Good morning, and welcome to the Hilton Grand Vacations Fourth Quarter 2018 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 PIN number is 7540297. At this time, all participants have been placed on listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] And I'd now like to turn the floor over to Robert LaFleur, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Greg and welcome to the Hilton Grand Vacations fourth quarter 2018 earnings call. Before we get started, we'd 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 Risk Factors in our previously d 10-Qs or our 10-K, 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, and on our website at investors.hgv.com. As a reminder, our reported 2018 results reflect the new accounting rules under ASC 606. For ease of comparability and to simplify our financial discussions today and also as required in this transition year, our comments will focus, unless noted, on this year's results adjusted to the previous accounting view which we also refer to as Percentage of Completion or POC. Reconciliations to percentage of completion and GAAP are also available in the earnings release. Also as a reminder, this is the final quarter of the transition year so this is the last time we will bridge results between ASC 606 and POC. After today, POC goes away. Finally, unless otherwise noted, the results discussed on this call will refer to both fourth quarter or full year 2008 and all comparisons will be against the comparable period of the prior year. In a moment, Mark Wang, our President and Chief Executive Officer will provide highlights from the quarter and year in addition to an update of our current operations and company strategy. After Mark's comments, our Chief Financial Officer, Dan Mathewes will go through the financial details of the quarter and year and our expectations for the balance of 2019. After that, we will be available for questions. With that let me turn the call over to Mark.

Well, thanks Bob, and good morning, and thank you for joining us. Q4 was a solid quarter that capped off a great year for Hilton Grand Vacations, as our team has done an outstanding job executing against our strategic priorities. So let me highlight some of our key accomplishments. We delivered on our financial commitments with strong contract sales, revenue and earnings that met our growth objectives. We continue to grow our installed base of members with our 26th consecutive year of positive net owner growth. We expanded on our global footprint launching new properties in Hawaii, Japan and Barbados. These are the leading edge of a multiyear product offensive that will drive contract sales and earnings growth for many years to come. Our resort and club teams continue to win awards and accolades for the quality of our properties and the high level of service we provide. And importantly we began returning cash to our shareholders under the capital allocation framework we outlined at our Investor Day in December. Turning to results, 2018 was a really strong year with contract sales growing by 10.6%. We anticipated sales to moderate in the fourth quarter due to reduced availability of certain inventory types and given how front loaded sales were earlier in the year. With that and to a lesser extent the elevated noise we saw in the financial markets our pace moderated to 6.2%. Our earnings momentum remained on track and adjusted EBITDA came in at the high end of our guidance. Our sales team did an amazing job executing on our plan. For the year we saw double-digit sales growth in Orlando, New York and Oahu demonstrating our consistent execution and the resiliency of customer demand in these important legacy markets. Newer distribution centers like Hilton Head and Washington…

Thank you Mark and good morning everyone. Just a quick reminder before I get into the numbers, all comparisons I will discuss this morning are between 2017 results and 2018 results under POC accounting. As Mark highlighted, we finished the year strong hitting our contract sales, adjusted EBITDA and EPS guidance. We saw solid results in real estate and finance this quarter and exceptional results in resort and club. In real estate tours and contract sales volume increased for both owners and first-time buyers. VPG declined slightly due to the inventory buildup and market noise Mark spoke about earlier. Segment revenues increased 13% to $365 million while segment adjusted EBITDA increased 5% to $101 million. For the quarter, Resort Operations and Club Management segment revenues increased 23% to $119 million while segment adjusted EBITDA increased 29% to $66 million. Segment margins expanded by 290 basis points to 55.5%. Company-wide adjusted EBITDA increased by 13% for the quarter to $114 million and by 10% for the year to $435 million. Now let's go to the details and highlights for the quarter and year. Total company revenue in Q4 increased 15% to $513 million, reflecting growth in all business lines. Net income was $66 million and diluted EPS was $0.69. Compared to Q4 2017, net income did decrease 64%. As you'll recall, we received a $132 million deferred tax benefit last year under the new tax law. Our effective tax rate for 2018 normalized in the 26% range. Fourth quarter real estate results were solid as contract sales increased 6.2% to $360 million. Strong demand for Grand Islander helped drive 8.6% fee-for-service contract sales growth in Q4, while own contract sales grew by 3.3%. The fee-for-service mix was 56% in Q4, up slightly from 55% last year. Our full year fee-for-service mix…

[Operator Instructions] All right and first from Goldman Sachs, we have Stephen Grambling.

