Good morning and welcome to the Hilton Grand Vacations First Quarter 2017 Earnings Conference Call. Today’s call is being recorded and will be available for replay beginning at 2:00 PM Eastern Time today. The dial-in number is 888-203-1112 and enter PIN number 5550864. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] I would now like to turn the call over to Robert LaFleur, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Lorie, and welcome to the Hilton Grand Vacations first quarter 2017 earnings call. Before we get started, we would like to remind you that our discussion this morning will include forward-looking statements, actual results could differ materially from those indicated by these forward-looking statements, and the forward-looking statements made today 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 previously filed Form 10-K or our 10-Q, which we expect to file later today. In addition, we will refer to certain non-GAAP financial measures in our call this morning. 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 at our website at investors.hgv.com. This morning, Mark Wang, our President and Chief Executive Officer, will provide highlights from the first quarter 2017, in addition to an overview of current operations and company strategy. Jim Mikolaichik, our Executive Vice President and Chief Financial Officer, will then provide more details on our first quarter and expectations for the balance of 2017. Following their remarks, we will open the line for questions. With that, let me turn the call over to Mark.

Well, thank you, Bob, and thank you all for joining us this morning. We’re pleased to report another strong quarter or second since the spinout, as we continue executing on our strategic priorities and evaluating opportunities to deploy capital to accelerate our growth. If you recall those priorities include growing contract sales, optimizing our capital efficiency, expanding our member base, enhancing member experiences, and pursuing opportunistic ventures. Let me now address some of the progress we made in each area, followed by an update on a few of our longer-term strategic initiatives. The first quarter was a very strong – was very strong across the board in our real estate business with all key metrics showing solid year-over-year gains. We saw both the U.S. and Japanese consumers’ propensity to spend on HGV’s future vacation products, remains strong in all markets. First quarter contract sales were up 9.5%, driven by improvements in both tours and VPG, and tours were up 2% with VPG up 8%. I’d like to point out that our first quarter contract sales growth was comfortably above 5% to 7% guidance we laid out for the year. But I’d like to remind everyone that the first quarter is the easiest comp of the year and the comparisons get tougher as the year on flows. That being said, we’re more comfortable at the high-end of the contract guidance range as we see things today. And if you look at our performance by region, Asia-Pacific was exceptionally strong with contract sales up over 20% away and by high single digits in Japan. Our strongest mark in the U.S. Mainland was Las Vegas with contract sales growth in the high single digits. On the capital efficiency front, over three quarters of our contract sales in the first quarter came from either…

Thank you, Mark, and good morning, everyone. Mark indicated the first quarter demonstrated continued strength in operating performance and our adjusted EBITDA was above the guidance range we provided in December. However, as Mark also indicated comps grew more difficult as the year unfolds. So we are maintaining our current full year 2017 operating guidance. Looking at our 2017 first quarter results, our key financial and performance metrics grew across our business lines. First quarter revenues were $399 million, an increase of $29 million or approximately 8% in comparison to the first quarter of 2016. The primary drivers were a $10 million increase in real estate revenues, mostly driven from higher fee-for-service commissions and a $5 million or 16% increase in our highly recurring club and resort management revenue. Net income in the quarter was $50 million and this represented a $2 million increase over first quarter 2016, as operating gains were largely offset by year-over-year increase in general and administrative expenses, most of which are related to our transition to an independent public company. We also benefited from a lower income tax provision which, resulted from a change in a convention and calculating interest on taxes associated with instalment sales. This led to a decrease in our effective tax rate to 34% in the quarter from 40% last year. Turning to our operating segments, total segment adjusted EBITDA increased by 6% in the first quarter to $134 million. The first quarter results in the real estate business lines, our contract sales increased 9.5% with on own sales up 11.8%, and fee-for-service sales up 8.1%. However, real estate revenues increased by only 5% as a shift from a favorable percentage of completion deferral in the first quarter of 2016 to an unfavorable deferral negatively impacted reportability. Real estate margin was…

Thank you. We’ll now conduct an electronic question-and-answer session. [Operator Instructions] Our first question comes from Brian Dobson, Nomura.

Hi. Thanks for taking the question. Real quick, do you think you could touch upon the uses for your pre-tax this year and also on your plans to reach out to existing customer bases which is I think that’s been under penetrated source of sales over the past few years?

