Earnings Call Transcript - HGV Q2 2024

Operator, Operator

Good morning, and welcome to the Hilton Grand Vacations Second Quarter 2024 Earnings Conference Call. I would now like to turn the call over to Mark Melnyk, Senior Vice President of Investor Relations. Please go ahead, sir.

Mark Melnyk, Senior Vice President of Investor Relations

Thank you, operator, and welcome to the Hilton Grand Vacations second quarter 2024 earnings call. As a reminder, our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements, and any statements are effective only as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the risk factors section of our SEC filing. We'll also be referring to certain non-GAAP financial measures. You can find definitions and components of such non-GAAP numbers as well as reconciliations of non-GAAP and GAAP financial measures discussed today in our earnings press release and on our website at investors.hgv.com. Our reported results for all periods reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606, we are required to defer certain revenues and expenses related to sales made in the period when a project is under construction, and then hold off on recognizing those revenues and expenses until the period when construction is completed. For ease of comparability and to simplify our discussion today, our comments on adjusted EBITDA and real estate results will refer to results excluding the net impact of construction-related deferrals and recognitions for all reporting periods. To help you make more meaningful period-to-period comparisons, you can find details of our current and historical deferrals and recognitions on table T-1 of our earnings release and a complete accounting of our historical deferral and recognition activity can also be found in Excel format on the financial reporting section of our Investor Relations website. In a moment, our Chief Executive Officer, Mark Wang, will provide highlights from the quarter in addition to an update on our current operations and company strategy. After Mark's comments, our President and Chief Financial Officer, Dan Mathewes, will go through the financial details for the quarter. Mark and Dan will then make themselves available for your questions. With that, let me turn the call over to our CEO, Mark Wang. Mark?