Hey, thanks. I guess first starting with the buyback. What are the key things you're evaluating when thinking about starting the buyback? And will the future deployment be opportunistic or systematic?

Thanks Stephen. When we were thinking about the buyback I mean, I think the best place to start is just to reiterate what we said on Investor Day back in December. From a capital allocation strategy, we were very focused on organic growth and we've obviously laid out the investments over the next few years on that very front. Our next priority was definitely repurchasing shares, returning capital to shareholders via a repurchase share program. I think everybody agree where we are in our growth strategy. That is a better -- gives us more optionality. It's a better option for us now from where we stand from a dividend -- versus a dividend perspective. Going forward, we constantly and routinely look at different options to repurchase shares, but our focus is to be very disciplined but at the same time very measured. So we're looking to make sure that we have the flexibility with our balance sheet as we move forward. So we will leverage our balance sheet to the tune of 1.5 to 2 times as we mentioned on Investor Day. But from a how do we do that on the repurchase share front, that's something we'll update you on as we progress.

And maybe changing gears as a follow-up. You gave a lot of good detail on the deferrals. But how should we think about the fee-for-service upgrades and the net impact to EBITDA in 2018 and going forward?

I think the easiest way to think the fee-for-service upgrades is take that in consideration where our mix is today. So when we look at 2019, we're looking at a mix that's coming down a hair. It's not dropping dramatically, but it is shifting more to owned contract. So as we shift to more owned contract -- owned inventory, excuse me, sales that will naturally come down. So in 2019, I would assume that will be of a similar level to slightly less. And then as that shift is more pronounced in 2020 where we'll be sub-50% and 2021 where we'll be sub-40% you'll see more of a shift on that front.

Great. And one last one I'll sneak in is on the loan loss provision, looks like it was relatively unchanged from 3Q. I guess normally, I would expect that to kind of tick down from for 4Q to 3Q. Are you seeing any changes in delinquencies or write-offs? Has there been any response to requiring higher down payments on upgrade sales?

I think first and foremost the first thing to address is any pushback if you would or any impact to sales from requiring additional down payments on those larger balances. And we're very happy to say, it's deminimis. There's really no impact on the sales front. So that's a positive from our perspective. Now -- and then when we think about our portfolio, we look at the default rate and year-over-year the default rate is up. It -- last year I think it was a little bit over 4.1%, and this year it's under 4.8%. It's right at 4.7%. But we've seen some good movement from the aspect as we just mentioned that sales are not impacting by requiring additional down payment. So hopefully that will strengthen it. And some of that degradation is, as we mentioned on our last call, from some of the higher creditworthy customers from Japan upgrading out of our favor into our fee-for-service partners' paper. So that's where we see some of that. But there's really no material change that we've seen in the recent months on that front. And keep in mind, there's additional down payments that we've required on those larger balance loans and upgrades. That's going to take time to whittle through our portfolio. So the real benefit we probably won't see for a couple of quarters from now.

Helpful. Thanks. I’ll jump back in the queue.

And moving on, we have Brandt Montour with JPMorgan.

Good morning, everyone. Thanks for taking my question. So net owner growth continues to be really impressive even stronger than maybe the levels that you've said in the past, is where you think it sort of needs to be or kind of over that 5% growth mark. So is that outperformance [indiscernible] or how do you continue to be so successful there?

Well, Brandt. Anyways, good morning. First, I'd say it is core to our strategy. It is absolutely the number one thing that we focus on as we develop our initiatives every year, because we understand that the value that a new customer brings into our system. And so I'd say, number one, we're very pleased with the relationship we have with Hilton, and how we've been able to engage Hilton, and access customers, our relationship right now with them. We have the leading call transfer program. We're the first ones that started doing that in the branded space. We have comprehensive exclusive rights for marketing with the branded hotels, any Hilton-branded hotel. So no one else can move into those hotels other than us. And then we're actively moving on the innovation side, and developing new initiatives especially around digital. And I haven't spoken much about those because I'd rather get them done and proven, and before I get out in front of it. But millennials and Gen Xers are the majority of our buyers today. And we're enhancing our digital capabilities. We know it's critical, especially with this the new generational customers coming in. And it's not just in our marketing. It's around our brand interaction. It's around our customer service channels. And we're adding capabilities for our owners, as I talked about in my prepared remarks, as you saw both digital and web reservations move up. But there's a lot of opportunity we believe in increasing the number of leads that we get from Hilton through digital channels and partnering closely with them. And it's a good time for us as Hilton is also investing heavily in those areas. And so the relationship is good. We've got initiatives that Hilton has with us that are -- that they're collaborating with us on. And so I think over time, you're going to see our business continue to expand using what I would call kind of more new age marketing.

Got it. That's helpful. And then a second question. Just given the choppiness that we all saw in the macro last year I think most people are happy enough to see you guys reaffirm contract sales guidance and so I don't want to seem like I'm nitpicking. But just looking at the guidance for contract sales of 9% to 11% which at the midpoint is kind of right in line with what you ended up doing last year and yet you have several projects opening this year. So I guess my question is, are you baking in any conservatism into that range? Or is there -- are there tough comparisons from Ocean Tower now? But any thoughts around that would be helpful. And that's it for me. Thank you.

Yeah. Thanks. First of all there's no conservatism in that range. It is an aggressive range and I'm saying that being up front with people. It's -- we really outperformed last year. You think about -- our 10.5% growth for the full year outpaced the whole industry. No one had that level of growth. And as you mentioned, we launched the first phase of Ocean Tower. It was a strong catalyst for us. And while we expected it to be well received, it was more -- we more than tripled our -- it more than tripled our expectations with most of those sales occurring in the first half of the year. And what made Ocean Tower so appealing was that it equally met demand from our new buyers as well as our existing owners. So I would say that the guidance we put out there is -- gives us -- based on the visibility we have today provides us the best view. And we did see some impact from some of the impact from the financial markets that happened last year. But that was minor. And if we look at the fourth quarter, the fourth quarter sales contracted some. That was more inventory related. And as we talk about new projects for this year in inventory we're really excited about the expansion of our portfolio. But it is back loaded. And so you should expect that our sales momentum will build as the year goes forward. And we're also coming off of a 14.5% comparable in Q1. So especially in Q1, the comparable makes it more difficult for strong growth. But we're excited about the expansion and this will be meaningful for us towards the back half of 2019, but actually more meaningful as we move into 2020 and 2021.

Thanks guys.

We'll move on to Brian Dobson who's with Nomura Instinet.

Hi, good morning. So to what extent does your free cash flow ramp into 2023 give you confidence to draw down on your revolver to pull forward some of that capital return? And also could you maybe just highlight some of the high-level puts and takes that are driving that steep ramp into 2022, 2023? Thank you.

Yes. So I think as we provided in our Investor Day what gives us confidence is really the new properties that we're going to be putting in place. And as we talked about when we get to 2020 -- when we get to the outer years, our free cash flow in 2022, 2023 is in the low-4s to $500 million average range. So I don't know Dan, if you have anything else you want to add to that.

No, I mean, I think that as I said I mean the real thing and I think we communicated it fairly well on Investor Day, the investment we're making in the inventory today is really resetting the level of the business. So when we get into the out years you're looking at adjusted EBITDA that's north of $650 million which translates into the adjusted free cash flow that's in the $425 million to $500 million that we discussed.

And I'd also say it's just a -- another reflection on the fact that we continue to drive positive NOG which we know -- and that's a significant amount of value into the business. And as that NOG, as we embed value we're also extracting that value. It -- and last year, if you look at transactions from new buyers they were up 10%. So very, very strong. And that's coming off multiple years of really strong growth to new buyers. So I think we're really well set-up to be able to perform against the new investments that we're putting into inventory with the embedment of new customers that we've added.

And I think the only thing I'd add on that front is with this new inventory coming online and where we see the growing that's what's giving us a lot of confidence in drawing on our revolver and levering up to repurchase shares in a reasonable amount of timeframe. I know, we discussed earlier that we're looking at different avenues to do that and very well may stay with an open market program. But again that leverage target of 1.5 to 2x that's something that we anticipate getting to sooner than later just to be clear on that front.

Sounds good. Thanks very much.

Next from SunTrust, we have Patrick Scholes

Hi. Good morning. I want to ask about your seven years of inventory. I would say that's probably about the most that I can ever recall or at least been publicly disclosed by a company. And certainly -- it's certainly not a bad thing. But what is the right amount? I mean would you see that whittling down over time? And what would you see as perhaps your target for number of years of inventory?

Yeah, Patrick, this is Mark. Look, I think, it -- when you define our pipeline, first of all, we only have approximately 1.4 years of inventory today that's available for sales right? So that pipeline is really -- it evolves through multiple stages right? We've got design. We've got construction. We have government approvals for registration. So we define our pipeline with anything that we see that we have either commitments to or future commitments to. So to be clear it's seven years of inventory sitting unoccupied waiting to be sold. It's not all ready for sales today. So some sitting on our fee-for-service partners' balance sheets -- some of it sitting on our balance sheet, but it's in various stages. So we're unique right now in our space in that we continue this strong net owner growth which requires us to add inventory. We're not getting the kind of inventory back from our members to support the kind of growth we have. And so the right amount it's really hard to pinpoint that. But I feel really comfortable that the pipeline, we have in front of us gives us ample inventory to meet the growth objectives that we've laid out in Investor Day in December.

Very good. That was actually very interesting on not getting inventory back from your customers which is a good thing. That’s it for me. Thank you.

And next from Wolfe Research we have Jared Shojaian.

Hey! Good morning everyone and thanks for taking my question. So maybe can you still elaborate a little bit more on the contract sales growth in the fourth quarter being a little bit lighter and specifically the VPG component? What did you see with conversion rates specifically parsed out between first-time buyers and existing owner upgrades? And then can you talk about the trends so far year-to-date that you've seen with I guess the volatility in the market coming down?

Sure. Yeah. So I would say number one, when you look at the fourth quarter our owner behavior -- buying behavior patterns remain very strong. We had double-digit growth there. Where we did see some apprehension or maybe reduced commitment levels was from our new buyers. And so -- but again we had anticipated sales were going to contract in the fourth quarter and it was more of an inventory mix. It was more that than it was I think the noise that was in the market. But when you think about the type of customers that we're selling if I just look at our owner base today and let's translate that into the customers that we're trying to sell the majority of our owners have net worth of over $1 million. And so, I assume that most of them have 401(k) plans. So there was a lot of noise that converged at one particular time. And so I don't -- I guess I'm not surprised that there was some impact. But again I -- our belief it was more inventory related is when we build our models every year there's a number of factors that go into that. And so -- with really tour flow and inventory being the key drivers. And once we match those two metrics up we project a VPG which translates into contract sales. So, we expect strong customer traffic. And I think as we look forward with these new sales centers and inventory coming in Chicago, Cabo and Charleston end the expanded presence in Myrtle Beach and Hilton Head and New York market we expect most of our growth really to come out toward the back half of the year.

That's helpful. Thank you. And I guess, as a segue to your last comment I mean if the quarterly cadence is ramping quarter-to-quarter in 2019 then we could be looking at a scenario when the fourth quarter is nicely ahead of the full year guidance. Is that the right way to think about I guess the right run rate going into 2020 in terms of how contract sales could accelerate in 2020 versus 2019? Is that how you're thinking about it right now?

Well. I think when it comes to -- Hi Jared its Dan. I think when we look into 2020 there's going to be another evolution if you will on how projects unfold. Because remember a lot of the inventory spend that we're committed to those projects are in different phases of development. So there's always a timing element where it could shift between quarters. So I won't start with a run rate in Q4 2019. I think you're going to have to look to us to provide a little bit more color as we get closer to that point in time. I hope that's somewhat helpful.

Okay. Thank you. And one more from me, if I may. The fee-for-service mix came up a little bit in your guidance for 2019. Can you talk about that? And then I guess separately, do the higher product costs that you've called out, does that have anything to with just general inflationary trends in title construction supply or anything of that nature?

