Good morning, and welcome to the Hilton Grand Vacations Third Quarter 2018 Conference Call. Today's call is being recorded and will be made available for replay beginning at 2:00 PM Eastern Time today. The dial-in number is (888) 203-1112, and enter PIN number 5339458. [Operator Instructions] I would now like to turn the call over to Mr. Robert LaFleur, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Cody, and welcome to the Hilton Grand Vacations Third 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. We will also 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, on our website at investors.hgv.com. As a reminder, our results reflect new accounting rules under ASC 606. For ease of comparability and to simplify our financial discussion and also as required in this transition year, our comments today will, unless noted, focus on the previous accounting view we refer to as Percentage of Completion or POC. As noted, reconciliation to GAAP are available in the earnings release. Also unless otherwise noted, the results discussed will refer to third quarter 2018, and all comparisons will be against the prior year period. This morning, Mark Wang, our President and Chief Executive Officer, will provide highlights from the third quarter 2018 in addition to an overview of the current operations and company strategy. After Mark's comments, I will come back on the line to go through the details of the third quarter results and expectations for the balance of the year. Following Mark, our Chief Accounting Officer, Allen Klingsick; and our Senior Vice President of Finance, Valerie Spangler will be available to answer your questions. And with that, let me turn the call over to Mark.

Well, thanks, Bob, and good morning and thank you for joining us. Q3 was a great quarter. Contract sales grew by 11.7%, NOG was up 7.4% and adjusted EBITDA was up 14%, with diluted earnings per share increasing by 47%. We've been building momentum through 2018 as we continue to benefit from ongoing investments we make in our customer, sales and marketing and result -- and our resorts. Despite volcanoes, hurricanes and the worst typhoon that Japan in over 30 years, our marketing teams generated record tour volume, and our sales teams effectively converted those tours into sales. Tours increased 9%, with strong growth from both owners and first-time buyers. This reflects our ongoing efforts …buyers. This reflects our ongoing efforts to identify new customers and build up our tour pipeline. Our success generating tours was broad based across multiple sourcing channel, including direct, local and owner reliables, as volume and efficiency improved in most of our key marketing programs. We continue to add first time buyers at a rapid pace. Half of our sales came from new buyers, and we added nearly 21,000 net owners to our system in the past 12 months. Consistent NOG means that every year, we expand our owner base, which grows our high-margin annuity stream of cost and management fees, and also embeds value from future real estate upgrades and related financing transactions. Operationally, our business is firing on all cylinders, and our ability to monetize the value embedded in our owner base each year provides us significant earnings visibility. As many of you follow the broader lodging industry are aware, hotel operators have the benefit of visibility and predictability when it comes to group sales. On the order book, approximately 20% of their total bookings. In our sector, HGV benefits from good visibility…

Thanks, Mark. As Mark highlighted, we saw strength across all business lines this quarter. In real estate, tours, VPG, conversion rate and contract sales volumes increased for both existing owners and first-time buyers. Strong NOG drove results in resort and club, while rental and ancillary benefited from our acquisition of the Quin, better availability and strong rates. Adjusted EBITDA margins expanded by 100 basis points in the Real Estate and Finance segment and by 180 basis points in the Resort and Club segment. With just one quarter left in the year, we're increasing our contract sales guidance and raising the low end of our adjusted EBITDA, net income and EPS guidance ranges. Reconciling GAAP to POC, Ocean Tower was still under construction in the third quarter, so GAAP results reflect Ocean Tower deferrals. That said, we completed the Phase I Ocean Tower construction in early October, so fourth quarter GAAP results will reflect the recognition of all prior Ocean Tower deferrals. Now onto our results. Total company revenue increased 13% to $483 million, reflecting growth in all business lines. Net income increased 44% as this year's lower tax rate amplified the benefit of the 17% increase in pretax income. Total segment adjusted EBITDA increased 19% as margins expanded 150 basis points. Real estate fundamentals were strong across-the-board as contract sales increased 11.7%. We had a good third quarter at our Mainland locations, with double-digit growth coming from Orlando, New York, Hilton Head and Washington, D.C. Despite a lost week at the end of September due to Hurricane Florence, Myrtle Beach still showed positive growth. Shaking off the effects of typhoons and an earthquake, Japan led the APAC region with high single-digit Shaking off the effects of typhoons and an earthquake, Japan led the APAC region with high single-digit contract sales…

Thank you. [Operator Instructions] We'll take our first question from Patrick Scholes from SunTrust.