Mark Wang, CEO

Good morning, everyone, and welcome to our second quarter earnings call. Reported contract sales in the quarter were $757 million, and EBITDA was $270 million with margins of 22%, which were below our expectations. We had a solid start to the quarter carrying the momentum we've built as we exited Q1 and saw trends in both April and May improve from the first quarter. As we moved into June, however, we experienced a broad-based pullback in consumer spending behavior. This shift was evident across all our brands and customer segments, but it was particularly acute in our new buyer segment. We've noted on several prior calls our perception of increased consumer hesitancy, which continues to influence purchase decisions, and there's no question this played a role in our results. In addition, we also faced some execution challenges during the quarter. As part of the integration process with Bluegreen, we just completed an extensive restructuring of our sales and marketing organization to increase the flexibility with our new scale and improve our execution in two key areas: regionalization and staffing. Regarding the first area, while we'll continue using HGV's more centralized marketing approach to large destination markets posting multiple HGV properties, we've also moved to empower those smaller regional markets with additional tools and resources to optimize their sales and marketing efforts at the local level, which we believe will generate both additional tours and improved VPGs. In addition, over the past year, we've been keenly focused on driving new buyer tour flow, which creates significant lifetime embedded value for HGV. As part of our recent organizational design efforts, we've also reevaluated optimal staffing levels to allocate additional resources to our new buyer sales lines, which should enable them to more effectively handle the current and future tour volumes. So while we can't control the macro spending environment, we've moved quickly to address those execution issues as part of our new organizational design we rolled out across the business in June. These changes will take some time to flow through our business; however, which, when combined with the quarter's results in a more challenging macro environment, led to us lowering our guidance expectation for the year. Now let's turn to our operational performance during the quarter. Contract sales in the quarter were impacted by a year-over-year decline in both tours and VPG. Looking at our tours, our owner segment remains a relative bright spot with consistent positive low single-digit growth in each month of the quarter, supporting owner sales. They remain 15% ahead of 2019, demonstrating the resilience of our owner channels. Our new buyer tours remain lower as we rebuild our tour pipeline following the adjustments we made at the end of last year. In addition to seeing softer local marketing trends, new buyer tours from direct marketing packages will improve in the back half as the teams have done a great job rebuilding and activating the pipeline, but we also expect pressure on local marketing tours to continue in the back half as our recent operational adjustments work through the organization. VPG for the quarter was just over $3,300 or 10% ahead of 2019 levels. Both legacy HGV and Bluegreen posted similar mid-single-digit declines versus the respective prior year metrics. And on a consolidated basis, we also saw similar levels of year-over-year decline for both our new owners and new buyer channels owing to the combination of factors we talked about earlier. But with the operational changes we've made, we still expect to maintain the low end of our target range of 10% to 15% ahead of 2019 VPGs. Looking at our forward demand indicators, occupancy in the quarter was in line with last year at 83%. And our marketing and rental arrivals on the books look strong for the back half, particularly in the fourth quarter. So as we've seen for a number of quarters, travel intentions remain strong among consumers, and we're focused on improving our ability to convert those tours into transactions. Moving to our non-real estate segments, our financing team continues to do a great job managing through the higher rate environment and meeting the strong ABS investor demand with several well-subscribed note offerings. Our rental segment also continues to see healthy demand from travelers and in our recurring club and resort business. We ended the quarter with over 720,000 owners and NOG of 1.7%. I also think it's important to highlight our cash flow generation. This quarter, we produced $370 million of adjusted free cash flow. So despite some of the near-term challenges, our business is still able to produce a significant amount of cash, and we're using that cash to support our commitment to capital returns, repurchasing 2.3 million shares of stock during the quarter for $100 million. Turning next to our integration efforts, we'll start with an update on Diamond. Through the end of the second quarter, we rebranded 40 properties representing 9,800 keys, and we remain on track to rebrand another eight properties this year for an additional 1,300 keys, bringing us to 70% of our targeted total. We also continue to integrate and enhance our technology platform and have launched two major improvements this year, benefiting our consumers and team members. We recently combined our legacy HGV and Diamond customer-facing member websites into a unified experience, simplifying the booking process and management of their member points across our brands. And we launched an integrated sales tool that is now being used across all of our sales sites, enabling our sales teams to more seamlessly sell both deeded and trust products from a single platform. On the partnership front, we've had strong traction with Great Wolf Resorts out of the gate. We've already seen a number of our members using their points for stays with their families at Great Wolf Resorts. And on the marketing front, early signs indicate strong interest in our vacation packages like Great Wolf guests across call transfer, digital and on-property ambassador program. Turning to Bluegreen, we continue to make good progress. The teams are now integrated into our corporate workflow, and we're tracking ahead of our scheduled synergy realization, as Dan will cover shortly. There's a lot of anticipation among the Bluegreen member base and sales force about the launch of HGV Max, and we're working hard to get everything in place for the rollout. Recall that until the launch of Max, we will continue to run Bluegreen's sales organization in parallel with ours, which is also why we think that addressing these execution challenges now will be key to ensuring a smooth sales integration during our rebranding. While this has been a difficult quarter for us, we're maintaining our long-term perspective on the business while acting with a sense of urgency on what we can control in the near term. Despite these challenges, I'm confident that we've identified the issues and are working diligently to address them. And I'm optimistic that we'll improve from here, and above all, I remain confident in our future path. We have a much stronger business model than we've ever had with our best product offering. We've got more geographic diversity, we have a larger member base, and we're generating more free cash flow than ever before. So with that, I'll turn it over to Dan to walk you through the numbers. Dan?

