and just familiarity with products and whatnot, three to six months to get them to a level that you would think where they're, I guess, fully operational?

Yeah, no, I mean, look, the good news is, you know, as I said, you know, over 160 of these were, you know, experienced in HEV, but you're right. You know, when you bring in a new sales rep, a new sales professional, and you invest in them, it does take some time to ramp up. And there was a lot of movement, you know, during the quarter, so a lot of disruption that we experienced. And the good news is, you know, those things, those people are settling in, a lot of training going on involved, and we've made some, I think, really good moves from a retention and compensation standpoint that I think gets us in a much more competitive position now.

Thank you.

And next, we'll move on to Michael Hirsch with J.P. Morgan.

Hi there, and thank you for taking my questions. In the third quarter, your adjusted free cash flow was, or a free cash flow conversion, I believe, was 20%. So I guess, could you speak through the building blocks in the fourth quarter that could allow you to reach your target for the year, which is around 55%, I believe?

Yes, no, that's a great question. So it's a function of a couple of things from a building block perspective. Predominantly, it's timing of securitizations. We anticipate closing two transactions in Q4 that materially drive that up. In addition, you probably recall during my prepared remarks, our inventory spend for the year, we originally had estimated it would be in the range of $375 million, and we've modified those plans, and we're going to be close to $90 million. Thank you.

And then for my follow-up on capital allocation, given where your stock is currently trading, you know, how do you rank buybacks against M&A, debt pay down, and maybe any other uses of capital?

Yeah, I know. It's also a great question. So we've been fairly vocal for some time now that we were not going to simply lever up the balance sheet in order to buy back shares. And at the same time, we've also been very vocal about the use of capital from a capital allocation strategy. No real M&A out there for us. We feel the best use of capital is buying back our shares, and that was at prices that obviously have decreased over the past 90 days. So do we think it's a good investment? Absolutely. We're very cognizant of the leverage level, and as you'll note in Q3, we bought less than our programmatic $150 million that we've been buying for about 18 months. We still expect to hit $600 million for the full year. We did decelerate those share repurchases as we saw the performance in contract sales in July and August underperform our expectations, but given where we see the year playing out, even with the materially decreased outlook for the balance of the year, we feel that we're in a good spot to still execute on $600 million in share repurchases. But no M&A in our line of sight, and we feel the best use of capital right now is still repurchasing of shares. Thank you.

And next, we'll move on to Chris Wronka with Deutsche Bank.

Hey, guys. Good morning. Thanks for taking the questions. So I guess, guys, if we could drill back a little bit on the sales center, the things that are going on there, it's kind of a two-part question. One is, are there any initiatives you have to kind of make sure that these folks, assuming they deliver as you expect them to, to retain them? Because I think, you know, we hear about a lot of kind of back and forth with some other operators. And then the second part of it is, is this new, I guess, incentive structure at the sales centers, does that have any implications longer term for your, you know, your overall margins? And then I have a follow-up. Thanks.

Look, I think we're, what, about 30% of the industry. So we have a significantly large sales and marketing organization, right? And I think we've taken the actions required to, number one, attract and retain the talent that we're looking for. So, and we're going to continue. I mean, this is an ongoing process, right? And, you know, we've talked about there's always movement with talent across the industry, and I think we've done a good job with what we've done around our retention program. We strengthened our recruiting incentives, and we significantly increased, you know, the recruiting efforts across the company, including adding staffing in our recruiting side. So we feel comfortable that we're in a much better place. When you think about the costs, the changes to the comp plans, you know, there'll be, you know, there'll be some pressure on our sales and marketing costs, But we're also confident that we're going to be able to offset the impact with savings in other parts of the business.

Yeah, Chris, just to jump in there and just to underscore Mark's last point. In the short term, clearly it has an impact on our sales and marketing rate. As you saw in Q3, our sales and marketing rate year over year was up almost 400 basis points. I envision that rate to be fairly consistent in Q4, given the fact that we've lowered our contract sales. There's no longer a ramp that we anticipated in Q4. So in the short term, yes, it will have a great impact. On the longer term, we believe there's going to be benefits on the contract sales side. This will help drive volume. And as Mark just alluded to, we will be more than offsetting any cost pressures associated with the investment in sales and marketing with cost savings across the balance of the business.

Okay, super helpful. Thanks, guys. And just as a follow-up, what does the pipeline, I know it's kind of difficult to look at at a specific point in time, but what does the pipeline maybe look like for additional inventory recapture? Have those recapture trends been in line with greater or less than you maybe thought at the beginning of the year? Is there anything to kind of inform your thinking as to how that'll, recaptures will play out over 27? Thanks.