Yes. Hey, Brian, Jim here; Mark and I can tag-team. Guess I’ll take the first and punk the consumer question on our owners to Mark. Free cash, I think we’ve stated in the past that we’re upping our owned inventory spending, which is embedded in that free cash flow concept. So we are upping that to about $135 million to $165 million that’s largely existing market, and we upped our CapEx for refurbishment on sale centers, investments, and consumer experience at our resorts. As for the free cash flow, the $140 million to $160 million, I think our focus near-term will be on entering new markets, new projects. Those markets include other urban destinations in the states, potentially Mexico, Cabo, Cancún, the Caribbean. We’re looking as Mark mentioned in his remarks, Japan is very interesting to us to get product to access the tourism direct in Japan and we’re also starting to get some maturity to our fee-for-service contract, where we have private equity partners that are starting to look to exit given the finite lives of their funds, and I think we’ll work with them as it’s – I think it works well on both sides for them to be able to get a return of capital enough to take on some new owned inventory potentially in a successful project that ultimately allows us to access consumer financing, some additional revenue and EBITDA. Longer-term we may consider some M&A. We will look at that, but we’ve got really nothing on there – our direct sites there at the moment. We think there’s a lot more we can do organically. Should we get out a couple of years and have trouble putting that to work? I think that’s when we’ll start looking at returning through dividends or buybacks, but that’s not the case right now. We really feel like we’ve got a lot of good growth opportunities.

Brian, this is Mark. On your question on the penetration of our owner base; actually, we had a great first quarter with our owner base. Our VPGs were up 14%. But most importantly we’ve got a lot of imbedded value going forward in our business with our base. We know and you’ve heard us say probably before that for every dollar that a new customer invest in the real estate with us, we’ll average another dollar with them over the lifetime of their ownership. And that, actually that lifetime that horizon typically for that second dairy purchase was in the first seven years, eight years and so. The fact that we’ve doubled our owner base since 2008, we have a very, very fresh and young owner base. And if you just look in average our contract sales against our overall owner base, we generated north of $2,000 per member last year, and we think it’s – had peaked the top of the industry as far as how well we’re doing, selling our owner base.

Great, thanks. That actually hits on my follow-up questions as well and looking forward to seeing you at our conference in two weeks.

All right. Thank you.

Thanks.

We will go next to Stephen Grambling, Goldman Sachs.

Hey. Good morning.

Good morning.

Good morning.

First question on, at the Analyst Day I think that you suggested 1Q it represented about 20% to 22% of EBITDA for the full year. I think that would put you above the range at this point. Can you just elaborate on some of the other puts and takes in the quarter that may have impacted that comparability? And was there any discernible impact from the Easter shift?

Sorry, what was the last piece? Easter shift did you say?

Yes. Was there any discernible impact from Easter moving around in the quarter?

No, nothing outsized from the Easter shift. I’d say, we really weren’t – we’re really not looking to give quarterly guidance. I think the bar that we set out there was just to give folks a starting point and short of going out with 25% per quarter we thought that putting some guide bars where we do see a little bit of seasonality is really in Q1, so we set those bars there. It’s not our intention to continue with that and we’re really looking at this on an annual basis. Really the puts and takes in the quarter as we – we had tremendous headline growth again, almost 10% on the sales side. And we saw most of that drop to the revenue line, but we have a little bit of negative – negativity quarter-over-quarter on the deferrals because we had a real positive deferral last year of about $10 million in the states and negative on the New York property at the beginning of this year which we mentioned in fourth quarter which will roll through the end of this year, maybe early next year. And then we really had put a lot of investing I think into our marketing and sales which is why we saw only about 2% growth in the real estate and finance segment. But you saw that all flow through in the net owner growth to our – to the club and resort segment growing at 11%, dropped about 6%. We still feel really good about the EBITDA guidance for the year. We did shift it obviously down given we added – we didn’t add back consumer finance similar to the rest of the timeshare industry, so people hopefully took note of that, otherwise it’s unchanged and we feel good about it. The comps are tough. I think as Mark said, for the rest of the year we had a really great year of growth 12%, 15% and 14% in Q2, Q3 and Q4 last year. And I think we just want to see how the year plays out, but we’re doing some investing and we think we’re set up.

