Hilton Grand Vacations Inc. (HGV) Q3 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Hilton Grand Vacations' third Quarter 2017 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning at 2 PM Eastern Daylight Time today. The dial-in number is 888-203-1112 and enter PIN number3802457. 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 conference over to Robert LaFleur, Vice President of Investor Relations. Please go ahead.

Thank you, Melinda. And welcome to the Hilton Grand Vacations third 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 file 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 third quarter, 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 third 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 good morning everyone. I would like to open by acknowledging the tragedies that occurred the past few months in many areas of the country, whether directly or indirectly many of our owners, team members and their families have been affected by these events. As always the safety and care of our team members, owners and guests is the most important. And we are focused on providing direct assistance to help with the healing process. Our business was directly affected by hurricane Irma. In Orlando and South Carolina we saw cancelations and closed our sales centers for several days. Our resorts in both markets remained open throughout the storm and our properties in Orlando were full as many evacuees' headed inland. We also have 17 managed properties in South Florida that were located in evacuation zones along the coast. Ahead of the storm, our dedicated team members showed incredible generosity and compassion to safely evacuate our owners and secure our properties. Many did so before attending to their own homes and families. And they returned right after the storm to help re-open our properties as quickly as possible. Within weeks, most of our properties were re-opened and all of our South Florida properties are fully opened today. I am thankful for our team's efforts during Irma. With that in mind, let's discuss how the business performed. We had another solid quarter as the resilience of HGV's diversified business model overcame the challenges I just discussed. We are confident heading in the year end and are reiterating our 2017 operating guidance, which Jim will discuss in more detail shortly. For the second quarter we posed at high single digit tour growth and contract sales were up by mid- single digits. Meanwhile adjust EBITDA in our Resort and Club segments increased nearly 20% producing margins in the mid 50s. In Real Estate, Los Vegas was our strongest region with mid teen contract sales growth. And the Asia Pacific region grew by double digits for the third quarter in a row. Contract sales were a bit soft in Orlando and South Carolina due to the sales center closures. None of our South Florida properties are in active sales, so there was no impact to contract sales from property closures area. Despite these disruptions and some tough comps, total contract sales increased 6.5% driven by 9% tour growth and 1% decline in the VPG. As we discussed last quarter, we are seeing strong tour growth from the first time buyers as our marketing and sales teams continue to outperform the industry in engaging new customers. In fact the future investment we are making by focusing on first time buyer toward is critical to driving the one metric that ties together our entire business and touches on each one of our strategic priorities. And that metric is not or net owner growth. As you've heard me say before the importance of NOG to HGV's business cannot be emphasized. Third quarter and that was 7%. In other words there were 7% more owners in our system at the end of the third quarter of 2017 than there were a year ago. And why is this number so important, because each one of our 25,000 new members that we welcomed to HGV in the past 12 months imbeds meaningful future value into our business. We estimate that 60% of the life revenue we see from each owner comes at after their initial purchase. It comes from club dues, transaction fees, management fees, financial revenue and future real estate transactions. And most future real estate transactions occur within seven years of the owner's initial purchase. So strong and consistent NOG means we always have a healthy base of owners who are within their upgrade window. In fact over half of our current owners, made their initial purchase within the past seven years. Now, some of our area operated that we estimate there are over 75,000 future real estate transactions currently embedded in our owner base. That's the power of NOG and in our business without marketing there no NOG. So I would like to take a few moments to welcome the newest member of our executive team, our chief marketing officer, Sherri Silver. Sherri joined us shortly after our last earnings call and she brings over 20 years of strategic marketing experience and expertise in managing change and innovation. Sherri comes to us from outside of our industry. And that's important because I wanted to bring in a fresh set of eyes that could help us to expand our horizon and think about new and innovative ways to evolve our product offering and customer acquisition practices, ways to grow