Must feel good, finally, to see your stock getting a little love in the market after a little bit of a dry spell there.

Well, I haven't even looked yet. But Bob's been looking at me like something positive is happening. So that's good.

My question has to do with balance sheet, share repurchases and dividends. Certainly, with cash going out the door this year for developments, you haven't done any of dividends or share repurchases. As we think about next year and perhaps timing of it, what's the trigger event for you to be more aggressive? You don't initiate a dividend or share repurchases. Is it simply just on a sustained basis cash flow, free cash flow turning positive? Is there something else that you would look at?

Yes. No, Patrick, I think, maybe the broader question or discussion is how do we look at prioritizing our capital allocation. And I can assure you that senior management and our board are frequently evaluating our capital allocation and as part of that buybacks and dividends. So we're looking at evaluating all the opportunities that are out there. But I think we said from the outset, and we were very clear that the priority of the first 24 months was to put our money to work to grow the business. It was the main driver -- the main rationale for spinning out of Hilton was to unlock the value of the business and finally get our hands on our own dedicated capital. And we knew there is opportunities out there to accelerate the business, and we're a little slow out of the gate. First year, we put $45 million to work, but we're really pleased with what we've been able to accomplish this year, with these amazing assets and the fact that we've remain very capital efficient and the structure. So I'm convinced we've made the right move, and we're going to start seeing the benefits. We've already started to see a little bit this year. But as we go into '19 and 20, we're going to see this accelerated growth and we're going to see our cash flow levels multiply from where they are. So really, we're going to be resetting our business at a higher level. Now that said, we're 23 months into our 24-month initial plan, so you can expect we'll update you on our capital priorities going forward at the Investor Day.

We'll take our next question from Brian Dobson with Nomura Instinet.

So last quarter, you outlined some medium-term EBITDA, free cash flow and inventory spending. Could you update us, at your comfortable, with those targets? And then, secondly, what level of flexibility do you have with inventory spending if we were to see meaningfully softer GDP in 2019?

Yes, sure. I think we'd reiterate what we talked about last call. We're expecting 100 to 200 bps of growth rate this year and next year. So I think, we've put in a range of 7% to 10% for next year. And then beyond that, we expect growth rates of 300, 400 bps above the based case that we've put out originally. As far as -- in terms of cash flow, we're expecting about $100 million next year and as our EBITDA grows, we should see a nice ramp-up in free cash flow, adding the 300 to 400 potentially beyond that when we get out to about 2021. And we're going to provide a lot more details at our Investor Day as it relates to that. As far as flexibility goes, most of the projects we've talked about are existing structures, and they're capital-efficient, they're just-in-time deals, they're conversions of hotels or they're conversion of existing timeshare projects. So one project we would have some flexibility on, should we have to, will be King's Village, and that's a site in Waikiki. But that being said, the King's Village opportunity for us is a great one. First of all, it's in a market that's really proven for us. If you go back, I think, since 2015, we sold $1.3 billion of Waikiki inventory. So securing the site was really important, and we were very fortunate that the residential or resort, high-end condo market is slowing in Waikiki right now, but we're not slowing. And we were able to secure the site. It was fully entitled and fully designed, and just to give you an example of The Grand Islander, which is the last project that Blackstone and I had built. We contracted on third-party basis. That took 10 years from the date we identified that site, to get the entitlements, to get the approvals through the city and to get it constructed. So we're looking to start construction, I think, later this year, early next year. So we took a lot of risks out of that deal, and we've got a lot of demand that we're creating in that market. So I guess, that's a long way to say there's probably one deal after that we could possibly push back.

And we'll now take our next question from Jared Shojaian with Wolfe Research.

Mark, I'm wondering if you can just talk about some of the trends you're seeing from the consumer right now, and specifically what you're seeing with close rates, write-offs, ability to drive tours. Obviously, there's a lot of concerns, and your stock has been pretty volatile. So I'd love to just hear your perspective right now in the current environment.

The current environment is really good. I mean, we're up, what, 12% for the whole year. We just had another great quarter. When we look at the demand creation piece, we're -- our business is about -- we have an active model. We're not a passive model. And we're out there connecting with customers. And for us, our relationship with Hilton has never been better than it is today, and we're engaging with them. Every day, we're engaging importantly with this great pool of customers that Hilton provides us access too. So if you look at our -- our tour pipelines are at record levels. And what I mean by tour pipelines, those are new customers that we've already sold vacation packages to this -- we've sold this year that will be traveling this year or within the next 18 months. And that pipeline is fuller than it's ever been, it's very robust. If you look at what we're doing in the markets, in all the markets we're in today, we're seeing strong, we call it, ground game, where we're touching a lot of customers in the markets that we're in and have very, very strong demand. So we're feeling really good there. And then when you talk about the conversion rates, we're at record levels with our owners today. We've never converted and seen more yield out of our owners than we're seeing today. And we're also seeing improvement in conversion with new buyers, and we've seen a meaningful uptick this year. So all in all, the customer is behaving really well. I talked about it in my prepared remarks, from an operational standpoint, I couldn't be more pleased at what we're seeing today.

That's great. And just to switch gears here. I didn't hear you calling a financial impact from the hurricanes and the typhoons in Japan. Can you just talk about what percentage of your sales volume is in the affected areas? And I would imagine the headwind is probably too immaterial to call it in the press release, but can you just tell us what the headwind was?

Yes. Well, we're very fortunate. Things could have been a lot worse. And while we were impacted, we elected to kind of exclude the impacts as we mitigated the losses with outperformance in other markets. But that being said, we had sales centers and resort closures at Myrtle Beach and Hilton Head, and we had sales center closures in Japan. But in all cases, in those three examples, we still grew the market year-over-year. So I think we've just elected not to put a number in there right now. We're fortunate with the actual bullet. There's going to be a point in the future, where we've got a lot of resorts that people love to travel to, but that are -- that sit in natural harm's way. So anyway, so the bottom line is I prefer not to mock-up the numbers and have to do the year-over-year comparisons if it's not material.

We'll now take our next question from Cameron McKnight from Crédit Suisse.

This is Ben coming on for Cameron. Just a quick question for either Mark or Bob, just on the contract sales for this quarter. I might have missed it, but I was wondering if you could break out the contribution from the new assets. I think I had $170 million from Ocean Tower, but can you give any color on the other new assets?

Look, I don't know that we have that breakdown. I think right now, I think, it's Ocean Tower. The next new asset that really goes online is our Crane property in Barbados, which we're really, really excited about. That's a very capital-efficient deal of an extremely high-end asset. It's an asset that was developed by a Canadian developer. He's been selling timeshare at a very moderate pace. I think he's at that point in his life that he thought, maybe it's time to speed some things up, and connecting the Hilton brand to it made a lot of sense. So, really, the impact from the new investments that we've been talking about this year, will get a little bit on the very tail end of this year, but we'll start seeing some benefits more toward the end of '19 when we look at Chicago and a couple -- I think that's a couple of other of those deals that could benefit us.

And then just a quick follow-up. In terms of the 500 million of inventory spend this year, can you break that out in terms of what you'd consider to be genuine maintenance spending versus growth?

So this is Valerie. When we think about -- we've announced several projects so far this year. So there's a fair amount of new opportunities that will be coming in future years, which Mark has mentioned. But we do have continued spend on the residences that are still under construction, as well as our Ocean Tower project. And then, there's, to a smaller degree, a small percentage of that is also just kind of our standard annualized spend around our fee-for-service upgrade programs, specific to Grand Islander, as well as our active buybacks of our owned projects.

We'll move on to our next question from Stephen Grambling with Goldman Sachs.

I guess what would you typically look for as a signal that the consumer environment is softening? I guess, would that be conversion rates or tour flow? And then, is there any way to assess the amount of growth year-to-date that's come from the investments that have already been made versus kind of the underlying consumer health?

Yes. Look, Stephen, I'd say we've really benefited from rolling out the Ocean Tower. And that, interestingly enough, that property was part of the spin. And so we're really benefiting from that asset being transferred over to us at spin. So it's the main, main contributor. As we mentioned before, the opportunities that we've announced this year, only Crane will get a little bit of benefit toward the end of this year, and then the rest really starts materializing in our '19, '20 and '21. As far as the customer goes, I think its conversion rate is probably going to be the biggest indicator out there. It seems that the customers have worked targeting. They don't take on the general characteristics of the U.S. population because we've been focusing our attention on a more affluent customer, those averaging about $150,000 in household income. And this segment typically has more discretionary income and has fared much better in downturns. So I think the fact that we're zeroed in and very focused on this average household income of $150,000 is important for us. But I would say, it would be conversion. We were, I think, circa $3,600 in VPG last quarter, I think, we're leading the industry there, even though we're 50-50 mix. I think, if we were to mix our sales to about 65% to owners and 35% to new buyers, our actual effective VPGs would be around $4,200. So I think, the other day, our sales teams are doing a great job on the conversion side. And importantly, our marketing teams are continuing to impress by going further upstream and really finding the quality customers that I've talked about earlier that are more stable.

And then maybe a different follow-up. I guess, what are the strategic merits of extending credit to customers yourself versus, perhaps, pursuing a partner with a bank or, otherwise, take on the financing receivables and may even provide you the permanent source of immediate capital?

Well, I think, effectively, we're doing that right through our securitizations, right? So I don't know if you want to cover on that, Allen?

I think what we find with the potential upside of financing, the receivables, the additional adjusted EBITDA contribution from those -- from that financing book is material and very lucrative. And so until that changes, and we don't foresee that changing, we would stick with that strategy.

Yes. We -- I think as Bob alluded to, we had a great execution on the ABS, so there's -- our portfolio is very marketable, as attractive rates and spreads I think we're 4 or 5x oversubscribed this last time, and so it's a good business, as Allen said.

We'll hear now from Brandt Montour with JPMorgan.

I just wanted to circle back on comments you made regarding the loan book. And I understand the Japanese borrowers and the mix issue on that side of the equation. But you talked about more stringent lendings requirements as part of your book. And I just want to understand a little bit more, how much of this is you being preemptive due to macro, rising rates, et cetera, and how much of this is you guys reacting to actual -- some deterioration within the credit quality of your consumers.

Brandt, this is Allen, thanks for the question. So just to start off. Our portfolio, we still feel very confident in its performance. As Bob indicated, a couple of the things that we are seeing or trends we're seeing driving some deterioration, we believe are unique to a mix shift versus a consumer macro deterioration, specifically around the shift to Japanese borrowers out of our book. However, we are cognizant that there is deterioration across most consumer financing folks in various industries, and part of our deterioration is likely due to some level of just macroeconomic deterioration. The changes in some of the lending practices that Bob did mention in his remarks around creating or taking additional down payment on larger-balance loans, we feel, definitely, will correlate to a lower default rate in those higher-balance loans that people have more skin in the game there. Looking at -- back historically, at the last recession, we didn't see default rates surpass 7%., and that level of the default rate was tolerable then to continue to have a very profitable and strong returns on the sales, and we feel -- we don't feel there's any indication that, that would -- we would see something higher than that at this time.

