Good morning, and welcome to the Hilton Grand Vacations First Quarter 2020 Earnings Conference Call. A telephone replay will be available for seven days following the call. The dial-in number is 844-512-2921 and enter pin number 13697041. 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 Mark Melnyk, Vice President of Investor Relations. Please go ahead sir.

Thank you, operator, and welcome to the Hilton Grand Vacations first quarter 2020 earnings call. Before we get started, please note that we have prepared slides that are available to download from a link on our webcast and also on the main page of our website at investors.hgv.com. We may refer to these slides during the course of our call or question-and-answer session. As a reminder, our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements and these statements 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 10-K, as well as similar sections of our 10-Q, which we expect to file soon after the conclusion of this call and in any other applicable SEC filings. We will also be referring to certain non-GAAP financial measures. 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 results for both periods in 2020 and 2019 reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606, we are required to defer certain revenues and expenses related to sales made in the period when a project is under construction and then hold off on recognizing those revenues and expenses until the period when construction is completed. To help you make more meaningful period-to-period comparisons, you can find details of our current and historical deferrals and recognitions in table T1 in our earnings release. Also, for ease of comparability and to simplify our discussion today, our comments on adjusted EBITDA and our real estate results will refer to results excluding the net impact of construction-related deferrals and recognitions for all reporting periods. Finally, unless otherwise noted, results discussed today refer to first quarter 2020 and all comparisons are accordingly against the first quarter of 2019. In a moment Mark Wang, our President and Chief Executive Officer will provide highlights from the quarter 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 for the quarter. Mark and Dan will then make themselves available for your questions. With that, let me turn the call over to our President and CEO, Mark Wang. Mark?

Good morning, everyone. Earlier today, we released our first quarter results. I'd like to start by saying that this call is going to feel very different from the ones before and that's because we're in a very different environment. While I'll discuss the performance of the business, I believe it's also critical to address what we're facing today. It's clear that the impact of coronavirus has been sudden and significant and that this period of disruption remains uncertain. While we saw minimal effects from the virus in January and February, it should come as no surprise that we saw a significant falloff in trends in March as the effects of the virus spread to the U.S. Health and travel advisories began to appear in late January and February in our major markets, which cascaded into a full lockdown and self-quarantine orders, as we moved through March in markets such as New York, California, Hawaii and Florida. We took immediate action to ensure the safety of our team members, owners and guests by shutting all of our sales centers and suspending operations at most of our U.S. resorts. It was clearly an unprecedented decision that I never contemplated having to make particularly over the span of just a few short weeks. Fortunately, we entered this period with a strong business model, engaged owner base and solid balance sheet and we took further steps to ensure those strengths will carry us through this time of uncertainty. Today, I'd like to talk to you about three things. First, I'll provide more context about, what we've done to address the urgent needs of the business and our people. Second, how we view the industry its relative resilience during these times and our position within it. And last, I'll share four strategic priorities we are…

Thank you, Mark, and good morning, everyone. We have a lot of ground to cover today. And given the unique environment our format will be different from our prior calls. After a walk-through of our Q1 results, I will spend more time talking about our actions to preserve our cash flow during these unprecedented times followed by additional detail on our liquidity, credit position and covenants. As Mark Melnyk mentioned in his introduction to our call, our Q1 results did include deferrals, specifically $47 million in revenue deferrals and net deferrals of $27 million impacting adjusted EBITDA and net income. All references to net income adjusted EBITDA and real estate results on this call for current and prior periods will exclude the impact of deferrals and recognitions. A complete accounting for our historical deferral and recognition activity can be found on -- in Excel format on the Financial Reporting section of our Investor Relations site. Let's turn to a quick review of the results for the quarter. Total first quarter revenue declined $52 million to $398 million reflecting declines in our real estate and rental and ancillary segments that more than offset the growth in our resort and club and finance businesses. This decline in revenue was primarily the result of COVID-19 and its global impact on consumer activity. Q1 adjusted EBITDA came in at $60 million versus $102 million last year. In addition to lost sales and rentals during the month of March Q1 2020 was impacted by incremental bad debt accrual of $23 million, which I will discuss in a few minutes, as well as $11 million in one-time payroll-related expenses incurred in connection with operational closures and a refund of $2.2 million in reservation fees for those impacted by our resort closures. Net income was $35 million…

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Jared Shojaian with Wolfe Research. Please proceed with your question.