the business, expand the market and build upon the strength that what is already the industry is leading marketing and sales organization. Shifting gears, I would like to spend a few minutes updating you on the recent investments and development opportunities then I will talk a little bit about the benefits of our fully diversified in capital future business model. So first with joint venture we announced in July contributed 3 million of adjusted EBITDA and its first quarter out of gate, which is right in line with expectations. The transition is going smoothly and we continue to believe the JV will produce very attractive returns on our investment. We followed the law with a second Fee-for-service buy out at our Sunrise property in Park City, a project we have been involved since of 2012. While much smaller than the Elara deal, Sunrise was an opportunistic investment that allows us to fully participate in the projects mainly real estate and financing economics. It also locks in a long term management agreement and provides an anchor for potential sequel projects in the region. Looking at another one of Fee-for-service projects, phase 2 of our Hilton Head property is set to break ground later this month. We entered this market last year in owner's response to this property in the short time it's been open, it's a good example of how we can leverage our third-party developer relationships to expand vacation options for our owners and grow our business. On adjusting time front construction is under way at two new projects, our 48, street property in New York and Ocean Tower Waikoloa, which is a conversion of an asset that was transferred to us in the stand. Elsewhere, our development team continues to make progress on projects in the US, Mexico, the Caribbean and Japan. And we still anticipate to formally announce some new destinations by year end. In fact, I am heading into Japan in a few weeks and expect to have some good news to share afterwards. When I look at our pipeline today in only our eleventh month as an independent company, I've never been more excited about the opportunities ahead of us. Now that we are free to deploy our own capital and at the same time continue leveraging our Fee-for-service relationships. We've been able to build a pipeline of incredible projects in exciting markets. Running through our list of recent investments, ongoing projects and future opportunities really demonstrates the scope and power of our diversified capital efficient approach to grow in the business. While the term capital efficient is used a lot in industry these days, the definition seems very broad; it means different things to different people. So, I'd like to take a minute and walk you through HGV's approach to capital efficiency. W believes our products provide maximum flexibility regardless of where we are in the cycle. We have multiple levers at our disposal from full capital commitment on development projects, to no capital commitment on Fee-for-service deals. Collateral commitments in just and time deals and as we saw with Elara, where we made a direct equity investment with the Fee-for-service developers, we can also mix and match her up for our quick hybrid structures. Having three of the available purchase plus hybrid expands in our projects we can look at and the number of projects we can pursue at the same time. Rather than spend 200 million in one year, on one project, in one market, we can spend 50 million on four projects with different structures in different markets. And as we do this with our own capital, third parties can invest that much or more on our behalf. So, our approach to capital efficiency allows us to multiply the amount of capital being deployed to expand our system grow our business. So clearly having a robot fee-for-service program gives us tremendous flexibility. We did invent fee-for-service, but the current scale of our program is unmatched in the industry. And, we believe this position is secure because making a meaningful share towards fee-for-service as a public company will be difficult given the risk it poses to bottom-line growth. So tying this all together, we believe that our growing direct investment capacity plus the ability to leverage our fee-for-service program is a key differentiator that gives HGV a strong competitive advantage in pursuing growth. To ramp up, just we started the journey of becoming an independent company, we stressed towards resiliency and sustainability of our diverse earnings streams and capital efficient business model. As we've talked with investors and analysts, I've been encouraged by the streets openness to the timeshare industry in general and HGV in particular. We know this is a complex business and our goal from the outset was to be as transparent in fourth coming as we could and we are pleased with reception so far. Even given the challenges we faced this quarter, HGV continued to execute and invest in our future. Going forward, we intend to stay focused on run our sales and number based, maximizing our customer experience, strengthening our brand presence and focusing on our talent. If we can do that, we should continue to create meaningful value for our team members, our owners and our shareholders. With that I'll turn things over to Jim.

