Good morning and welcome to the Hilton Grand Vacations First Quarter 2018 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 888-312-9854 and enter pin number 8205589. 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, Don. Welcome to the Hilton Grand Vacations first quarter 2018 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 10-K or our 10-Q, which we expect to file later today. In addition, you will – 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 on our website at investors.hgv.com. This morning, Mark Wang, our President and Chief Executive Officer, will provide highlights from the first quarter 2018, 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 the year. 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 thanks, everyone, for joining us this morning. 2018 is off to a great start with very strong operating metrics across the Board. In real estate, contract sales were up 14.6%. In our Resort operations and club management business segment, revenue and adjusted EBITDA increased by double digits and margins were north of 60%. We just announced an exciting new project in Charleston, and our 2018 inventory spending remains on track with multiple projects announcements expected in the coming months. We started the year off stronger than anticipated. We’re confident in our trajectory and we’ve raised our full-year guidance. With that, let’s take a closer look at the business. As I said, we saw strong contract sales in our real estate business with double-digit gains in each of our major markets except for New York, where limited inventory continues to affect us. Asia Pacific, again, led the way with contract sales growth exceeding 20%. While trends were very strong in Oahu and Japan, the real standout was Waikoloa, where we started selling our new Ocean Tower project in January. While we’ve been in this market for years, this is the first time we’ve had oceanfront inventory in the Big Island. The product is exceptional and the market response has been very positive, especially among our owners and Japanese customers. The consumer is in a very good place right now and we clearly saw that in our results with improvements in all of our real estate drivers: tours, close rates and pricing. Tours increased 7.3%, driven by very positive trends in our first-time buyer channels. VPG increased 7% to nearly $4,000, and we continue to invest in new owners who embed significant future value into our system. NOG was 7.1%, driven by a 9% increase in first-time…

Thank you, Mark, and good morning, everyone. Before we get into the details on the quarter, as Mark mentioned, we adopted an accounting standards update regarding revenue recognition or ASC 606 at the beginning of the first quarter. The most important change resulting from these new accounting rules is that, we’re now deferring all sales revenue and direct expenses for inventory under construction until that project is complete. Previously, we had recognized these revenues and expenses under the percentage of completion method. However, we have provided additional schedules in the release, which reconcile the current period between both approaches. All that said the key takeaway is that, day-to-day operations and economics of our business are unchanged. And given our strong start and how we see the rest of the year unfolding relative to expectations, we’re increasing our annual guidance. As Mark highlighted, first quarter operating results were very strong with increased volumes and metrics in our real estate business and excellent growth in margins in our recurring finance, resort, club and rental business. First quarter revenue decreased to 8% to $367 million. Without the impact of 606, first quarter revenue increased 8% to $430 million. The primary variance was $59 million of deferred VOI sales related to two projects, which are both under construction in the quarter. A schedule that reconciles our first quarter results between the old and new accounting rules is in the press release. First quarter net income decreased 40%. However, without the impact of 606, net income increased by 8%, as a lower tax rate offset revenue reportability and expense timing in our real estate business that should normalize over the balance of the year. When we defer revenues and direct expenses for projects under construction, under both the current and previous accounting rules, we don’t…

[Operator Instructions] And we’ll take our first question from Stephen Grambling with Goldman Sachs.

Hey good morning. So lots of noise I guess with the rev rec rules, but I guess even excluding these, it looks like the margin flows through maybe with little bit light of recent history, can you just elaborate maybe on what the puts and takes are excluding rev rec?

Yes, again, operationally again the business performed really well. And as you said, there is a lot of noise in quarter that really impacts the put through and it’s mainly reportability. When you – that’s the reason we don’t guide on a quarterly basis, but the biggest impact again is that rev rec $66 million, but aside from the 606 we had some other reportability impacts, the biggest one being rescission reserve. And Jim I think he’s got, I think he’s going to sharp his answer.