Daniel Mathewes, President and Chief Financial Officer

Thank you, Mark, and good morning, everyone. Before we start, note that our reported results for this quarter included $13 million of sales deferrals, which reduced reported GAAP revenues and were related to decreased sales of our newest phases of our Maui Bay Villas and Ocean Tower projects. We also recorded $5 million of associated direct expense deferrals. Adjusting for those two items would increase EBITDA reported in our press release by $8 million to $217 million. In my prepared remarks, I only refer to metrics excluding net deferrals, which more accurately reflects the cash flow dynamics of our financial performance during the period. I'd also note that our results today also include a full quarter of financial results for Bluegreen, which we closed on January 17. Turning to our results for the quarter, total revenue, excluding cost reimbursements in the quarter was $1.1 billion, and adjusted EBITDA was $270 million, with margins of 24% excluding reimbursements. EBITDA included $14 million of Bluegreen cost synergies recognized during the quarter for a run rate of $71 million annualized on target with our plan for $100 million of cost synergies within 24 months. Turning to our segments, within real estate, contract sales were $757 million for the quarter with Bluegreen contributing $189 million of sales in the quarter. New buyers comprised 31% of contract sales in the quarter, improving over 300 basis points from the first quarter level. Tours for the quarter were over 226,000, which was slightly below the prior year's pro forma level, and Bluegreen contributed just under 66,000 tours for the quarter. Our owner tours and low single-digit growth in the quarter remain at levels over 15% ahead of 2019, demonstrating the continued resilience of our owner channels that want to explore our expanded resort network and the benefits of HGV Max. However, as Mark mentioned, the new buyer tours remain pressured as we're continuing to work to rebuild our new buyer tour pipelines, along with making operational adjustments to improve local marketing. VPG for the quarter was $3,320, just over 10% ahead of 2019 levels. Our new buyer VPGs declined by a similar amount, and both core HGV and Bluegreen saw a slight deterioration in year-over-year growth rates from Q1 into slightly lower close rates from the macro and execution factors that Mark mentioned earlier. The cost of product was 14% net VOI sales for the quarter, and our provision for bad debt as a percentage of owned contract sales was just over 15% in the quarter. Real estate sales and marketing expense was $375 million for the quarter, or 49% of contract sales. Real estate profit for the quarter was $128 million with margins of 22%. In our financing business, second quarter revenue was $102 million, and segment profit was $58 million with margins of 57%. Interest income and segment profit for the quarter were impacted by $28 million in contra revenue for the amortization of the non-cash premium associated with the portfolio of receivables that we acquired from Bluegreen and the acquisition, coupled with the non-cash premium still being amortized for the Diamond transaction. These items will continue to decline over time as our acquired portfolio pays down. To more clearly distinguish them from our core underwriting business, we've updated the tables for our financing business in our press release. Excluding the temporary impact of these adjustments, the core underwriting business had interest income of $116 million and margins of 68%. Going forward, we expect the non-cash premium amortization of these portfolios to continue to create some noise in reported financials. Combined gross receivables for the quarter were $3.85 billion or $2.84 billion net of allowance. Our total allowance for bad debt was $1 billion on that $3.85 billion receivable balance for 26.2% of the portfolio. Our annualized default rate for our consolidated portfolio, inclusive of Bluegreen, stood at 9.68% for the quarter, our provision was 15.4% as a percent of contract sales in the quarter, consistent with the expectations of a steady-state provision level in the range of mid-10s. Currently, we expect the provision for the year to remain in the mid-10s with a sequential uptick in the third quarter, followed by sequentially lower provision in the fourth quarter due to seasonal trends. It is important to note that this assumes similar levels of new buyer and owner mix. Recall that new buyers carry a higher provision levels than owners, which can impact provision levels in any given quarter. Digging deeper into the drivers of our provision, generally, the HGV underwritten deed of trust folks are holding steady. For the Bluegreen portfolio, we've seen higher losses from some originations that were underwritten prior to our integration and have increased our provision accordingly. While we've addressed much of this in our opening balance sheet process, we do expect some headwinds in the near term while we work on consolidating and aligning underwriting procedures, sales practices, and risk-based pricing, much like we did for Diamond. In our resort and club business, our consolidated member count was 720,000, and our NOG was 1.7% at the end of the second quarter. Revenue was $171 million for the quarter, and segment profit was $123 million with margins of 72%. Rental and ancillary revenues were $195 million in the quarter, with segment profit of $7 million and a margin of 4%. Revenue growth was driven by higher available room nights offset by slightly lower RevPAR, expenses on our low legacy business continued to be elevated due to the impact of additional inventory and developer maintenance fee expense, along with the inclusion of Bluegreen's much lower margins rental business. Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA of HGV, EBITDA added $5 million, offset by G&A expenses of $44 million, license fees of $40 million, and EBITDA attributable to non-controlling interest of $4 million. Our adjusted free cash flow in the quarter was $370 million, which included inventory spending of $86 million. Cash flow conversion rate exceeded 130% this quarter owing to the timing of inflows from our two recent ABS deals. For the year, we anticipate that we will be able to maintain a conversion ratio that is roughly in line with our expectations as well as last year's conversion in the low 50% range. During the quarter, the company repurchased 2.3 million shares of common stock for $100 million. And through July 31, we repurchased an additional 1.1 million shares for $46.3 million, leaving us with $114 million of remaining availability under the 2023 repurchase plan. We also received approval from our Board of Directors authorizing us to repurchase an aggregate of $500 million, which is in addition to the remaining amount of our 2023 authorization. We remain committed to capital returns as our primary use of excess free cash flow, and we'll maintain our existing base of approximately $100 million per quarter in share repurchases. Turning to our outlook, as Mark mentioned, owing to the more challenging quarter and outlook, we are lowering our guidance for adjusted EBITDA to a range of $1.075 billion to $1.135 billion, $425 million lower than our prior guidance. Our own primarily to the pressures that we mentioned on our VPG and tour trends and to a lesser extent, the continued headwind from bad debt normalization that we had mentioned on prior calls. As of June 30, our liquidity position consisted of $328 million of unrestricted cash and $446 million of availability under our revolving credit facility. Our debt balance at quarter end was comprised of corporate debt of $4.9 billion and a non-recourse debt balance of approximately $1.7 billion. At quarter end, we had $750 million of remaining capacity in our warehouse facilities, of which we had $647 million of notes available to securitize and another $324 million of mortgage notes we anticipate being eligible following certain customary milestones such as first payment dating and recording. From a timing perspective, we anticipate coming to the market with another ABS deal this coming fall, which should provide incremental adjusted free cash flow in our second half. And as I mentioned, we still feel comfortable with our prior assumption around our adjusted EBITDA to our adjusted free cash flow conversion rate ratio. Turning to our credit metrics at the end of Q2 and inclusive of all anticipated cost synergies, the company's total net leverage on a TTM basis was 3.67 times as we continue to make progress towards our target leverage range of 2 times to 3 times while still repurchasing shares. I'm also happy to report we successfully repriced our 2031 Term Loan B from a spread of 275 basis points to a spread of 225 basis points, generating nearly $5 million per year in cash interest savings. We will now turn the call over to our operator and look forward to your questions.