Yeah, I'll take the first part of that question then I'll pass it to Dan on the COP cost. Yeah, from a guidance standpoint, we're guiding 48% to 54% on our fee this year. And in 2020 it drops just below 50%. And in 2021 it drops below 40%. Now that's how we have it structured today. That's how we're guiding to it today. We have the ability to pivot and do more fee should -- should an opportunity come about or should the market dictate that. So -- and then as far as the cost goes ...

Yeah, as long as -- far as the cost goes, Jared, from a cost of product perspective, it's not really inflationary. It's really -- it truly is the mix of sales more than anything else. And as we progress and that pendulum shifts from fee-for-service to owned inventory, the margin percentage will get compressed, but the actual dollars that you see running through our P&L revenue and translating into EBITDA will improve. So, it's really more of a sales mix more than anything else to be perfectly honest.

Got it. Thank you very much for the time.

Thank you.

Next from Jefferies, we have David Katz.

Hi. Thanks for taking my question. I'm just curious, thinking long-term, I think we've all maybe gotten sort of sucked into quarters and thinking about cadence and so forth. If we were to draw kind of a long-term trend line for how you think the business can grow the next several years, how would you sort of have us think about that? And you obviously do take a long-term view on the business.

Yeah. Look, I think as we talked about back in December, we're expecting sales growth in that 9% to 11%, 9% to 12% range and -- in both contract sales and adjusted EBITDA. Adjusted free cash flow, we're expecting to ramp up to $250 million to $300 million by 2021. And then and if you take a look at the individual project communities as we illustrated at Investor Day, the cash flow will continue to grow beyond five years. So, I think that's what we've talked about here more -- most recently.

And I apologize if I sort of missed any commentary on this, but just thinking about more geographies and which ones are at or near the top of the list, or how long the list that is, I know expanding into new geographies is an important part of that growth, how are you thinking about that?

Well, we've -- no, that's a good -- great question. Of course, we talk about the ones today that are more immediate 2019 and 2020. We announced Sesoko in Japan, really excited about that opportunity. That'll be the -- really the first big property that we're going to be able to expand into and to what I consider to be a really comparable market potentially to Hawaii for the Japanese market and also some of the other Asian customers out there China and Korea, in particular. So beyond that, we've got a number of different markets that we're looking at. We're not going to talk about in any detail today what they are, but West Coast continues to be an opportunity for us. And as we look at our member base, we've got 50000 members in California alone. So the West Coast is a -- and California in particular is a market of great interest. And Texas is also another very interesting market for us as Texas is our third highest number of owners reside in Texas. So I think geographically, there's a number of opportunities we're looking at right now, but we're not going to provide you any specifics at this point. Q – David Katz: Thank you, very nice quarter. A – Mark Wang: Thank you.

[Operator Instructions] Moving on we have a follow-up from Stephen Grambling of Goldman Sachs. Q – Stephen Grambling: Hey, thanks for sneaking me back. On the -- I guess on upgrades and the amount of money being put down or the down payment, I guess what percentage of upgrades put money down? And what is the typical amount that's put down on average for upgrades? A – Mark Wang: Yes. Well we've instituted additional 10%. So previous to that change in our underwriting guidelines, we were just allowing them to use our equity for their upgrade sales. So I don't know if that answers your question or not. A – Dan Mathewes: Yes. And just to add further color, I mean we've started to institute that and now we're getting close to 90% of upgrades are putting down new money. A – Mark Wang: Okay. Q – Stephen Grambling: That's helpful. And one other one is just, what's the minimum kind of cash commitment on inventory required in 2019 and 2020? A – Dan Mathewes: Well the tax commitment on the inventory that we talked about on Investor Day was $315 million to $365 million in 2019 and $375 million to $425 million in 2020. Q – Stephen Grambling: Thanks again. A – Dan Mathewes: Thank you.

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

Well thanks again everyone for joining us this morning. We had a great 2018 and 2019 is off to a solid start. As always, we appreciate your continued interest in HGV and I look forward to speaking to you -- all of you again in just a few months on our first quarter call. Thank you.

Ladies and gentlemen, that does conclude today's call. Thank you for your participation. You may now disconnect.