Thank you, Mark and good morning everyone. As Mark indicated despite some challenges third quarter results were in line with our expectations. Despite hurricanes and the tougher second half comps we've discussed on previous calls, we feel confident about the remainder of the year and we are reiterating our 2017 operating guidance. With that let's move on to our third quarter results. This quarter's results reflect the benefits of HGV's diverse earnings model, as strong third quarter trends in our Resort and Club business offset more modest trends in our Real Estate business. Third quarter revenues were $426 million an increase of $90 million or approximately 5% in comparison to the third quarter of 2016. Our Resort Operations and Club Management segment revenues increased by 11%, led by 25% increase in Resort Management revenues and 11% increase in Rental Revenues. Higher Resort Management revenues will reflect the contribution from strong NOG and the opening of Grand Islander. The strong growth in Rental revenues reflect higher ADRs in Las Vegas and a shift to rental occupancy from owner occupancy in Orlando during hurricane Irma. Net income in the quarter was $43 million. This represented an $8 million increase over the third quarter of 2016 as G&A declined modestly in the quarter. And, we benefitted from a more normalized effective tax rate. At this point we believe our full year 2017 tax rate will normalize at approximately 39%, which is consistent with the guidance we updated last quarter. In our operating segments, total segment adjusted EBITDA increased by 3.1% in the quarter to $131 million. Third quarter results in the Real estate business line experienced an increase in contract sales of 6.5% with owned sales up 26% and fee-for-service sale down 7%. As Mark mentioned, we saw a strong same-store sales result in Las Vegas, Hawaii and Japan. The total real estate revenues were up 2% in the quarter, as lower fee-for-service sales and a change in sales mix led to 11% decrease in commissions and other fees in the quarter. Real estate margin was down $9 million compared to the third quarter of 2016 and the real estate margin percentage decreased 430 basis points to 23.5%. Product cost on an absolute basis and percentage basis were lower in the quarter despite 26% increase in owned contract sales. The reduction is attributable to favorable inventory mix and lower fee-for-service upgrade volumes. Sales and marketing cost net increased on an absolute basis by $17 million as a percentage of contract sales by 270 basis points. We are still witnessing elevated costs from our new market distribution channels and building our tour pipeline. And as Mark mentioned, we also saw stronger growth in more expensive first time buyer towards this quarter. Additionally, this line item captures the R&D cost associated with new development projects targeted at international expansion. In our financing business, revenues increase 12% on higher interest income from growing receivable balances and higher servicing fees. Financing margin increased 4%, while financing margin percentage declined to 71.1%, as the higher non-recourse debt balances led to higher consumer financing just expands. At the end of the quarter, our consumer finance portfolios stood at approximately $1.2 billion and carried an average interest rate at 12.1%. Delinquencies remain low on an absolute basis at 1.7%, 40 basis points lower than they were at the end of the second quarter. Our default rate was essentially, unchanged from year end at just under 3.7% and our long term allowance for loan last stood at 11.6%, 40 basis point increase from last quarter. Combining these two business lines, into our Real estate and financing segments, third quarter segment revenues increased 3% and segment adjusted EBITDA decreased 4.7%. Real estate sales and financing segment adjusted EBITDA margins decreased to 210 basis points to 26.1%. Our Resort and Club management business line experienced an increase in third quarter revenue of 12.1%. The increase was a result of net owner growth, price increase and incremental management fees from recently help in properties. Resort and Club margin increased 4.2% at higher cost related to our growing member base, newly opened properties and ongoing investments and customer experiences offset some of the stronger top line growth. Resort and Club margin percentage declined 510 basis points to 67.6% with that reflecting those same trends. And, our Rental and ancillary business line third quarter revenues increased $4 million as rental revenues increased 11% for the reasons we discussed earlier. Ancillary revenues were flat, and rental and ancillary expenses were also flat in the quarter. Rental and ancillary margin increased 36% in the quarter and the margin percentage expanded 650 basis points. Combining these two business lines into our Resort Operations and Club Management segments, third quarter segment revenues increased 11% and segment adjusted EBITDA increased 19%. Resort operations and club segment adjusted EBITDA margin percentage increased 370 basis points to 55.6%. Bridging the gap between segment adjusted EBITDA and adjusted EBITDA, license fees are flat in the quarter and general and administrative cost increased $6 million. It's worth pointing out that year-over-year increases in G&A, related to additional public company expanses are starting the moderate as we comp against the pre-spin ramp up in these areas in the back half of 2016. Finally, the Elara joint venture contributed $3 million to adjusted EBITDA in the quarter, bringing total third quarter adjusted EBITDA to $94 million, $1 million increase from third quarter of 2016. With respect to inventory management, we remain capital efficient with 75% of our contract sales in the third quarter coming from either free-for-service or just in time inventory. And our free-for-service sales mix was 52% for the quarter. Year-to-date we are within our 2017 guidance range of 52% to 57% and still expect to finish the year in that range. At the end of the quarter our pipeline of inventory represented 4.8 years of sales at our current pace, including 2.5 years of owned inventory, and 2.3 years of free-for-service inventory. Approximately 88% of our pipeline is capital efficient, free-for-service adjusted time inventory. And, as Mark discussed in greater detail, we have a robust deal pipeline that should provide sufficient inventory to support our current and future sales strategy. Our capital structure remains flexible and capable of supporting new development projects and other growth opportunities. And we ended the quarter with $484 million of corporate debt and $612 million of non-recourse debt. Our corporate leverage is approximately 1.2 times on a trailing 12 month basis or 0.7 times using net debt. From a capacity standpoint our $200 million bank revolver is fully available and we have over $320 million of capacity on our time share facility. We also have approximately $284 million in cash, comprised of 226 million in unrestricted cash, and 58 million in restricted cash. In the quarter we generated $106 million of free cash flow compared to $45 million in the third quarter last year. Year-to-date we've generated $262 million of free cash flow compared to 119 million for the first nine months of 2016. As we've discussed throughout the year, some of the year-to-date strengths in free cash flow is spin related payment timing, and timing of inventory spend. We also received $32 million benefit in the quarter, when the IRS granted an extension on income tax payment to businesses in hurricane affected areas like Orlando. Given these items, we believe free cash flow, through the year is likely to come in above the high end of our previous guidance range of $180 million to $200 million. Now, full year free cash flow guidance is now, $280 million to $300 million. Again, we would like to point out that most of the payment timing and inventory spending flows should reverse themselves next year. Now, as a result we believe are average annual cash flow over this year and next combined should be in the range of $180 million to $200 million. I'll warp up by reviewing our 2017 guidance. We still expect full year contract sales growth of 6.5% to 8.5%, delivering net income of $180 million to $198 million and adjusted EBITDA of $380 million to $410 million. Despite, the direct and indirect impacts of storms in Florida and Texas, coupled with the uncertainties related to the incident in Las Vegas, we are maintaining our 2017 guidance at the elevated level discussed last quarter. Looking forward to 2018, we expect to release full guidance details on our next earnings call. This completes the prepared remarks. We'll now turn the call back over to the operator and we look forward to your questions. Operator?

Thank you. [Operator Instructions] And we will go to Stephen Grambling, Goldman Sachs.

Hi, good morning thanks for taking the questions. So, on the two properties, just in time properties Ocean Tower and New York City, can you give us just provide a little bit more color on the timing of these projects and how the economics could, maybe compared to existing projects that are being sold through now, thanks.

Yeah, so on the first one Ocean Tower; you're going to see the property that we received in a stand. We are looking to start sales in early '18 construction convergence started just recently. We are anticipating that we are going to open the first phase in the fourth quarter of '18. I think if you look at it from the comparative standpoint, the difference between this project and what we currently have in Waikoloa, this project is going to be a higher price product. Its Ocean front inventory, but as I can assume our standpoint is pretty close to what we are developing today, so, Ocean Tower really is more of a sequel type product for us in that market. New York, 48 streets, the timing on that is, it started construction, but I don't believe we are actually going to be able to start sales until late '18 early'19. And, again the economics are very similar to our sequel properties, our previous properties in that market.

Steve, I would say both of these projects were included in our original guidance that we went out in late 16. So, we had already anticipated these, these are not incremental development opportunities that Mark was touching on earlier. So, they are not economically sort of stacking on top of the existing guidance.

And so maybe on that note, you gave some color on the free cash flow between this year and next year and I realize it's still early. But, are there any other kind of one time things or factors that we should be considering as we look into 2018 that have come up, relative to your initial expectations. We look at that three year outlook verses where you've come over the course of the year?

No, I think the bulk of what we are seeing is probably for a little less money to work on the development side than we would have liked here. We've got a nice pipeline of really good opportunities in a bunch of different markets that we think can be incremental, there's some new distribution opportunities and some new product opportunities that we're tracking. We make it some of that spending gun before the end of the year, but it's likely that it might push into the beginning and next. The tax phenomenon is about a $57 million tax deprival that we get to push to the beginning of next year, it will reverse itself completely. We did benefit from one last license repayment in 2017, as a result of a cash slip that happen right before the spin. And, as I said we push the inventory spend on Ocean Tower which I've touched on an earlier call related to our desire to make sure that we really got the more room, actually complete. But we are still on phase to complete that project by the end of next year, which is what we intended to do to begin with. So, I think we are realizing a little bit of cash flow than we expected, so the guidance for the two years on average is still higher than what we initially came out with, by about 10 million to 20 million. But, we do expect a number that sinks the reverse and do we expect the number for the development projects to start to roll through either late this year or early next.

And I have one very quick follow-up by me before I get back in the queue, just on that comment, that there has been a little bit less development, is there any reason for that, either based on what you're seeing in the market or even as we look at corporate tax form. Could that have any impact on your capital allocation or decisions? Thanks.

Yeah, no Stephen, it's Mark. No, it's just about timing. We've got a robust deal pipeline right now, the activity around getting these deals done is an all-time high. And, so, I realize that with the audience we have today, they're trying to understand what the timing and the benefits are for this, but at the end of the day, it's just a timing issue, we feel really good, I think we are incrementing some of this capital to work potentially at the end of this year, but more likely early in the 2018.

That's great. Thanks so much.

And we'll go next to Bradford Dalinka, SunTrust.

Hey, good morning, guys.

Good morning.

Appreciate taking my question. So the first one just a quick one can you quantify the impact of the storm in 3Q I know you touched on it quite a bit but is there any way you could give us kind of tours you lost in Orlando or and around like that?

Yeah, I'll let Jim give you at an approximate on that it is again it's a difficult number. But it's again it's very unfortunate as types of events because they're becoming more frequent but now that being said our financial performance wasn't significantly impacted. It sounds like we're a bit more fortunate than the others is we had less exposure and impacted areas. Our closures were really temporary so there's no infrastructure ongoing impact. The fact that but the fact of the matter is the hurricane did affect two of our larger markets Orlando and Myrtle Beach. And we're coming off of 40% year-over-year and I think the fact that we group 6.5% a quarter really demonstrates not only the resiliency of the business but also our leadership and team of put the customer first and we still matter objectives. So again I want to take our teams for everything they do with towards every day and Brad, I would say that proximately 1% to 2% of volume is probably what we saw so 6.5% for the quarter would have likely been closer to 8% and 8.5% probably about $5 million to $10 million of volume at the margins depending on what the sales mix would be somewhere between kind of 28% to 35% maybe a little north of there. But it where we're saying no at the end of the days we really sold through it and the quarter was still a very strong quarter we saw great uplift on the rental side and as a result, it didn't impact our parents' expectations from an earnings standpoint from the end of the year we're still targeted exactly where we were previously and we saw it as an immaterial piece of the puzzle during the quarter.

Understood. Appreciate it. And one more if I can know you're not given 2018 guidance today you made that clear but any bread crumbs you can put out there for us be helpful just kind of the torque flow versus the VPG driven growth continue any major comps thing like that? Thanks. That's it for me.

Yeah I don't see if you go back to the guidance that we rolled out at the Investor Day in late 2016, I think we've paced against that well through 2017 and in fact up the guide and last quarter and were targeted exactly where we thought it would be for the end of the year. I think the guidance that we laid out in for 2018 and 2019 during that timeframe from a contract sales standpoint, revenue standpoint, adjusted EBITDA sort of down through the entire model I think are coming true about the only thing we're talking about for 28 years and see a little bit more free cash flow coming out of the business and we originally expected but that's if there are bread crumbs that I think we're doing what we set out to do when we finished the year in 2016.

Got it. Thank you.

And we got a Brandt Montour, JPMorgan.

Good morning, guys. Thanks for taking my questions. I just want you to touch on Las Vegas I know you don't give quarterly guidance but what form or if you've seen any impact at all of the tragic event there and 4Q tours?

Obviously we had with the event out there the tragic event but I have to tell you I think it's bounced back really well and anything quite frankly that we lost and maybe softness in and tour flow right after the event we caught up with and conversion. So that again the very resilient and its interesting time share owners they have a vested in an interest in their property and they tend to come back quicker than the DC with lodging because that vested interest they have so. So our owners are back filling the property and we've got a good tour flow happening right now so we don't see any really long term impact on it.

Great. That's helpful. Thanks and that and then some the time share cost side with two parts so the cost of sales just wondering how much of this favorable change year-over-year was in line with your internal expectations for how much of the difference was mix versus maybe more recapture activity and then on sales and marketing expense you mentioned the R&D cost and international expansion in there are just wondering how much of the lift in the quarter was sort of related to the forward investment?

So I missed the piece right before the sales and marketing the last piece.

Yeah sure the cost to sales came in so you're well again this quarter like it did in the first quarter just wondering how much of that that helped was from first is more recapture activity?

Yeah I'd say it was more mix related but the other impact was related to lower fee for service upgrades. As a result of lower fee for service sales they flow through some impairment into the cost of product so they add back on the revenue side and they add inventory back to our balance sheet and the residual is run through the impairment. So it's in an accounting nuance that when you have a lower fee for service sale or up the upgrades rather you will have that changing impact on the on the cost of products. So there is a piece of it was that a piece of it was mix related. On the sales and marketing cost side, we actually have been and continue to really invest in the business and part of the reason that the development spending has been maybe tempered is because they are really focused on a few opportunities internationally and have some different products structures to them and we're working to operate and some environments that we haven't historically and we want to make sure we get it right and have the right model going forward and that specifically if we're looking at some of Japan, looking at Mexico and the Caribbean so you are seeing some R&D costs that are not capitalized as well as we get those markets figured out and structured for the future.