Operator, Operator

Our first question comes from David Katz with Jefferies.

David Katz, Analyst

Hi, good morning, everybody. Thanks for taking my questions. Two from me, please. I mean, with respect to the guidance adjustment and isolating the discussion around execution issues. Can you just talk a bit more about your comfort that you've sort of got your arms around that? The question we all have is have you taken out or not, right? And how do we get comfortable that there isn't more? And the follow-up is I'm not sure if you sort of updated or touched on Maui, and I would love a little more update on what you're seeing and sort of feeling. Yeah, thank you.

Mark Wang, CEO

Yeah, David, this is Mark. So look, I think obviously we've spent a lot of time going through it from a bottom-up perspective on the components that are going to drive the rest of the year's performance. And we expect when you think about guidance, you should expect continued macro pressure on the consumer in the back half of the year, as you know, we're competing for their discretionary dollars. And given the outlook and the second quarter's performance, the pullback in the guidance really reflects lower contract sales versus what our expectations were, right. And so when you look at the guidance, what's really been pressuring us has been our new buyer close rates. We look at the data constantly. When you look at the top two-thirds of our new buyers, that VPG has stabilized, right. And I'm talking about looking at it from a net worth cohort perspective. However, the bottom third continues to underperform, and we've seen more variance than we've seen in quite a while between the top two-thirds and the bottom third. So we expect pressure on new buyer close rates. As far as tour flow goes, we're expecting flat new buyer tour flow as we continue to ramp up our direct marketing. We're going to see growth in the back half of the year, but it will be offset by some softness in our local marketing. From an owner perspective, the business again is intact. It's performing well. When we look at owners on the books, we feel pretty good about the arrivals there. Now we're seeing a normalization in owner conversion rates versus our prior expectations, and it's still above 2019. So still outperforming what we saw in the past since our owners are intact and doing well. But ultimately, we see pressure on contract sales on the new buyer side. Well, Dan, if you want to cover any additional components around the bad debt piece of it.

Daniel Mathewes, President and Chief Financial Officer

No, David, it's a great question. Especially the logical one being, have we de-risked the guidance to the extent that we need to. I think just from a modeling perspective, the way to think about it when we were looking at it and the pullback was majority driven by VPG, and as you know, that has a high level of flow through to the bottom line. Tours from our previous expectations did have a minimal impact. As for contract sales, that will obviously have an impact on revenues associated with financing. Bad debt is a piece of it. As we talked about, we've seen some increase in defaults and delinquency rates, most notably on the broking side, and we've raised that provision accordingly. I would say that is still consistent with where we ultimately always thought we were going to end up in that mid-10s range but obviously accelerated. We previously thought that we would probably exit this year and go into next year in that mid-teen range, and we're there today. So a bit of a pull forward on that front. But it's and there's a little bit of savings on CMP, but just generally speaking, if you were to look at the pull-down in guidance, it's effectively 80% associated with contract sales, most notably on the VPG side and 20% associated with bad debt with some offset from a lower cost of product. We clearly tried to de-risk this guide based on everything we are seeing as of today.

Mark Wang, CEO

And then, Dan, on the Maui update. So first of all, it's hard to believe today is the one-year anniversary of the tragic wildfire in Maui. There's still a lot of recovery happening there. On a positive note, both our resorts are fully operational now. That being said, a lot of our new buyer tour generation were locations that were, for all intents and purposes, shut down and those won't be reopening anytime soon. But the other business has come back. It's still lagging where we thought it would be pre-fire, but part of it is in our sales from a sales marketing standpoint, some of the pressures are really related to rehiring staff. Housing values continue to be a challenge, especially for our property that's near West Maui. However, I would say on the other side of the island in Kihei, the Valley Bay Village project we are building is performing well and is selling well throughout our network.

Operator, Operator

Our next question comes from the line of Patrick Scholes with Truist.

Patrick Scholes, Analyst

Please proceed with your question. Good morning, everyone. I have a number of questions here. I'll actually start out with potentially a positive one, then move into some other questions. Mark, what are your thoughts on the Japanese yen now strengthening? When might you expect to see that show up in increased demand for your Hawaii product? The yen having gone the other way for a year or so was a big headwind, but really has, and directionally, what's your thoughts on that and the possible impact? Thank you.

Mark Wang, CEO

Yeah. Well, first of all, it's nice to see the yen strengthening. It's been quite a challenging period from a currency standpoint for our Japanese members and for Japanese tourism overall for Hawaii. Good news is our members' timing was really good for us when we opened our property in Selco, Japan, and owners are traveling there and using the property. We have very high occupancies there. But there will be a lag effect as far as the euro and the yen strengthening, and hopefully, where we're really off on the Japanese business is the new buyer Japanese business from the talk tourism that's coming into Hawaii. Our owners have come back and they've actually come back faster than the general population that's coming back to Hawaii. That's really because of the commitment level they've made to being with us. But overall, we're hoping that this improvement will strengthen that part of the business.

Patrick Scholes, Analyst

Okay, we will see. My next question: you had said that you had talked about a sales reorganization. Can you give us more color on that? What exactly is that about? And where within sales north that's more of the middle senior level? Or is that specifically in some of your acquisitions, which tends to happen when you purchase companies? More color, please. Thank you.

Mark Wang, CEO

Yes, sure. There was quite a bit of disruption in the quarter as we were integrating Bluegreen and a very positive outcome of that is we spent a significant amount of time in the quarter restructuring our sales and marketing organization, and we really restructured for the next wave of growth. Importantly, with the acquisition of Bluegreen, they were a much larger company with a broader sales marketing footprint. Just to give you a little historical data here, if you look at us historically, we were very centralized. Back in 2019, we were doing $1.5 billion in contract sales, 20% of that was outside our five core markets. So it was really five distribution, smaller distribution centers out of our five core markets. Today, we're at $3 billion in contract sales with 40% of our volume outside of what we would call big destination markets. Those destination markets have grown up by 60%, which means the 40% represents a move from five sales centers to 44 sales centers on a regional basis. Our footprint and the makeup of our business have changed materially, and to support that larger destination market and those smaller regions, we went from two regions to five regions with multiple subregions. We strengthened our mid-level leadership to really increase focus and execution and to create better oversight for the sales and marketing activities out there. We also named a new Chief Sales and Marketing Officer, Dusty Tonkin, who was leading Bluegreen's operations. Dusty has a great background and experience running large organizations. All in all, a big move; it did create quite a bit of disruption, as you can imagine. We rolled out the new structure in mid-June, but I'm happy to say the work has been done, and I'm very confident, with Dusty as our new leader, that this new structure will improve our execution going forward.

Patrick Scholes, Analyst

Okay, thank you. I have one more question here before I get back in the queue. On the loan loss provision increase, and maybe this is getting into the weeds and policy making, but I think it's important. Why do you have to take that percentage up going forward as opposed to doing what your competitor did this quarter and a couple of quarters ago as opposed to increasing your sales reserve or taking a charge or however you want to call it? What's the decision-making thought process around all of that? I hope that makes sense. Thank you.

Daniel Mathewes, President and Chief Financial Officer

Yeah, no, that all makes sense. I mean, I think, as well, when we're talking about the bad debt provision, we could go into a lot of variables. I'll try to keep it as simple as I can. First and foremost, what I would tell you is we have not fully integrated grouping; Bluegreen is still operating as a separate entity. The Bluegreen credit processes are not fully integrated into the legacy HGV and Diamond processes yet we're also still in the realm of purchase accounting. But to put things in perspective, when you look at when we acquired Diamond, they had a reserve on their books that was roughly 30% of their portfolio. Once we completed our due diligence and acquired them, and then applied fair value to their portfolio, that reserve went from 30% to 37%. Similarly, on Bluegreen, their reserve was just under 30%, about 28% or 29%, and doing the same exercise that we did with Diamond, the reserve is now right at 36%. So very consistent with Diamond. The other thing I would tell you is when you look at how we run our bad debt provision, and I don't have insight on any of our competitors, but our bad debt is based off of a very robust static pool model that utilizes in excess of 15 years of historical loss data that takes into consideration by loan fiber and even the country of origin. And those loss models are updated on a monthly basis. Any changes that occur this month are applied to the previously originated loans and then also are applied on a prospective basis that helps to capture current trends quickly and mitigate wild swings in the provision to the extent we can. Additionally, we account for various seasonal items like prepayments and even later stage defaults, and that's the third bucket that goes in. And again, this is done on a monthly basis. Regarding Bluegreen, they've been upgrading their owners quicker than they were previously. The balances were getting larger. We knew those defaults and delinquencies would increase. I think that's true for any timeshare operator; whenever you upgrade people faster and increase loan balances, you can expect an uptick in delinquencies and defaults. I think I got here sooner than we originally expected, but we still anticipate that long-term run rate in the mid-10s percentage. But that did obviously impact our expectations for this year because we got there sooner than we expected. That was a very long-winded answer, but I think I captured everything you were looking for.

Patrick Scholes, Analyst

I appreciate having gotten into the weeds on such things. I'm going to jump back in the queue with some more questions. Thank you.

Operator, Operator

Our next question comes from the line of Brandt Montour with Barclays.

Brandt Montour, Analyst

Good morning, everybody. Thanks for taking my question. So Mark, if we could just go back to the beginning of the year when you were exiting '23, the tone and the message was that you guys had sort of overwhelmed the sales, your resources, and manpower at these smaller sales centers that were concentrated in the legacy Diamond footprint. And so we could sort of bridge that adjustment you made it sort of year and going into '24 with this adjustment now. It seems like it's sort of an extension of the same problem, maybe compounded by a deterioration in the lower third in terms of purchasing propensity. Is that how you would characterize it or is it sort of a different element of the resources and understaffing of those sales centers?

Mark Wang, CEO

Yes, Brandt, I think that characterizes that pretty well. As you know, we went through this rework, right? And that performance was impacted by this integration work, and we worked through the quarter. We completed the redesign and rolled it out in June. This process, unfortunately, distracted a lot of our leadership teams until the final structure was established, as you can appreciate a lot of people were on pins and needles trying to figure out whether they would be on the team or what position they would play and where they would be located. You have that. From a staffing standpoint, it's kind of a knock-on effect from the disruption because it did lag in some of the hiring of sales and marketing staff, which limited tour slot availability. We've identified the issues, and quite frankly, we're just behind on staffing. We're behind on hiring and recruiting, but we now have the organization and the structure to address those things. On top of that, coming out of last year, we did see stabilization in US from a customer standpoint for new buyers, other than the bottom third, but that bottom third of new buyers is just not performing well for us. We're seeing more variability in that performance on the bond side than we've seen in a long time. Now good news is we saw some stabilization in July. Performance at VPG contract trends stabilized in July, more in line with what we saw in April and May. Once we have this reorganization behind us, we hope it will stabilize some of what we're seeing from just the disruption standpoint. But there is pressure on the consumer to make commitments at the level of discretionary spending required to be part of our club, and talking to the sales teams, they are indicating increased customer hesitancy. I think people are taking a more wait-and-see approach, but that being said, we continue to have to work hard. I think we've identified some of the issues, and we're going to improve them. With the current macro situation, we just felt it was important to adjust our guidance down for the rest of the year.

Brandt Montour, Analyst

Okay, thanks for that. That's actually a good segue into my next question, which was just really a follow on to David's question earlier. When you look at the second half guidance for VPGs, what I'm trying to get to is close rates. Are you assuming something similar to what you saw in that July level? Or did you bake into that back half VPG something more conservative?

Mark Wang, CEO

With regards to the guidance on the back half of the year, it takes into consideration the VPGs that we had been experiencing. It didn't assume some uptick in outperformance; instead, let me say it differently. It does nullify what we saw happen in Q2. So it does take the risk into consideration.