Hi, good morning everyone. Thanks for taking my question and I appreciate all the color and commentary here today. Could you just talk about how you decided the new 15.9% allowance rate is the right number? And what's your level of confidence there? And then I appreciate the commentary on the delinquencies. It doesn't seem like much of an increase so far, but it's also only been 45 days since the shutdown. So if you have it maybe a better stat would be what percentage of people are late on their monthly loan payments right now versus what you might normally see?

Hey Jared, it's Dan. Good morning and thanks for the question. With regards to the additional bad debt expense that we accrued getting to that allowance of 15.9%, it's a really tough estimate to make. Because to your point very limited data it's been less than 60 days. So what we did was we looked back to the last shop that we sell to the portfolio and that dates back to the Great Recession. We're very cognizant that this crisis is going to be different than -- potentially different than that crisis. But that's the best thing that we had to look to. So what we did was we looked at the increase in defaults during that period applied that same increase in default to every single bucket in our static pool and assumed that the -- that impact negatively impacted us for about 15 months. So effectively rolling out until August of 2021 and then it starts to more normalize. And once you do that it – the additional reserve you would need is roughly $23 million. Now the level of delinquencies that we see today at just north of 3% are also below the level of delinquencies that we saw during the Great Recession if you will. And they were more at the level of 4.2%, which is more in line with what that bad debt expense expects over the course of this period. Now how comfortable are we with that? We have a limited set of data points. It could clearly extend longer than that and it could clearly extend less than that. This is going to be a bit of an evolution process. But given the fact that we have to-date, you can see that we've assumed a higher delinquency rate than we're currently seeing. And we're also tying it back to the last major shop that we sell to our portfolio. Hopefully that's helpful?

Yes. Jared this is Mark. And I'll just add to that. As Dan alluded to, it's just too early still to really get your arms around this one. But we have been as you know over the last decade since the financial crisis – we've been originating our loans at around 740 FICO score. In a pre-financial crisis we were originated around 700. So hopefully the quality – well, obviously the quality has improved but hopefully that quality will hold up.

And just another point to add on the quality standpoint that we did not take into consideration. During the Great Recession, the credit process here has improved materially not only from a FICO score perspective. But back in 2008, 2009, we actually did not do credit reporting either. That is in place today, so that should help mitigate that to some extent. But that was not taken into consideration when we came up with our accruals.

Thank you. That's really helpful. And I guess just the second part of that question. I mean have you seen anything unusual in terms of people that are not necessarily delinquent because they're not in that 60-day window but maybe they missed a payment? I mean have you seen anything unusual there?

Well, I think the best stat to tell you – and this is a bit anecdotal. But when we talk to the portfolio team and we analyze the calls that are coming through the doors, the number of individuals who are calling to cancel something and just completely default and they just want to get out has not increased from Q3 last year to Q4 last year till today. So that's been a very static number. What we have seen is an increase in the number of calls of individuals asking for some level of deferment. And to-date we're just over 1000 individuals in aggregate who have reached out to ask for some level of deferment. So out of the people that have loans with us that's just under 2% of the portfolio. And some of these calls are individuals who – obviously, some of the larger banks are allowing deferments on mortgages. So they're just looking to say "Hey look they're doing it you should be doing it too." And then there's other individuals who obviously have been directly impacted by COVID-19. These are all being handled on a one-off basis. But again it's less than 2% of our portfolio to-date.

Okay. That's really helpful. I appreciate that. And then just for my second question. What do you think that – if I look back to Slide 5, which is really helpful on the liquidity and the cash burn, what do you think that $38 million monthly burn looks like when you start to reopen? Assuming you're at very low volume levels initially and you start to bring back those costs, do you think you're still burning cash initially? And if so should we assume that any burn is definitely going to be less than the $38 million?

Look I think it's a great question. It's all how we bring things back. We've done – we've obviously readjusted the business as something that you've never ever planned for, right? So we've really pulled back that expense quite dramatically. And it's all how we come back. I mean there's a scenario where you bring individuals back who are selling packages sooner than you actually open up sales centers. So while you would have a cash, hopefully neutral standpoint you would have compression on your margins. But I don't want to get into a level of prediction at this point just – since we're so early into this. We – the $38 million is really trying to be just an example of if we're where we are today for the balance of this crisis how long can we last. I just don't want to get into anything predictive at this point.