Yes, Stephen the – it really was revenue recognition and reportability, if you listened to the remarks I just made, we do not defer even under the old accounting rules, indirect expenses and license fees. So if you think about almost 45% on a sale on average of our sales and marketing plus license, maybe a little north to that. There is only a small portion even under the percentage of completion that we would defer with the revenue, and that’s into the direct selling costs which are more in the neighborhood of 12% out of 45% to 50%. So we really when – when we had such a big quarter in deferred projects, $66 million which a big portion of that being Ocean Tower. It’s a great start, but it does have a disproportionate mismatch in terms of the expenses being recognized in the quarter on the indirect side versus revenue that will flow through during the remainder of the year. When we complete the project and when you match that off also with the rescission, we had a lot of sales with Easter falling where it did towards the back half of March, just had big volumes there and you piece those two together and you look at it on an OPOC basis, we really had a quarter-over-quarter that had high single digit year-over-year gains to may be the low double digits gain. So we’re very pleased with the quarter, we know that accounting has caused some difficulties, but that’s why we’re reasserting our guidance and actually bumped it up some, given how we know the rest of the year should flow through.

That’s helpful and then on the projects that are embedded in your spending guidance, but not yet announced, I guess what is the expected timeline of these projects and the potential impact of the P&L, especially as we think about the new rev rec rules?

Yes, I don’t think I got the detail here to talk about the impact from a rev rec standpoint, but we’ve got a wide range of structures and locations here, but the majority are conversions, we’ve got one Greenfield site, so in a number of just or just-in-time. There’s a – the time is really dependant on a number of factors, first, when we get the deal completed this year, the extent of work required on a conversion and then the jurisdiction really dictates securing construction permits and sales registrations. But with all that said, we should see the benefit of the investment kick in as early as next year, but most of the benefit will start flowing through in 2020 and beyond. So the good thing is, is most of the deals we’re looking at are conversions and relatively short timeframes compared to ground up.

Great, one last one if I can sneak it in. Just on the consolidation that has been announced in the space, I guess any thoughts on how you think about how important scale is to the business and any kind of competitive impacts that could occur if the proposed transaction is consummated? Thanks.

Yes, first of all, I’d say that we already have scale and when you look at our platform today, the value proposition that we have today provides over 5,000 really Hilton branded vacation options for our owners today. So from the scale standpoint, we believe we have scale and from an M&A standpoint we believe we’ve got a great path for opportunity for organic growth and we’ve talked about the multiple markets and distribution extension that we’ve got planned out and the accelerated spend this year and that should also flow into next year. That said, we wouldn’t rule out an opportunity if we find the right fit that allows us to accelerate our growth. But for us I think the number one criteria has to be sustainable revenue growth, it needs to come with some type of additional source of customers. And then of course from the brand standpoint it’s got to be able to fit either our current brand now or potentially another brand that we could put in place either using the Hilton name or the Hilton’s other brands.

Great, thanks so much. Looking forward to when you lap over these rev rec changes.

We’ll take our next question from Patrick Scholes with SunTrust.

Hi good morning, thank you. Just a quick question here on customer demand, certainly on the, more of the pure hotel side we start to see a bit of a uptick starting earlier in the year on the leisure transient demand, does it – are you seeing in the last two or three months have you noticed anything improvement along that lines, maybe not as far as sales, but as far as responses to initial promotions and advertising?

Yes, if you’re talking just strictly leisure, I think we had a great quarter in rental, I think we mentioned our ADRs went up 7%, we were in the mid 80% occupancy rate. So I think leisure is – this whole movement towards spending your discretionary income and putting your discretionary income to work around experiences I think is really playing out well, and it’s really benefiting us. As you saw our sales were up 14.5% for the quarter and importantly our VPGs are up at $4000, really top of the sector and when you consider that, we’re selling to – we’re skewed higher to new buyers than our competitors, the gap to our peers is really understated, but anyways I think leisure travels is performing very well and it’s helping show up in our numbers.

Okay, thank you. And then just a follow-up question and this is similar to a question I asked to one of your peers this morning. Any uptick in international demand, especially given some more favorable exchange rates to come to visit in United States?

Patrick, I’m not really sure on that, I don’t really have any answer. I can tell you though that our business in Japan continues to perform very, very well. We’re very, very excited about the new project that we’re going to – that we just opened up to our owners to start using, we’ll start sales here in the next, within the next couple months in Japan. I can tell you the inbound travel into Hawaii has been very strong this year with the Japanese and I know that information, because that’s a market we depend on inbound international travel from, so that’s all very positive for us. But as it relates to other markets, I – we don’t have an information for you.

Okay, that’s great. That’s all, thank you.

For our next question we’ll go to Brandt Montour with JPMorgan.