Yes, Stephen, I could say that – this is Jim – elaborated on. We’re investing into the core business, we’re investing – you’ll see in our resort operations business, we’re investing back into our owner base this year, we’re also building our pipeline for future net owner growth. So everything we’re doing is being done to ensure the business will be strong over the long run. And then I’d also say we’ve got this G&A built due to the spin-off which is the one that – we just got to get through it this year, but, yes, it’s more of a one-time, one-year time event.

And so I guess two related follow-ups on those points. The first is just, what was the contribution from the new sale centers in the quarter and what’s the expectation for how those will continue to ramp? And then the second is just on the G&A, which did look a little bit high relative to – I think the expected range for the year. Is that the right run rate from the first quarter we should be expecting? Thanks.

No, the contribution – first of all, we opened up at Hilton Head and D.C. We’re really excited about those markets. We’ve gotten off to a good start. But as we said, it takes a number of years to really get those markets ramped up. So contribution-wise, nothing – not really meaningful from an overall standpoint, but you’ll start seeing contribution from those as we get later in the year and into next year. And I think on the G&A side, we’re still trying to add about 18% to 20% all in, and that’s flipping a little bit below the line and above the line. They may have run a little bit hotter than somewhere expecting as a contributor to adjusted EBITDA, but coming off of a basically a $92 million G&A expense line item last year all in, we’re expecting roughly 18% to 20% and we think we’re in line with that and we have no reason to change that. We think we’ll have a more inflationary growth rate of about 1% to 3% growth once we get passed – or 1% to 2% maybe once we get passed this year as Mark said, and despite what you think might be a little bit heavier G&A above the line, we’re still comfortable with the EBITDA guidance that we put out there.

Great. Thanks so much. I’ll jump back in the queue.

Thanks.

We’ll go next to Bradford Dalinka, SunTrust.

Hey, thank you for taking my question. Wanted to ask you guys first about the inventory pipeline, is there anything you guys have in there that isn’t sitting behind an existing distribution point, Maui still see on the table? Also concerning the strength at Grand Islander, how much is left there?

I’m sorry, what was the tail end of that question?

Considering all the strength at Grand Islander, how much get left there in Hawaii?

Yes. We don’t provide that level of detail, but I can assure you that we have multiple opportunities at what we’re looking at and we’re going to make sure that we never put that distribution center in a position where we run out of inventory, so we’re in a pretty good shape as far as lining up our sequels there. The first question I think was around do we have any inventory where we don’t have distribution, was that the question?

Yes, is there anything in your reported pipeline where you don’t currently have distribution, Maui still on the table?

No, I think everything that’s in our pipeline has distribution behind it. And Maui, Maui is the one project that we pulled out and the construction has been delayed on that property. And since we don’t have clear visibility of when we’re going to be able to start sales, we just thought it would be better that pulled out at this point to make sure that the visibility that we’re providing in our pipeline is clean as possible.

I would add that we still have sales and marketing agreement there. We still think that project has some viability. We just thought it would be more conservative just in way of transparency. All in though, I mean we’re comfortable with well over five years of inventory at our current sales rate and 2.5% as I’ve said is on balance sheet and it’s owned and 2.5% is fee, big mix on the capital efficiency side. So there’s nothing about the inventory pipeline right now that we think is a risk that how we’re distributing our current sales strategy.

Yes. We’re also on – Brad, we’re also making great progress in sourcing new projects in the new markets.

Understood and appreciate it. And a quick modeling question if I can, on your receivables factoring program. Appreciate that this is not in the cash flow guidance; some of your competitors have it in there. So we now that you’ve done securitization and paid down the non-recourse facility somewhat roughly speaking, moving forward, how much of a benefit to kind of reported free cash flow could that be?

I think we’re probably going to be out with more specifics on that as we get to the middle of the year or second half of the year. I will tell you the deal that we just did. While it gave us an additional, call it, $20 million, $25 million after a transaction costs and because it picked up 8% going from the bank facility to the securitization market. Most of that was also were [indiscernible] because we have heavier interest burden coming out of last year just given the debt that we picked up as part of the spin transaction. And so it really didn’t have a much impact at all, it’s relatively flat on the year from a financing perspective. As we push forward all-in sequel, we think we can do a deal a year, call it, $300 million or $350 million, it’s going to depend on our fee versus owned mix and what the propensity is on the on our consumer financing. As we do more deals, obviously that means we’re doing also more repayments and replacements as we push forward. And we’re modeling that right now and modeling some of what we’re using our free cash flow with our board. So it really wouldn’t be fair to give you an exact number, but that’s kind of the order of magnitude in size that we’re thinking about that we should be able to do on an annual basis.

Perfect. That’s super-helpful. Thank you.

And our next question comes from Chris Agnew, MKM Partners.

Thanks very much. Good morning. I wanted to ask a little bit about the growth opportunities that you talked about. And given that you led with Japan, would it be fair to say that Japan is maybe the biggest near-term opportunity out of all the incremental course opportunities you talked about? And in the Japanese market, does that mean it lend itself to you favoring fee-for-service more than just in time around or the way you need to enter that market you need to invest, just trying to think about the capital commitment on your part, by entering that market? Thanks.

Sure. On Japan, first I’d say to your first question that Japan we feel pretty confident that we’re going to be able to share some information later this year, but there’s also other markets that we feel comfortable that are going to play out this year too. But as it relates to the structure in Japan one of the things that we’re focused on is working with world-class partners in Japan, companies that have been in that market for multiple decades so with experience they build quality projects and so. As for as the structure we’re not really – we’re not really able to disclose how the structural would be done, but you can expect that we won’t be actually handling the development of it whether we take it down on a just-in-time basis or fee-for-service basis, those are discussions that are ongoing. But probably when you asked about Japan timing that’s probably, say, a little bit more mid-term because we’ve got to develop the product, we’ve got tremendous distribution there though which is what we’re trying to tap. But if I looked at near-term growth, it would probably be some of the properties that were converted to us as part of the spin which should be D.C. and Hawaii, New York and where we’re starting to ramp a couple of those up and we’ve got some interesting new products probably coming online. They’re excited about it and should be even more near-term growth opportunity.

Got it. Thanks. And then maybe a longer-term question, just your thoughts on balancing fee-for-service versus just-in-times/owned, what’s your sort of broader goal and what will determine the path there? Is it really just as opportunities present themselves or were there other considerations? Thanks.

Let’s see, our objective is to remain highly capital efficient while balancing where I see, our balance sheet risk and our EBITDA growth. And so the mix is really going to have inflow overtime depending really on market opportunities. Currently our thought is 50-50 gives us the right mix of growth and high returns, but it’s something we’re going to evaluate as we move forward and I can’t tell you that as we – as we add on the inventory we are very focused on the just-in-time structure.

Got it. Thank you.

[Operator Instructions] We will go next to Brandt Montour, JPMorgan.

Hey, guys, thanks for taking my questions. So, on the club and resort revenue per member which came in stronger in the 1Q, just wondering what the puts and takes are there. Did you guys put any longer-term services through that will carryover over these kind of one-time in nature and what’s the appropriate run rate fee growth per member?

Yes. First of all, our club business continues to grow. I think the benefit – you’re seeing the benefit early from two key areas. The first is, we’ve been talking about is NOG, where we just have more club members been using fees, additionally, we have higher management fee, dues that usually go up 2% to 3% a year as well as transaction fees. And we also saw four properties open last year and we’re going – we’re now experiencing the full benefit of those revenues in the first quarter.

Okay, that’s helpful. And then, just a quick question on AsiaPac. So we didn’t hear much on China, I understand this is of course a longer-term opportunity for you. But I was just wondering if you called it off on China just broadly given that you have political environment you’re in?

No, not at all, we are optimistic. I think, I mentioned in the last call it’s definitely kind of our attention. We have people on the ground there today working on opportunities, but it’s a market that is going to take a bit of time to develop, but we think there’s a big potential there, which is at the end of the day it’s getting the right product for design and also finding the right partner or partners and we’re excited about the HNA closing. And while we haven’t had a tremendous amount of engagement yet with them, we expect that here in the near future. So yes, China is something that continues to be on our radar screen, and we’ll update you as we progress.

Great, that’s it from me. Thanks guys.

Ladies and gentlemen, at this time we will conclude the question-and-answer session. Thank you for attending today’s presentation. This concludes today’s conference and you may now disconnect your line.