Okay. That’s helpful. Thank you very much. I appreciate it.

Our next question comes from the line of Stephen Grambling with Goldman Sachs. Please proceed with your question.

Hey, good morning. Thanks for taking the questions and all the details well. As a follow-up to Jared's last question I know you don't want to be predictive. But is there any additional detail you can provide on how you generally are thinking about or evaluating reopening of the sales centers? How you may be shifting to target existing owners differently? And is there a level of contract sales that you would need to get to free cash flow positive?

Yes. Stephen this is Mark. Good morning. Look, sales centers where we've – I can say that for the first two, three weeks 100% of our focus was how to resize the business and recalibrate the business. And since then it's all been about getting prepared and getting ready to reopen. And we expect our sales centers will open in close alignment with our resort openings. And the two main factors there really is really around the timing of the government mandates and also how people feel around traveling. And so – and at this point we can't predict the restrictions – when those restrictions are going to be lifted. But as of today, we expect probably a number of our markets will reopen here toward the latter part of this quarter and rolling into summer. And -- so that's what we're predicting on that at this point. But again, that's a moving target. And it could shift any time. So, that's what we're seeing. As far as which markets, I think, we start off in a really good position. Our top eight markets last year saw over 300 million visitors. So, there's strong inherent demand. And 70% of our markets are drive-to markets, which I think approximately 60% of the U.S. population, can reach within a 300-mile drive. So, we see each market really recovering on its own time line. And it's going to be based on the demand. And also the shelter-in-place will supersede all of those conditions. When you look at our portfolio, we -- you kind of categorize it really as urban. And then resort theme and resort feature or mountain. And our expectation is that, urban will take longer to recover due really to the density and nature of the urban markets in particular New…

Thanks. And I guess as a follow-up on the demand side. I'm sorry I guess maybe I cut you off there. But just I'll sneak it in real quick if you want to address it afterwards. On slide nine you have some good statistics on, owner arrivals, rental arrivals, marketing and sampler package arrivals, year-over-year. Is there any color you can give on postponements deferrals or cancellations on those? Thanks.

Yeah. So, look, again, when we look at the data we're really pleased with the trends. I think we're about 80% of the levels we saw at the same time last year. And our owners are sitting at about 90%. If you kind of take a snapshot, I think, it was done on April 28 this has been really, really consistent with what we've seen in previous slowdowns. And I think again, indicative and we've talked about this before and our competitors have said the same. The ownership position really -- the prepaid ownership nature of the business really drives that demand. However, I think the important thing is as I alluded to a minute ago there's still a lot of uncertainty around markets opening airlift and all of that. But I think, as we look at the data the important thing is the behavior. It's very consistent with what we've seen in the past. And that consistency gives me a lot of confidence that next year, we'll see a good return of our owners as we get farther along in the recovery. And then, from a cancellation standpoint, from a package standpoint, we've only -- let's see 92% of our -- those who have cancelled in our package pipeline have rebooked for a date later out. So we've had a relatively small percentage of those cancelling.

And Stephen just the second question with regard to adjusted free cash flow. I mean I guess the best way to look at it is I'll just tell you something similar that some of our peers have said. If you assume this paused state for the remainder of the year us getting to an adjusted free cash flow neutral basis is really dependent on the level of inventory spend right? If you -- if we stick to the contractual level which I mentioned earlier was $25 million $26 million that coupled with what we've already spent to-date we can easily get to adjusted free cash flow neutral. And even if we spend closer to what we've indicated just under $200 million it would be neutral-ish, so to speak. So, we're in that ballpark. Hopefully, that's helpful, just from a prospective basis.

Okay. That's great. Thanks so much.

And even if we spend closer to what we've indicated, just under $200 million, it would be neutral-ish, so to speak. So we're in that ballpark. Hopefully, that's helpful just from a prospective basis.

That’s great. Thanks so much.

And there's one other thing to add to that. The level of inventory spend we're very cognizant of this. We're managing this, obviously, as everybody else is day-to-day. And if we are shuttered for the balance of the year, we're clearly going to make a material decrease in that spend. The reason we're so focused and so cognizant about not just cutting the spend right now is we have several large projects that we're currently invested in Maui, Ka Haku, Quin, Ocean Tower. And those projects as we continue to invest, it's important to keep in mind, it's north of $5.5 billion in future sales value. So that's the reason where -- why we just don't automatically shut everything off. Now if we need to, we can, and we will manage that very prudently.