Operator, Operator

Our next question comes from the line of Ben Chaiken with Credit Suisse.

Ben Chaiken, Analyst

Hey, thanks for taking my questions. I'm sorry, there's a lot going on this morning. So I just want to clarify something for the guidance cut. Did you provide a mix between macro and execution issues? And then on the execution side, I guess I don't totally follow the sales and marketing adjustment commentary. Is the point simply that you're a bigger company today and need to align the sales force accordingly to maximize efficiency? And then just one follow-up.

Mark Wang, CEO

Yeah, we did not break it down between macro and execution. I think we've referenced it as disruption on the sales force. There are macro pressures, and it's clearly difficult to estimate specific amounts built in just because of macro. Ultimately, I think you probably heard us say just from a breakdown, it's driven primarily by VPGs that have high flow through to the bottom line, to a lesser extent, bad debt, and with a little offset on cost of product. The breakdown we want to talk about is really the 80-20 split: 80% associated with contract sales, notably the VPG, and 20% being bad debt with some offset on cost of product.

Daniel Mathewes, President and Chief Financial Officer

On the execution side, we restructured primarily to prepare ourselves for the next wave of growth. Importantly, we learned over the last couple of years and by looking at Bluegreen's model that we needed to reinforce critical mid-level leadership areas and dedicate greater oversight to these smaller sales centers. We made the decision to realign all our sales organizations under one leader. The execution part of the problem was disruption due to all the noise around the restructuring. Part of it was just lagging in certain key areas that are important for our sales organization. Our marketing organization performed well, and that's around staffing levels. We got out of sequence on our ratios and lost efficiency. Those are things we've identified and are addressing, and I think the missteps that occurred will not occur with this new structure.

Ben Chaiken, Analyst

And then really quick follow-up. So it sounds like you've got some new leadership and some new middle managers. If I interpret you correctly, what does the ramp-up of those positions look like? Is this something that's going to percolate through the rest of the year or into '25 or any color?

Mark Wang, CEO

Most of the people that have been identified and put in their new positions are in place. There's still a little disruption with relocations for some of their families, but for the most part, that's all behind us.

Operator, Operator

Our next question comes from the line of Chris Woronka with Deutsche Bank.

Chris Woronka, Analyst

Hey, guys, good morning. Thanks for taking the questions. I was hoping maybe we could spend a minute talking about buyer behavior on the financing side and obviously generally more a question about first-time buyers. Are you seeing any change there? I mean, are you trying to alter your strategy, or are you offering lower positive initial deposits or anything like that trying to figure out? Is this just trying to get them over the finish line or are they not getting anywhere close to the finish line and financing incentive dollar no matter at that point?

Mark Wang, CEO

No, great question, Chris. From time to time, and it's not uncommon for us to run various promotions to see if they move the needle. Sometimes it helps; sometimes it doesn’t; it depends on which sales distribution center you're looking at. I would say that when it comes to the new buyer, the financing element has worked in some cases and hasn't in others. It's not a definitive answer. With regards to deposits, we typically do not drive a lower deposit required because we want our owners to have a meaningful level of equity as they begin their ownership journey. It also has implications for revenue recognition because our internal policies we deferred revenue recognition until 10% is down. We're always aiming for that bare minimum, and when it comes to upgrades, there are different metrics we'll run as well to assess potential where existing owners might not need to put additional equity down.

Chris Woronka, Analyst

Okay, that's helpful. Thanks. As a follow-up, do you think as you evaluate all these changes you've made in the sales centers kind of post-Bluegreen? Yes, obviously, there's a little bit more you want to do, but does it make you think you need a new product for this current environment? Whether it's something that fits into a smaller budget or could be a shorter vacation, which we hear from other travel companies is something like that on the table if we're going to be in this environment for a while?

Mark Wang, CEO

Actually, I think the acquisitions that we made really put us in a great position. We've widened our product offering, and we've diversified our product. We're in a solid place from an inventory standpoint in our brand offerings, and we have a broader customer base. Importantly, we've diversified our lead flow with some of these world-class partners. I do want to make a comment on that on the new buyer side. The top third of our cohort is still performing well and the middle is performing okay. We’ve been taking good pricing on this; our average transaction price for a new buyer today is 19% higher than it was in 2019. It’s not that the new buyers are falling apart. The challenge is really the bottom third. We are considering ways to adjust our product to meet that bottom third. We believe once we get the Bluegreen system integrated with our overall system when we roll out Max, that will make a significant difference. There is some hesitancy on the Bluegreen business right now as they’re waiting for communication from us on what the acquisition means.

