Conference Transcript - HGV 2026-09-10

Operator

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 Matthews here, CFO of Hilton Grand. Thanks for being here, Dan.

Dan Matthews, CFO

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

Operator

Awesome. So let's open up with your transformation. HGV has gone from a single brand vacation ownership company into a much broader platform following the diamond and blue-green acquisitions. And so as you think about the business today versus, let's say, five years ago, excluding COVID, of course, what do you believe has changed the most meaningfully about HGV and what's still underappreciated?

Dan Matthews, CFO

That's a great question. I think HGV is, you know, really transformed over the past five to six years. It's a different organization than it was when I joined the organization back in 2019 you know 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 blue green but also most notably uh it's a change in the consumer base as well both the acquisition of diamond and blue green expanded uh 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 When you think about the organization today, we've tried to make it very simple from a consumer standpoint. We effectively sell three products. The vast majority of what we sell is three 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. um we've also you know from an investor standpoint i think it's a material shift uh 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 a billion eight 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 Blue Green, that introduced an average interval, a median interval, if well, $25,000. But we've also 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 a simple room and a vacation destination. It is also about experiences today. Okay.

Operator

Before we get into 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?

Dan Matthews, CFO

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 And the consumer is held up well. Travel domestically, travel even in Europe and Japan, to Japan rather, is still fairly robust. Not trying to be dismissive, you know, 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 four-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 de-risk 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 used the system, you probably defaulted right after we paid the sales exec 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 defaults 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 enhancing the product that we offer, capital investments in the various resorts. In addition to that, most recently, as recent as Q2 last year, we changed the underwriting practice most notably on blue-green. But system-wide, on Blue Green, they had a practice that was very similar, something that you see throughout the industry. You could come in and put zero down as an existing owner when you were 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 an additional 10% down. It's kind of de-risked that portfolio. So when we look at the leading indicators for defaults, which in our case is early-stage delinquencies, 30 to 60 days. We've seen improvement on the blue-green portfolio outpace the improvement that we've seen on Diamond, and we've seen HEV, which is always required, well, always, always in recent years required the 10% down, incremental down, hold steady. So we're really pleased with that.

Operator

So you're improving delinquencies on the blue-green 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?

Dan Matthews, CFO

So when we look, you know, 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 blue-green. and that acquired portfolio at this point is well in excess of two and a half years seasoned and when we compare that to the originated portfolio of the Blue Green Trust product that we sell that's any sales post January of 2024 so two and a half 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 enhancements to the credit risk.

Operator

Back to the top of the funnel. You are in a large new owner tour slash sales cycle 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 balanced between new owners and repeat sales going forward?

Dan Matthews, CFO

You know, over the past few years, you've seen us introduce HEV Max to two unbranded timeshare companies, both Diamond and Blue Green, And that comes with some ups and downs, some variability, obviously. As a reference point, our VPGs to our blue-green 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, 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 HGVMAX obviously introduces a level of variability. But as we move in and transition into 2027, 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's had over the past few years. $400-plus million. This year, we're on track for $375 million in inventory spend. Next year, that drops to a high-water mark 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. 2026, 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 and more of a rounding error. So the combination of that more steady growth combined with cash flow inflection points, I think, presents an interesting opportunity.

Operator

Okay. Okay. That's helpful. And then I want to go a little more near term. We're one month on from the second quarter print. You highlighted execution issues at Blue Green in just two markets, but two of your larger markets. And you said those issues had 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, 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 two markets?

Dan Matthews, CFO

Well, I would start by saying, you know, 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 blue-green owner side had VPGs up 45% per year. But going into Q2, I think there were 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-inflected 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? 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 were down 8.6%, and I would tell you to expect similar, if not more, decrease in Q3.

Operator

Your only branded competitor, I guess we all know what 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?

Dan Matthews, CFO

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 four of our top salespeople in the New York market to that competitor. And within 90 days, three 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 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. But 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.

Operator

Okay, great. And then maybe taking a step back for guidance this year, not depending 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 mixed dynamics of sort of lapping that. And is it really more, you know, selling less Macs 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.

Dan Matthews, CFO

Yeah, no, absolutely. So HDV Macs, I think an important thing to take into consideration is the way we rolled it out under the blue-green acquisition in the 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 our license agreement 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 Blue Green and given the results of our sales rebranding of Diamond, Hilton was comfortable with us rebranding all sales centers on day one of the HTV 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 blue-green 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 and you're a 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 consideration is HGV Max is not a membership that you buy online. You do not log on to HEV.com and buy HEV Max. It is a process. You go through a tour. Your average transaction price is the equivalent of an upgrade, so circa $25,000, but it is selling well. To date, north of 20% of the existing blue-green owner base has upgraded into HEV Max, and when you contrast that compared to HEV and Diamond, they're well north of 40%. Will we ever get 100% of everyone? No. A high-water mark is probably about two-thirds. But it is a multi-year process, and I think we've got a good trajectory on that front.

Operator

Historically, the Hilton relationship has been one of the company's greatest advantages. We've written about that. Increasingly, you've also discussed Bass Pro a lot. You have airline partnerships, other distribution channels you've mentioned. And so now you have a range of channels, though I think your audience is probably most familiar with Hilton. Can you just paint a picture for us sort of after all these deals, how you profile your owner base? It seems like from this conversation that you kind of think about them in different buckets, but I want to understand if there's starkly different behavior across these different cohorts or if all these customers are generally more similar than different and if your longer-term vision slowly sort of migrates them toward a similar operating field.

Dan Matthews, CFO

I think when you look at the owner base, there is a segregation today more so than there was in the past, but it's really driven off of the individual consumer themselves, not necessarily to some extent the lead source, but predominantly it's driven by net worth and household income. Today we provide a product that is really a true aspirational product. You have Hilton Vacation Club, which is your entry-level product, your core product being Hilton Grand Vacations, and Hilton Club being your luxury-level product. Regardless of the lead source, once you're into the system, we are trying to encapsulate you in the Hilton family and get you to move up that chain scale as appropriate. Will you act different? Absolutely. And again, it's driven by individual demographics more so than anything else. But our goal is to get everyone to, and I'm sure, I don't know if anyone from Hilton is here today, but I'm sure they'd love for me to say this, but our goal is to get them to become a Hilton Honors member. Our goal is for them to open a Hilton American Express card. and our primary goal is to deliver an amazing vacation experience for them and make them a long-time member of our system.

Operator

Ultimate Access is a program that's been running for many years now. You inherited that program from your acquisition of Diamond. It feels like it is a powerful program, and one of your peers is launching a similar program from scratch today. Where is that program in its life cycle for you? Is there more value to be built or mined from expanding that? And what are the economics beyond that program?

Dan Matthews, CFO

Definitely more runway in that program. We'll start with the economics. If you were to look at VPGs of a standard owner coming through the door who is not involved in an ultimate access, they can be anywhere from 20% to 100% less than someone involved in an ultimate access. So while the ultimate access program does come at a cost, and I've already talked about us hosting an LPGA event, we also sponsor an F1 event, we also host bespoke concerts, there is a cost associated with that, but it's more than offset by higher VPGs. Have we fully scaled that out yet? No, I don't think so. Predominantly today, it is an existing owner program. Is there an opportunity for new buyers to participate in that, for us to leverage some of the fixed costs associated with ultimate access? I think the answer is yes. It's got to be done with balance. It's got to be done intentionally, making sure that if it is offered to new buyers, it's those that fall into a high propensity to buy with us. We do not want to restrict owner access off a potentially lower close rate individual. But we've enhanced it since we acquired Diamond, and we will continue to enhance it as we go forward.

Operator

You mentioned earlier some numbers around inventory spend. A few years ago, the discussion around inventory was largely securing enough supply to drive growth, and you took us back to 2018 when it was a totally different company from that respect. Now the focus is inventory optimization, it seems. So as you become much larger and become more mature, what is the philosophy around the right level of inventory spend to support the growth that you want? And what is the mix of that inventory spend ideally in terms of types?

Dan Matthews, CFO

So when you think about our inventory spend today, it is definitely dramatically different than it was in 2019. And what I mean by that is it is very much focused on reacquired inventory more so than it used to be. It's not to say that we will not have new build projects. It's not to say that we're not looking for interesting dots on the map, so to speak, for our owners to experience or have the opportunity to experience new things. If you dig through our Qs and Ks, which I'm sure you've done, you'll see that we recently disclosed a project in Nashville. But I think this underscores our philosophy, especially even on new builds. The Nashville project is structured as such, where we can take delivery of that project as early as 2028, or we can defer taking delivery and, importantly, paying for the product until 2033. So really trying to match cash outflows with cash inflows, i.e. supply and demand, basic economics. That being said, with the trust product and the level of inventory we have today, we are also extremely focused on reacquired inventory that we can purchase for amounts that are, in some cases, well below 5% of retail value. So from an inventory spend level, not only is it coming down from the peak levels of inventory spend, of that 400 mark to circa 300 million mark, roughly a third of that, if not more, will be focused on reacquired inventory, where if you go back to 2018, 2019, it was sub-25 million.

Operator

Okay. Let's talk a little bit about Alara. That transaction is clearly more than just the incremental EBITDA benefit that you get by owning it. Those owners largely operated within a separate ecosystem. Now they can upgrade to the broader HTTP platform, and then existing HTTP members can use Alar. So how should we think about the strategic value of that acquisition in terms of decreasing the connectivity across the system?

Dan Matthews, CFO

I think it's fairly robust. I mean, when you're talking about 30,000 owners having access to the remainder of the system and being able to upgrade out of Alara, it's pretty powerful. And meaningfully so, the Alara property also, just given its breadth and scale, also operates extremely efficiently. So from a maintenance fee perspective, it is also very desirable by existing owners in other projects who are looking to upgrade into a project to maximize the point maintenance fee ratio. So it's a relatively low maintenance fee that provides an opportunity for individuals to upgrade into a large. So you get to your point. It's both sides of the coin. So I think it's a very interesting opportunity. And the fact that we were able to acquire it from Blackstone for net cash outflow of about $45 million, I think it's going to be a very good investment for us. It's also, you know, despite being an acquisition, it's deleveraging in the first year and EBITDA positive in the first year. So we're very pleased with that.

Operator

Remind us what the mix of your customer in the U.S. is in terms of drive-to versus fly-to, if you have that data. And with all the volatility between gas prices and airfare, Have you seen any shift in behavior differential between those two subsets?

Dan Matthews, CFO

No material shift. I mean, the majority of our destinations, and I may have alluded to this earlier, well in excess of 75% of our owners live within a four-hour drive. So having those drive-to markets, that transformation that really came with the diamond acquisition that was expanded with the blue-green acquisition, I think really behooves us in a dynamic that we see ourselves in today. I'd say from a travel perspective, the one notable item, and I wouldn't put this associated with the price of fuel. I think this has been a detriment to us for some time now, and it's more yen-based than anything else. But the new buyer construct in Japan traveling to Hawaii is still not back to where it was pre-COVID. But again, I think that's more yen-based than anything else.

Operator

Hawaii seems to be holding up well. Would you correlate that Japanese inbound with currency movement? I know that was one thing we were watching for a couple years there. We haven't heard much about it recently. What's the last 12 months look like in terms of Japanese inbound?

Dan Matthews, CFO

Japanese inbound over the last 12 months, relatively, from our perspective, relatively consistent. But that means no real improvement.

Operator

I want to talk about capital allocation. If you could run through the way that you think about capital allocation and especially M&A, and we've seen some M&A in timeshare this year, smaller stuff than what you guys are used to. you guys did some very large deals, where's your appetite now for M&A? Where does it slot in in your capital allocation priorities, if at all? And what kind of deals over the next handful of years would be interesting for you at this point in the company's life cycle?

Dan Matthews, CFO

Sure. When we think about capital allocation, we basically try to bucket it into three different areas. One, M&A. Two, organic growth, which would be, in our case, primarily inventory spend, and then obviously return of capital to shareholders. From a traditional, and when you look at M&A, really bifurcated in the two segments, you have the Alara type of M&A, and that's where we have a partner that is the developer on a project that we are selling on their behalf. It behooves us to actually acquire the tail of those type of investments at some point. I wouldn't say that's traditional M&A, but that's exactly what Alara was. Are there other opportunities with us like that? There are. We have a partner that operates out of South Carolina that is a developer on a number of projects in Myrtle Beach. Would there be an opportunity there? Maybe at some point, but not in the next handful of years. Then you have your more traditional M&A, what we've done in the past, Blue, Green, Diamond, et cetera. When you think about the large opportunities that are out there or the large players that are out there, nothing really fits the bill of what we're looking to do. I mean, if you look at Westgate, if you look at Holiday Inn, we have, I hate to say zero, but I will say zero appetite from that standpoint, and even on the regional player basis. I think we're in a position now from an inventory standpoint that we do not need any additional robust increase in our inventory base. So we're happy where we're at. I would say very limited, if any, and that's just me hedging appetite for M&A.

Operator

So you've given us a longer-term algorithm to think about for the business. You've given us a summary of longer-term free cash flow generation and your priorities for capital uses. If you could leave the audience with sort of one takeaway, about HGV, I already said the underappreciated question, so I can't say that again, but what would you want to leave the audience with regarding the company's outlook and proposition for owning shares here?

Dan Matthews, CFO

There's a myriad of things, Brian. We have got a couple minutes. So what I would say, in timeshare in general, what we hear consistently these days is the K-shaped economy. And what I think is loss on individuals and this will rapidly translate into a Hilton Grand Vacation specific comment, but I think what is lost on individuals is the way you can modulate amongst our product. Our product, once you are our owner, if you're having an amazing year, you can fly to Hawaii, you can do every excursion under the sun and spend $50,000 on a family-based vacation. At the same time, if you're not having a good year and you're already owner, you can go to Myrtle Beach, you can use the kitchen for every meal, You can sit by the pool, sit on the beach, and have a very economical vacation all at the same time without having to do any transaction with us. That is a user that has got full utility of the system. And I can't think of another product that allows you to do that. If you go this year and you're having a great year and you stay at the Four Seasons and next year and you're not having a great year, the Four Seasons is not going to change the rate for you. You can change the product that you have to buy, but it's just not the same. Now, when it comes to Hilton Grand Vacations, one of the outstanding benefits that we have is our partnership with Hilton. It's by far our most valuable partnership in the Hilton name. There is no one who protects the brand name more than Chris Nassetta than ourselves. We take that very seriously. That gives a level of trust to the consumer, and it drives a high propensity to buy us over regional players for sure. outside of that when you think from an investment standpoint Hilton Grand Vacations is a very interesting crossroads at this front we've talked about it already but it's worth repeating we've got a declining inventory spend level from $375 million to $300 million we've got a declining integration spend level from $150 million to $75 million just over the next year that coupled with the variability of the introduction of HEV Max being more normalized and being more algorithmic, that more consistent growth in future years, I think drives a very compelling story, especially with the backdrop of a very robust share repurchase program that's already returned in excess of $2 billion to our shareholders and is very programmatic spending with us spending close to $600 million on share repurchases annually today.

Operator

I think that sums it up. Excellent. Well done. Thank you, Dan, for being here. Thanks for the time. Appreciate it.