Great. Thanks, again.

Our next question comes from the line of Brandt Montour with JPMorgan. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking my questions and I appreciate all the details today. Quick question on slide 5 on the cash burn analysis, I just want to -- just curious. What, if any, assumptions are baked into that with regards to sort of recapture of defaulted inventory?

This, from a cash burn perspective, this assumes a very minimal repurchase of defaulted inventory.

And could you -- sorry. And then could you just sort of, I guess, just re-explain to us sort of what you would be viable for? I know this is nonrecourse debt, but is there a sense that you would be potentially in the market since it is obviously a good business, a lot of the time to do so? And sort of what that could look like in the -- as part of your forward modeling that you talked about with loan loss provisions?

Yes. No, sure. So the financing cash inflow that you see here takes into consideration the level of defaults that we've discussed earlier. It also, from a liquidity perspective, when you look at the warehouse availability, clearly, we already mentioned that the remaining capacity is at $255 million. What you see here is $120 million. What's driving a large part of the delta is us holding back loans for substitutions if we were to remain shuttered. So we've tried to capture those elements in this cash burn analysis.

Got it. That's super helpful. And then just on the drive-to versus fly-to stats, which were really helpful. I was just curious, which I think might be a different way to look at it, but how do you -- how would you sort of quantify how much of your sales mix is drive-to? And what I'm trying to get at is I think we all kind of maybe agree that the first segment to come back would be your existing owners that can drive to their market that you could potentially sell upgrades to. And so I'm just curious what percentage of your current mix is that sort of business? And then just a quick second parter of that is, do you think you might see a shift toward repeat business as a percentage of your mix?

Brandt, this is Mark. Yes. Our drive-to market's about 65% of our overall real estate revenue. And I'm sorry, the second part of that question?

Well, I was just curious because if you do see a shift to repeat business, which is arguable that it will be easier to get repeat customers in for tours versus new customers, that obviously comes with a higher VPG, a higher close rate. So that would be something for us to consider when we're looking to model forward. So just curious if you think that, that mix will shift towards repeat customers.

Yes, right. Okay. Yes, we're definitely going to lean on our owners coming out of this. And historically, we run at about a 50-50 mix. And but we're going to leverage our owners coming out of this. As you can see, there's a fairly strong demand, as I talked about a few minutes ago, and in the back half of this year from a bookings standpoint, but more importantly, we think that's going to continue into next year, that behavior. Fact that we've been able to double our owner base in the last 10 years and the fact that we've been driving positive NOG, we've got a lot of pent-up, unmaterialized embedded value in sales for our owners. So you should expect that, that mix is going to shift. I can't give you an exact number, but 60-40 for the next 12 months wouldn't surprise me, as I think our owners will be more confident to travel and, again, the prepaid nature of it. But yes, so we will definitely lean heavier on our owners. And as you know, that's a much more efficient sale.

Excellent, thanks. Good luck.

Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

Hi. Morning, everyone. You've covered a lot and all the questions and so forth. I appreciate that. With respect to the construction of inventory, I think, Dan, you showed you're sort of cutting that back by half. Just to follow-up on that point. When it comes time to ramp that back up again, what kind of trajectory should we expect? I mean, is there kind of a several month ramp-up period to it, or can you turn it back on with the same speed you shut it off?

Yes. So it's Mark. Just -- so what we've done is we've -- with Maui, for instance, we've just slowed it down. And Maui is a horizontal project. What I mean by that? It's low density. It's multiple smaller buildings. And so what we've done is we've slowed that down. So that will continue moving along. As it relates to Ka Haku, we have been able to get all the necessary permits to improve the land. So we've stopped that project in its entirety, but we will be able to turn it on in a relatively short period of time to -- they have to remobilize, because they moved all the equipment off-site, so that could take 60, 90 days to remobilize. With Ocean Tower, again, because it's a phase project, where we're converting hotel rooms, we've just slowed that down and it will -- we can ramp that up relatively fast. So I think we have a lot of flexibility. There's nothing here that we're talking about. