Hilton Grand Vacations Inc. (NYSE:HGV) (“HGV” or “the Company”) today reports its first-quarter results. Highlights include:

  • First-quarter results reflect the adoption of ASC 606 and may not be directly comparable to prior periods.
  • Adoption of ASC 606 reduced first-quarter reported revenues and operating expenses by $63 million and $30 million, respectively.
  • Diluted EPS was $0.30 and net income was $30 million for the first quarter.
  • Adjusted EBITDA was $62 million for the first quarter.
  • Contract sales for the first quarter increased 14.6 percent from the same period in 2017.
  • Net Owner Growth (NOG) for the 12 months ending March 31, 2018, was 7.1 percent.
  • HNA HLT Holdco I LLC, an affiliate of HNA Tourism Group Co., Ltd., completed the sale of its entire 24.75 million holdings of HGV shares, including 2.5 million shares that were repurchased by the Company.
  • HGV formed a joint venture with Strand Capital Group, LLC, to develop its first resort in Charleston, South Carolina.

Overview

For the three months ended March 31, 2018, diluted EPS was $0.30 compared to $0.51 for the three months ended March 31, 2017. Net income was $30 million for the three months ended March 31, 2018, compared to $50 million for the three months ended March 31, 2017, and adjusted EBITDA was $62 million for the three months ended March 31, 2018, and $94 million for the three months ended March 31, 2017.

Adoption of ASC 606 reduced net income for the three months ended March 31, 2018, by $24 million, or EPS of $0.24 per diluted share, compared to the previous accounting guidance. The comparable impact on adjusted EBITDA for the three months ended March 31, 2018, was $33 million.

Total revenues for the three months ended March 31, 2018, were $367 million, compared to $399 million for the three months ended March 31, 2017. Adoption of ASC 606 reduced first-quarter reported revenues by $63 million.

“2018 is off to a strong start as we saw solid first-quarter operating performance across all of our businesses, including mid-teens growth in both contract sales and resort and club segment adjusted EBITDA,” says Mark Wang, president and CEO of Hilton Grand Vacations. “Given this momentum and our outlook for the balance of the year, we are raising our full-year contract sales and adjusted EBITDA guidance. We just announced our new project in Charleston and feel great about our development momentum and the record number of projects we expect to launch this year.”

Segment Highlights – First Quarter

Real Estate Sales and Financing

Real estate sales and financing segment revenue was $241 million in the first quarter of 2018, a decrease of 14.8 percent compared to the same period in 2017. Real estate sales and financing segment adjusted EBITDA was $44 million in the first quarter of 2018, compared to $83 million in the same period in 2017. Real estate sales and financing segment adjusted EBITDA margin as a percentage of real estate sales and financing segment revenues was 18.3 percent in the first quarter of 2018, compared to 29.3 percent for the same period in 2017.

Contract sales were $329 million in the first quarter of 2018, an increase of 14.6 percent compared to the same period in 2017. Fee-for-service contract sales represented 51.7 percent of total contract sales in the first quarter of 2018, compared to 60.3 percent in the same period in 2017. Tours increased 7.3 percent to 77,700 in the first quarter of 2018, compared to the same period in 2017. Volume Per Guest (VPG) for the first quarter of 2018 was $3,997, an increase of 7.0 percent compared to the same period in 2017.

First-quarter results reflect the adoption of ASC 606, which has a significant impact on how the Company recognizes revenues. Under ASC 606, HGV defers the recognition of revenue and all related direct expenses for sales of Vacation Ownership Intervals (VOIs) under construction until construction is complete. Previously, the Company had recognized these revenues and expenses using the percentage of completion method. In the first quarter of 2018, HGV deferred recognition of $59 million of sales of VOIs, net, and $26 million of related direct expenses.

Financing revenues were $38 million in the first quarter of 2018, an increase of 8.6 percent compared to the same period in 2017.

The weighted average FICO score of new loans made to U.S. and Canadian borrowers at the time of origination was 750 for the three months ended March 31, 2018, compared to 743 for the three months ended March 31, 2017. For the three months ended March 31, 2018, 63.6 percent of HGV’s sales were to customers who financed part of their purchase.

As of March 31, 2018, gross timeshare financing receivables were $1.2 billion with a weighted average interest rate of 12.2 percent and a weighted average remaining term of 7.7 years. As of March 31, 2018, 2.4 percent of HGV’s financing receivables were more than 30 days past due and not in default.