Hi guys, good morning. Thanks for taking my questions. So on VPG, I wanted to touch on this quickly. It just came in really strong, it appears that close rate came in strong for your guys this quarter and was behind the VPG. And I was wondering if you didn’t – if you’ve done anything differently on the sales model, did you tweak anything or what was behind that?

Yes, I think, but this is a culmination of a lot of work that we’ve been putting into our sales and marketing organization. For us, the broader factor was really around conversion. If you think about the theme for us this last quarter, we converted higher across all of our channels with new buyers and we continue to see an upward trend in repurchase rates for our existing owners and we think that is really driven by the consistent positive NOG. I think, if you think about what we’ve done, I think there’s a number of factors in play. I think, the quality of the customer continues to improve, as our marketing teams work more upstream to understand the customers prior to suggesting any type of offer, and I think you’ve seen that even in our FICO scores. On the sales side, I think our investment into training and technology is starting to payoff and it’s really allowing us to educate our customers quicker and breakthrough the clutter faster. This is a 90-minute presentation. It is – there’s a lot of complexity and because of all the flexibility we provide in our product. And we’ve been upgrading our sales centers, making investments in our sales centers over the last couple of years. And I think, that combined with just the great work that our training teams are doing. I was just listening to some of the training sales pods that we have available now. It’s – so all in all, I think it’s just a culmination of a lot of hard work, and I think the consumers seem to be in a pretty good place right now.

Got it. That’s helpful. And then turning to your guidance. So you guys raised contract sales guidance for the year – contract sales growth guidance for the year by 200 basis points, which is worth roughly kind of $25 million or so in terms of the incremental. And I was just curious how you – EBITDA guidance goes up for about – by about $5 million, right? So that assumes real estate margins somewhat below the company average. Am I thinking about that correctly? And I just wanted to kind of understand how you guys get from kind of contract sales growth to EBITDA?

Yes, there’s some investment in there. We’re definitely continuing to invest in tours, new markets. Mark mentioned we’re really – we’re looking hard at everything we’re doing around this development spend to make sure it goes to the right places. So real estate does absorb that new market spending on the development side as we try to put that $500 million to work that we’ve mentioned a few times now. So I think you’re really seeing the investment coming through and kind of dropping about 20% of the additional contract sales on the top line to the bottom line. There’s always a little bit of reportability noise that goes into there. But I think, the main message was that we got off to a great start. We’re really thrilled with how the new project in Hawaii, Ocean Tower, is coming online, which really propelled our APAC sales momentum. And we wanted to let people know, despite some recognition process on the revenue side and some reportability, this year is going to unfold the way we thought it would; in fact, given the strong start we think even a little better. And then we’ve got some additional capital we’re looking to raise. So as you get down to the net income line, that additional capital could come with some interest expense, and we do still have some – a little bit of bouncing around on the tax rates as a result of all the tax reform.

Okay. Thanks for that – those details. And if I could sneak one last one in here. On Charleston, could you potentially give us an early read on maybe the incremental kind of contract sales growth you might expect from a project like that up and above – up and beyond your kind of same-store sales run rate?

Yes. we don’t provide that level of insight, Brandt. But we’re very, very excited about Charleston. It’s a smaller, but cosmopolitan world-class city and it’s really become more and more popular. We’ve had a great – we’ve had great results with the same developer Myrtle Beach and Hilton had. So – and the location is really superior. We are right there, where all the main attractions are in the heart of the city. It’s going to be brand-new, ground-up build. Now the structure, as we talked about, is that hybrid structure. And I don’t know if Jim wants to elaborate a little bit on that.

Yes, so we would expect, I think, the returns on our joint venture to have some similarities to Elara. And so we think kind of high-teens to 20%, not out of the realm of what we would expect pushing through on a project like that on a joint venture side. And then, the fee-for-service economics, obviously, would follow through a typical fee project and we’re looking at about 100 units there. So I think from a modeling standpoint, that’s how you’d look to piece that together.

Perfect. All right, guys. Thanks.

We’ll go for our next question to Brian Dobson with Nomura Instanet.

Hi, good morning. So given the recent investments that you’ve made in new markets, what are you doing to secure new customer sourcing and to build a pipeline of future demand for the business?