Great, guys. Thanks for details.

And next go to Brian Dobson, Nomura Instinet.

Hey, good morning. So you spoke a little bit about it to Japan in your prepared remarks. I was wondering if you could give perhaps a little bit more detail there and then over the next few years how do you see your portfolio evolving in terms of your international presence and your customer sourcing when it comes to domestic customers versus international customers?

As far as Japan goes I think you have commented a few times on it. We've got a great base of ours in Japan and we've been marketed to Japanese and with see 2000 and so that 18 years now and we've been looking at Japan as an opportunity to source and immaturity our members keep telling as they'd like some options closer to home. We've got two really good opportunities that are very, very close to getting completed in fact as I mentioned in my prepared remarks up in Japan, couple weeks. So we think Japan has tremendous run rate for us and potential growth as we bring product into that particular market. As a relates to the domestic market the one thing about our pipeline is we've got a really great cross-section of opportunities both in the U.S. and international and I think Jim spoke to the international ones the Caribbean, Mexico and I expect to Japan but we got some really good mix of new and core market opportunities. And so we expect that some of these are going to be available for us and beneficial to our business and in 2018 and 2019 and then we have some more longer term as there's - it relates to Japan one is more longer term I mean it'll be built out of the ground the other one is a conversion. So we think we're going to be a little bit of that shorter term with one project in Japan and longer term with one project in Japan.

Great. Thank you very much.

[Operator Instructions] And we'll go to Chris Agnew, MKM Partners.

Thanks very much. Good morning. And you talked about the fee for service is the key source of differentiation. I just wondering the given your pipeline mix and the deals like Sunrise and maybe potential few more deals like perhaps at the end of this year. Is it fair to think that fee-for-service mix in 2018 drops closer to if not below 50% and what are your thoughts long time is 40% to 50% the right mix or is it more towards 50% to 60%. Thanks.

Yeah, on year-over-date we running 54% and I think that compares to 60% last year. Our goal is and objective is to remain highly capital efficient and where the mix is going to help inflow depending on the market opportunities and I think we've said 50/50 is our long term goal with specific target gate. That being said, I don't think near term we are going to be early go, yeah, to get to 15% next year. We have got a few really big projects at both fit one in Hawaii and one in Vegas. So I think in near term we will still be over 50% fee-for-service. For longer term I think we are focused - in the same place, I think with we get to '20, '21 plus or minus we start to see some of those big projects roll off. So we do have an intention to make sure that we continue to fill that pipeline behind it.

Got it and can you expand and share any preliminary thoughts on your comments around expanding the product offering a new marketing initiatives and then just to clarify which of the new product offering are you talking about new locations, or just a new sort of form of selling time share. Thanks.

Yeah, that is a great question. Customer acquisition is as you know is the most important in our driver in our directed consumer model which makes evolving how we engage with our customers really a top priority and we started off with a great brand and this great relationship was helping which provide this rich full of highly qualified customers. If then it's really about how do we enter this HGV if this while basic customers and we have great success in certain channels. But there are great opportunities in other channels and really the biggest opportunity sits in online digital channels and we realize if there is a sway about digitalization that's washing over everything today and so what we are doing is we are building new confidences into our business trends. So we capture these opportunities and one of the things we think we have been out front of the innovation curve in our sector. The first - to put in an inbound call transfer program, the first to develop is Fee-for-service model. So it's important to keep evolving our business and as it relates to product form those are things that we are going to be looking at it and I think at the other day we are in the business of providing great future vacations and that's our product and so while our core product continues to be very strong and the demand is continues to be strong. We got to keep looking out to the future, so that we realize that not everything that got us here is going to get us where we need to be in the future. So we continue to think about how we are going to innovate the business.

Thank you.

Ladies and gentlemen at this time, we will conclude the question-and-answer session. I would now like to turn the call back to Mr. Mark Wang for any additional comments and closing remarks.

Well, thank you again for joining us this morning. We continue to be very excited about what's happening at HGV. And this despite the recent events we have strong momentum going into the end of the year and we look forward to speaking with you after Q4. Thank you.

And this concludes today's call. Thank you for your participation. You may now disconnect.