Resort Operations and Club Management

Resort operations and club management segment revenue was $98 million in the first quarter of 2018, an increase of 11.4 percent compared to the same period in 2017. Resort operations and club management segment adjusted EBITDA was $59 million in the first quarter of 2018, compared to $51 million in the same period in 2017. Resort operations and club management segment adjusted EBITDA margin as a percentage of resort operations and club management segment revenues was 60.2 percent in the first quarter of 2018, compared to 58.0 percent for the same period in 2017.

Inventory

As of March 31, 2018, the estimated contract sales value of HGV’s pipeline of available inventory was approximately $6.5 billion at current pricing or approximately 4.9 years of sales at the current trailing 12-month sales pace. As of March 31, 2018, the estimated contract sales value of HGV’s pipeline of available owned inventory was approximately $3.6 billion or approximately 2.7 years of sales. As of March 31, 2018, the estimated contract sales value of HGV’s pipeline of available fee-for-service inventory was approximately $2.9 billion or approximately 2.2 years of sales.

Of the current pipeline of available inventory, 45 percent is considered just-in-time and 44 percent is considered fee-for-service. As such, the Company considers 89 percent of the pipeline of available inventory as of March 31, 2018, to be from capital-efficient sources.

Balance Sheet and Liquidity

As of March 31, 2018, HGV had $479 million of corporate debt outstanding with a weighted average interest rate of 5.4 percent and $544 million of non-recourse debt outstanding with a weighted average interest rate of 2.5 percent.

Total cash was $154 million as of March 31, 2018, including $69 million of restricted cash.

Free cash flow, which the Company defines as cash from operating activities, less non-inventory capital spending, was $7 million for the three months ending March 31, 2018, compared to $125 million for the three months ending March 31, 2017. Adjusted free cash flow, which the Company defines as free cash flow less non-recourse debt activity, net was ($32) million for the three months ending March 31, 2018, compared to $131 million for the three months ending March 31, 2017.

New Accounting Standards and Adjusted Results

HGV adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASC 606”) on Jan. 1, 2018, under the modified retrospective method of adoption. The following are some of the significant changes to the Company’s consolidated financial statements:

  • Revenue and direct expense related to sales of VOIs under construction will be recognized when construction is completed, as opposed to recognizing revenue and related expenses under a percentage of completion method;
  • Revenue on prepaid discounted vacation packages will be recognized proportionately as packages are redeemed, as opposed to when the likelihood of redemption is considered remote; and
  • Revenue and expense related to certain sales incentives where HGV acts as the agent will be recognized on a net basis, as opposed to recognized on a gross basis.

Outlook

Full-Year 2018

  • 2018 guidance reflects the modified retrospective adoption of ASC 606 and may not be comparable to prior year presentations.
  • Net income is projected to be between $290 million and $306 million.
  • EPS is projected to be between $2.93 and $3.09.
  • Adjusted EBITDA is projected to be between $485 million and $505 million, which includes $68 million of net deferral impact related to a project under construction in 2017 due to the adoption of ASC 606.
  • Full-year contract sales are expected to increase between 8 percent and 10 percent.
  • Fee-for-service contract sales are expected to be between 50 percent and 55 percent of full-year contract sales.
  • Free cash flow is projected to be between ($235) million and ($275) million.
  • Adjusted free cash flow is projected to be between ($75) million and ($125) million.(1)
  • Inventory spending, which is included in cash flow from operating activities, is projected to be between $510 million and $530 million. In addition to ongoing and previously announced projects and initiatives, this amount includes approximately $390 million of anticipated spending on new projects during 2018 that have not yet been announced.

(1)

 Adjusted free cash flow represents free cash flow less non-recourse debt activity, net

Transactions and Other Events

During the first quarter, HGV formed a joint venture with Strand Capital Group, LLC, to own and develop a 100-unit timeshare resort in Charleston, South Carolina. HGV will invest a total of $10 million for a 50 percent interest in the joint venture, but because HGV is not the primary beneficiary, it will not consolidate the entity. Liberty Place Charleston by Hilton Club will be the fifth property developed in collaboration with Strand in South Carolina as well as HGV and Strand’s first joint venture as development partners. Construction is expected to begin in the fourth quarter 2018, with completion in the second quarter of 2020. Sales are expected to commence in early 2019. In addition to its ownership stake, HGV will market, sell and manage the property under a fee-for-service agreement with the joint venture.

On March 13, 2018, HNA HLT Holdco I LLC, an affiliate of HNA Tourism Group Co., Ltd., amended the existing Stockholders Agreement dated Oct. 24, 2016, to permit the sale of up to all 24,750,000 shares of HGV common stock prior to the expiration of an existing two-year restricted period, granted HGV the right to repurchase up to 4,340,000 shares of common stock from the seller, and eliminated HNA’s right to designate a certain number of directors to HGV’s board of directors. On March 14, 2018, HGV announced that HNA had priced an underwritten secondary offer of 22,250,000 shares at $46.25 per share. HGV did not offer any shares of common stock in the offering nor receive any proceeds from the sale of shares in the offering. Concurrent with the offering, HGV repurchased 2,500,000 shares of its common stock for a negotiated price of $44.75 per share, which is the same price at which the underwriters purchased shares from the selling stockholder. These shares were retired. Subsequent to the offering, both members of the board of directors appointed by HNA resigned. At present, HGV does not intend to nominate new directors to fill those positions and intends to maintain an eight-member board.

Conference Call

Hilton Grand Vacations will host a conference call on May 3, 2018, at 11 a.m. (EDT) to discuss first-quarter results. Participants may listen to the live webcast by logging onto the Hilton Grand Vacations’ Investor Relations website at http://investors.hgv.com/events-and-presentations. A replay and transcript of the webcast will be available on HGV’s Investor Relations website within 24 hours after the live event.

Alternatively, participants may listen to the live call by dialing 1-888-312-9854 in the U.S. or +1-323-794-2112 internationally. Please use conference ID# 8205589. Participants are encouraged to dial into the call or link to the webcast at least 20 minutes prior to the scheduled start time. A telephone replay will be available for seven days following the call. To access the telephone replay, dial 1-888-203-1112 or +1-719-457-0820 internationally and use conference ID# 8205589.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s beliefs, expectations and assumptions and information currently available to management, and are subject to risks and uncertainties. Actual results could differ materially because of factors such as: inherent business, financial and operating risks of the timeshare industry; adverse economic or market conditions that may affect the purchasing and vacationing decisions of consumers or otherwise harm its business; intense competition in the timeshare industry, which could lead to lower revenue or operating margins; the termination of material fee-for-service agreements with third parties; the ability of the Company to manage risks associated with its international activities, including complying with laws and regulations affecting its international operations; exposure to increased economic and operational uncertainties from expanding global operations, including the effects of foreign currency exchange; potential liability under anti-corruption and other laws resulting from HGV’s global operations; changes in tax rates and exposure to additional tax liabilities; the impact of future changes in legislation, regulations or accounting pronouncements; acquisitions, joint ventures, and strategic alliances that may not result in expected benefits and that may have an adverse effect on its business; its dependence on development activities to secure inventory; cyber-attacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to its reputation or competitive position; disclosure of personal data that could cause liability and harm to its reputation; abuse of its advertising or social platforms that may harm its reputation or user engagement; outages, data losses, and disruptions of online services; claims against the Company that may result in adverse outcomes in legal disputes; risks associated with its debt agreements and instruments, including variable interest rates, operating and financial restrictions, and its ability to service indebtedness; the continued service and availability of key executives and employees; and catastrophic events or geo-political conditions that may disrupt HGV’s business.

For more information about these risks and uncertainties as well as other potential factors that could affect the Company’s financial results, please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of HGV’s SEC filings, including, but not limited to the Company’s most recent annual report on Form 10-K and quarterly reports on Form 10-Q. All information in this release is as of May 2, 2018. HGV assumes no obligation to update any forward-looking statements or information to conform to actual results or changes in the Company’s expectations.

Non-GAAP Financial Measures

The Company refers to certain non-GAAP financial measures in this press release, including EBITDA, adjusted EBITDA, adjusted EBITDA margins, free cash flow and adjusted free cash flow. Please see the schedules in this press release and “Definitions” for additional information and reconciliations of such non-GAAP financial measures.

About Hilton Grand Vacations Inc.

Hilton Grand Vacations Inc. (NYSE:HGV) is recognized as a leading global timeshare company. With headquarters in Orlando, Fla., Hilton Grand Vacations develops, markets and operates a system of brand-name, high-quality vacation ownership resorts in select vacation destinations. The Company also manages and operates two innovative club membership programs: Hilton Grand Vacations Club® and The Hilton Club®, providing exclusive exchange, leisure travel and reservation services for more than 290,000 Club Members. For more information, visit www.hgv.com and www.hiltongrandvacations.com.