Operator, Operator

Our next question is a follow-up question from Patrick Scholes with Truist.

Patrick Scholes, Analyst

Thank you. I do have a number of follow-up questions here to talk, Mark and Dan, a little bit more about some of the demand in local markets or if you're seeing some of this related to local market softness, and if so, how does the reorganization address that? Thank you.

Mark Wang, CEO

That's a really good question, Patrick. We’ve talked a lot about our owner business, our pipeline, and what we see on the books. Our direct marketing pipeline is related to new buyers, where 40% of our tour flow for new buyers comes through local marketing. We've seen a pullback there, and I think it's less about the current macro and more about some of the execution challenges we've had. This is an area that we can do better, and we're focused on right now. Just so you have a definition, local marketing includes our guests that are rental guests staying on the property and guests frequenting the markets that we're in. We saw softness in the first half. We’ve identified it. We've been lagging on some of our hiring, but we believe we’ll get that turned around as we move into the back half of the year, although it will take a bit of time.

Patrick Scholes, Analyst

Okay, thank you. Just three more questions here. First one from a high level: have you any initial indication what maintenance fee growth might be for next year? Your competitor had a very large maintenance fee increase this year and in our normal 15%-ish, and some resorts have over 20%. I've come to the belief that when you put a very large surprise maintenance increase, it’s going to cause a certain comfort level for customers to quit your product, which now results in loan losses and shocks and surprises. Any initial indication what yours might be? Would you expect it sort of just a normal mid-single digit next year?

Mark Wang, CEO

We're expecting normal mid-single digits. I'm not sure what competitors are doing, but we consistently utilized even during the pandemic; we moved our maintenance fees up kind of that mid-single digit. So there's no catch-up requirement now, and we’re not going to surprise anyone with anything more than a mid-single digit increase this coming year.

Patrick Scholes, Analyst

Okay, good. Then two more questions here. You talked about the bottom third really not doing well. Does this unfortunately imply that your underwriting for Bluegreen is tracking behind initially at this point? And related to that, where do you stand with your synergies versus your targets for that acquisition? Thank you.

Mark Wang, CEO

We’re looking at our KPIs and VPGs across all the brands, and HGV, Diamond, and everything has moved down on a similar basis. There's really no discernible difference or declines across any of the businesses. Some pressure exists on the Bluegreen customer, as I mentioned earlier; they're waiting to see what HGV is going to roll out that will benefit the Bluegreen members. As for synergies, Dan, maybe you could take us through where we're at on that.

Daniel Mathewes, President and Chief Financial Officer

Yeah, absolutely. When it comes to cost synergies, we are right on track from our original expectations. We're at a run rate of about $71 million. This includes the primary item that anyone should consider when you think of cost synergies, which is headcount reduction, etc. For the balance of the year, I don't expect that run rate to change significantly as we drive towards that $100 million target for 2025 when you consolidate items and health benefits. Keep in mind, we have yet to even start rebranding any sales centers or resorts at this point, which is in line with our original expectations. Although it's not a huge figure, it’s in line with expectations. I think we're in a good place from a synergy perspective as of June 30.

Mark Wang, CEO

Today, we feel pretty good about both deals we've done and the long-term benefits they will provide the company. Our ability to leverage our brand across non-branded resorts is great. We’ve tripled our resort size, have built-in demand, and we have over 700,000 members. We've increased our recurring EBITDA from 42% to 57% today, and our free cash flow conversions have improved to over 50% today. Ultimately, we feel good that this supports a great return of capital to our shareholders throughout this cycle.

Patrick Scholes, Analyst

Thank you. That's good to hear. I think that'll alleviate some of the folks who had reached out to me this morning with those concerns.

Operator, Operator

Thank you. Before we end, I will turn the call back over to Mark Wang for any closing remarks. Mr. Wang.

Mark Wang, CEO

All right. Well, thank you. Before we wrap up, I'd be remiss not to acknowledge today is the one-year anniversary of the tragic wildfires in Maui. As we mark this somber occasion, I'd like to thank all of our team members for their hard work and service to the community to our guests and to one another. They show tremendous courage and resolve as we work through the initial tragedy. We know it will take time for West Maui to fully recover, and we will be there to support our teams and local communities in the long term. Again, thank you for joining us today. We look forward to speaking with you soon. Thank you.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.