Yes. No that’s a great question. It’s – I can tell you every single day, we’re focused on generating new customers. I think, one of the things you can see from – over the last 10 years, we’ve been able to win and secure new customers at a faster rate and the whole industry out there. And really, when you look at that, a lot of it is our relationship with Hilton. We were just up there couple of weeks meeting with Chris Nassetta and his executive team and we’re very, very focused on our relationship there. The fact that we had this variable rate agreement really aligned us well with Hilton. And we continue to work with them on a daily basis working on new channel development and we’ve started the investment in digital and working very closely with them on that. We were the first one to roll out call transfer years ago, and that continues to yield very strong for us. In fact, I think, the package pipeline for the first quarter was up a 11% for new customers coming through Hilton. So all in all, it’s very focused around our relationship with Hilton. And then as it relates to our APAC region, we’ve got a lot of work being done through partnership development and relationships there. So this is – for us, is priority right at the top of all of our priorities sourcing new customers, because we know these new customers, they – a new customer – the revenue for our business follows a new customer.

And Brian, I’d just add to that too. That’s a piece of the puzzle that new customer and you see us add consistently high single-digit net owner growth, which consists of new owners. And then you get that flywheel start as you get the – our owners then buying back in at $1.10 for every dollar they put in initially. And we had invested – we continue to invest in that frontline to make sure the new owners are coming in. But that’s why you then see all the recurring revenue and earnings streams are flowing really nicely off of the back of that. And there’s a lot of embedded value after multiple years of new owner sales that we have built up in the system that give us that that additional sale out three, four, five, six years. And you see the financing book generating really nice growth and then really the club and resort had incredible growth, all all really built off of the back of the new properties and the new owners that we’re putting into the system.

All right. That’s great. Thank you.

[Operator Instructions] We’ll take our next question from Edward Engel with Macquarie.

Hi, thank you for taking the question. It appears your pipeline of fee-for-service inventory actually increased sequentially from last quarter. Were you signing fee-for-service deals during the 1Q?

Nothing specific on – not sure what number you’re referring to, but other than the Charleston deal that we have coming online, which is the smaller deal just given where it’s located, nothing specific that we’ve been adding on the fees side. We have – we do have several projects in the queue in addition to Charleston that we’re looking at from a fee-for-service standpoint. And actually, we see our fee-for-service inventory balance staying pretty consistent through 2020, 2021, and that mix on the sales side being sort of in that low 50% range just given the two largest projects we have, which is Elara in Las Vegas and Grand Islander in Hawaii. As those start to roll off, we are looking to replenish behind them. But our near-term goal, as Mark mentioned, was to put the balance sheet to work a little bit more, get some additional owned inventory on the books to drive greater flow-through in absolute earnings dollars and cash flow longer-term. And then – but we’re not going to go away from just-in-time and fee-for-service. We’re going to remain capital efficient and thoughtful on that. But with such a low leverage rate, we’d want to put some of that money to work, which will probably skew us a little more towards owned pipeline in the near future.

Okay. That’s really helpful. And then, I think, you noted in the past that the hotel conversions that you’re working on were opportunistic. Could you maybe just talk about the IRRs and the product margins of hotel conversions relative to maybe a just-in-time inventory deal?

Well, I think, when you look at conversions and just-in-time, and we have a number of just-in-time conversions. We’re still targeting that mid-teens IRRs to maybe low 20s. So it’s right around that range, Ed.

Okay. And then do you think you would be able to keep on finding opportunities such as these, or are they a little bit more rare and a bit harder to come by?

I actually think, these opportunities are going to be pretty abundant going forward. The fact that we’ve proven out the model, we’ve got – we’re talking about the spend this year. We’ve got another slate of projects that we’re looking at for next year. We think it’s a very, very interesting model. We think it’s very efficient for us. It helps the hotel owner side as they are – in some cases, they are reducing rooms, which is helping their yield. And then when you look at the overall cost structure as far as operating one of these properties, it really makes it more efficient from a maintenance fee standpoint, and we can pass that on to our customers. So we think these are very attractive deals and we’re going to continue looking at those.

Great. That’s all I have for today. Thank you.

Thanks.

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, thanks again, everyone, for joining us this morning. 2018 is off to a great start and we look forward to sharing several more new projects with you as the year unfolds. We appreciate your continued interest in HGV and look forward to speaking to you next quarter. Thank you.

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