Yeah, but, you know, recapture obviously has become a much bigger piece of our inventory, you know, and I think as, you know, systems mature, people, you know, as people are aging out, they're traveling less, and it really gives us more opportunities on the recapture side. So it's really a natural part of the system's evolution, and it's, I think, a real advantage for our model going forward, especially from an ability to recapture that inventory at a good rate, and it's good for our long-term free cash flow in that we don't have to go out and necessarily build inventory at the same rate we have in the past. So, anyways, I think there's opportunity to cycle that inventory, and our focus continues to be driving new members and creating new lifetime value creation and using that inventory to create that lifetime value creation.

Yeah, and just to jump in there as well, we are truly capitalizing on the recapture of inventory. If you were to look at HCV prior to any acquisitions, our cost of product was between 25% and 30% after the acquisition of Diamond. We expected that cost of product to be in the low 20s and after a few years of owning Diamond and fine-tuning that recapture program, it dropped into the high teens. And with the acquisition of blue-green, we've bolstered that even more. And immediately following blue-green, we were in the mid-teens, and now we think that longer-range view is in the low single digits to, you know, low teens on, you know, mix obviously come into play, but in that 10 to 12, maybe 13 percent range, which is meaningful. And it clearly will have an impact, as Mark just stated, with inventory spend patterns. We talked about just a few minutes ago about inventory spend patterns this year going from an original expectation at 375 and reducing that by 90 million to 285. We've also talked previously about the long-term run rate being closer to 300. Now, that 90 million deceleration this year is not simply getting pushed into next year. We still anticipate being below 300 next year in that inventory span, but that is just underscoring, you know, what Mark was just talking about with that recaptured inventory process.

Great. Thanks for all the color, guys. Appreciate it.

And next, we'll move on to Trey Bowers with Wells Fargo. Please go ahead.

Hi, this is Nick Weichel on for Trey. Thanks for taking our question. I know you guys are undergoing a lot of different initiatives right now, but I was curious if you had any early thoughts on what 2027 might look like. Yeah, just any color would be great.

Yeah, so I'd say, number one, I think when you think about our long-term algorithm, we think that getting past this year, Getting past these very difficult comps that we had from last year, that our long-term algorithm is achievable, you know, as we go on to next year. And we've shown that, you know, even in cash flow, we're resilient, you know, in the face of, you know, softer sales trends. But as you look, as we look at it on a go-forward basis, you know, we think we're going to be able to balance VPG and tour costs and drive consistent EBITDA growth. And we're not looking at double-digit tour flow growth to drive our business. It's really about more of a low-to-mid single-digit tour flow growth with a low-to-single-digit BPG growth. So anyways, I think we're moving to a pattern of consistent growth on a go-forward basis, and it's very aligned with our thinking around our long-term algorithm.

Got it. Thank you.

And we'll move on to Stephen Grambling with Morgan Stanley.

Hi, thanks. I may have missed this in some of the opening commentary, but just given the interest rate environment, are you seeing any, you know, changes as you're having conversations around the securitization market or your borrowing costs in the financing segment? And how would you generally think about approaching if rates were to move higher, you know, trying to pass that on to the consumer versus, you know, maybe using it as a sales tool? Thanks.

Yeah, it's a bit of a balancing act when it comes to interest rates. We constantly debate that internally. What I would tell you with pressure on interest rates, just given the dynamics of what the Fed is doing, will we always match what the Fed does? No, absolutely not. Will we move the needle where we can? Definitely. We do balance that with sales table initiatives, though, so it's not going to be necessarily, like I said, it's not going to be a one-for-one, so a bit of a balancing act there. From a benchmark perspective, that clearly works against us when we go and execute on securitization. We, much like others in the industry, are trying to be a very robust issuer of securitization. We try to make sure that we meet the commitments to those bondholders so they know what they're walking into, to have a high level of liquidity in those notes, and help us drive the best pricing we possibly can. And we've been very successful in that in the past. We're also looking at different avenues to capitalize on that. Clearly, we've talked about our Japan initiative, where we've been able to securitize receivables for the first time last year in Japan that had a rate that was sub 1.5%. We will do a second deal this year. The rates in Japan, as you've probably seen, have also gone up, but they're going to be materially lower than the recent securitization and timeshare market that you saw from one of our competitors recently. Japan markets would still have a two-handle on it, which is substantially better than what you see in the U.S. So, ultimately, I've said this before, we're changing the collateral mix and the securitization that we do in Japan, and ultimately, we're looking to be a more robust issuer even in the Japanese market, which should help us mitigate the pressure that you see on rates in the U.S., and at the very least, it allows for a competitive environment.

Thanks. That's a lot of helpful detail. One unrelated follow-up. There's been a bit of a spike here in airfare. Are you seeing that impact specific markets at this point? And are there tools or things that you're seeing that may help alleviate that if you are seeing any kind of change in travel behavior from either your owners or prospective owners? Thanks.

You know, we really haven't seen, you know, a lot of pressure as it relates to, you know, air costs of moving around or flying. You know, obviously fuel costs are high, much higher than they have been with, you know, all the Middle East activity that's going on right now. But, you know, despite all of that, people continue to travel and people continue to, you know, move their discretion and spend toward leisure travel. And so it's made remain very resilient. You know, our demand indicators remain very positive. You know, rivals for Q4 and through, you know, the first half of next year are positive year over year. Our occupancy levels are steady. You know, we maintain a very strong package pipeline, and importantly, you know, our new buyer transactions continue to grow, and, you know, while, you know, our main pressure, you know, this year has been blue-green owner comps, you know, we did have 18 percent higher new buyer transactions in blue-green last quarter, so I think that's a really good signal That our product continues to resonate with these new buyers that are coming through the door.

Right, and not to be remotely dismissive of higher fuel prices, because that's obviously adding pressure to the consumer, but it's one of the benefits of the acquisitions over the course of the past five years is the fact that in excess of 90% of our owners do live within a four-hour drive of one of our resorts. So even if you do see pressure from a flight perspective, we have a number of options to accommodate a tougher environment for the consumer.

Great. Thank you so much.

And Patrick Scholes with Truist Securities will have our next question.

All right. Follow-up question here. Thank you. Mark, I may have missed it earlier. With the new methodology for the provision coming in at 12.5, what would an apples-to-apples provision result under the prior methodology have been, just so we can compare it to what we were expecting? Thank you.

Yeah, no, absolutely. Absolutely. So, if we had not changed the methodology, simply adding the $55 million back to the provision would have gotten you a provision rate of roughly 20%. That is a function of a couple of factors, most notably a mix, higher mix of trust and higher loan loss provisions associated with some deeded product, coupled with a sequential increase in propensity to borrow by I think I mentioned this north of 400 basis points. So adjusting for, you know, that those two items alone accounted for, you know, over 150, 200 basis points of that move. So it would have been at the higher end of that longer term range. But that would be under the previous methodology. If we would have adopted the new methodology, you probably already heard me say this, it would have been at, you know, just under 18%. But again, the propensity to borrow drives that up by about 100%.

Okay. And lastly here, would you be too kind to give us a bit of a guidance walk here as it remains for the rest of the year? Thank you.

Yeah, so let me maybe take the first part of that. No, I'll let Dan give you a little bit more color on it. But first, we realize that comps get easier in November and December, right? But the reality is, and when we talk about this, we've made a major leadership change to address the execution. And while we're very confident in Mike Riley and what he's going to do to lead our sales organization, there's always some risk involved in that. But we know it's best for the long-term interests of the business. And so as you think about the rest of the quarter, we expect sales to really be in that kind of low to mid-single digits in line with what we saw in October.

And I think, Patrick, you know, just to do more of a walk, you know, clearly we're, you know, very disappointed with the ultimate performance. But there are some things to take into consideration. Just the underlying resiliency of a number of factors in the business, we see that continuing. The rental business, we believe, will be in line with last year, which is very consistent with our previous expectations for the year. Our resort and club business will continue to benefit from a strong seasonal Q4, again, in line with prior year, probably slightly hair up, and also consistent with our previous expectations on the financing business, despite, you know, contraction and contract sales that's still performing in line with our previous expectations. So when you look at the walk, it's really geared around the real estate segment. Mark has talked at nauseam about the compression and contract sales, but what does that translate to the bottom line? There are some good guys. Bad debt year over year, as you may recall, last year was at an elevated level given the upgrade into HDD Max scenario, so there should be some benefits on the bad debt side. But that's going to be more than offset in the investment that we're making in the sales and marketing team. So that is going to be driving your SMGNA rate, which is going to be the detriment, which is causing the contraction in margins that we're projecting in our EBITDA walk. Now, again, we believe that increase in sales and marketing rate should be short-lived, short-term, and as we progress forward, we should be able to capitalize by increasing contract sales. And also, ultimately, lowering costs in other areas of the business to more than offset that pressure.

Okay, thank you. And then just lastly, while I have the microphone here, can you just confirm that the licensing fee percentage for next year should be at or about 5% for modeling purposes? And then related to that, remind us, after that, it seems that that has stepped up to its sort of its ongoing run rate for the next, let's say, for 2028 modeling. Is that correct, that 5%? I just want to clear the air on that.

Yeah, remember the 5%, different elements of the business pay a different license fee. So it's not just a flat 5%. But to your point, the ramp up, we just passed the last ramp of Diamond. Blue Green still has one more ramp. That happens on January 1st. So we will be at a normalized run rate starting January 1st. I'll try to rebranding some of the properties, because as you would expect, we do not pay a licensing fee if the property does not bear the Hilton name.

Okay.

And the rate of – Okay.

Thank you. I know investors had some questions on those, so I appreciate you just clarifying everything. I'm all set. Thank you.

There are no further questions at this time. I would like to turn the floor back to Mark Wang for closing remarks.

All right. Well, thank you again for joining the call today. To our members and our team members around the globe, thank you for making HCV a part of your story, and we look forward to updating you on our next call. Have a great day.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.