And then just on the CFO search. You gave us some helpful details there. I was just wondering, how important it is for that person to have timeshare experience and/or public company experience?

Brandt, yes. I don't think it's that important to have timeshare experience. I think one of the things that the CFO is their -- I think their skill set is very portable and can move across different sectors and different industries. As far as public company experience, again, I think it's always nice if they have it, but there are also great candidates out there that had really checked all the boxes, that had been in the public company environment, that participated in IR, participated in the treasury side, knows the capital markets, and importantly, has a really good understanding of how to interact and support the operating side of the business. So while it would be nice to have somebody who has that experience, I don't think it's critical.

We'll hear now from David Katz with Jefferies.

And I apologize if we've sort of covered this. But with respect to up guidance, is it just a deferral matter? Or how much are we pushing through the beat from 3Q? And I'm thinking about it essentially on an EBITDA basis. How would you have us characterize the up guidance?

This is Valerie. Thank you, David. It's really the confidence that we have in the business. So the performance that we've seen over the last three quarters, really, is allowing us a good feeling to go ahead and up that midpoint of our guidance range on an adjusted EBITDA basis, as well as on the contract sales side of the business. So when it comes to the deferral impact, we anticipate to be fully covered within Q4. So just to kind of circle back around, I think the business is strong, the first three quarters are evidencing that. And so we're feeling really good to go ahead and give you kind of an implied guidance of what our future will look like.

[Operator Instructions] We'll hear now from Edward Engel with Macquarie Capital.

Do we have any sense of the pace of inventory investment being made by your fee-for-service partners right now, maybe over the next couple of years, kind of relative years prior?

I'm sorry. Could you repeat that question? I want to make sure I understood the first part.

In terms of the levels of investment being made by your fee-for-service partners, I guess, their inventory spend. Had there been any change in that within the past 1 to 2 years? And do you kind of see that maintain the pace that was made kind of through 2011 to 2016?

Yes. That's a little hard to kind of articulate. I think every deal we do with the fee-for-service partners are one-off projects, right? I would say that we've got a good ample supply, but it's still fee inventory that's going to carry us over probably in the 50% range fee for at least the next 18 to 24 months. And I can also say that there's an over -- potential other fee deals that we are talking to you, investors, there's an over -- potential other fee deals that we are talking to you, investors, about. But anyways, they're really aligning their spend around our sales pace. And so at the end of the day, I think we're in really a good position with our fee partners. There are more opportunities, and we're willing to take on. And what I mean by that is you've got to match your customer flow and your demand to these projects. And one of our goals is trying to be very disciplined and ensure that we're meeting the objectives for our fee partners. We don't want to get ourselves out too far out of that, and to ensure that they're getting the kind of returns that they expect.

So there's no evidence of just rising building costs maybe impacting your interest in making new deals?

No. At the end of the day, this is not anything that we've heard. We've got a Big 350 project in Myrtle Beach under construction right now. We're in discussions with another fee partner for another substantial investment in building a fee project, we've got another fee project in Charleston that is going to be starting construction here pretty soon. So one of the things that I think we've proven out is that the fee model works through multiple cycles, meaning, I think, initially, there was I believe that the fee-for-service model only worked in a down market. But we've done more fee deals in an up market and more ground-up construction deals on a fee basis than we have when the market was recovering from the financial crisis.

Ladies and gentlemen, at this time, we will conclude the question-and-answer session. I would like to turn the call back over to management for any additional or closing remarks.

Well, thanks again for joining us this morning. We had a great third quarter in 2018 and so far has been strong. As always, we appreciate your continued interest in HGV, and we look forward to seeing many of you at our Investor Day next month and then spending time talking to you about the year-end early next year. Thank you.

Thank you, ladies and gentlemen. This concludes today's call. Thank you for your participation. You may now disconnect.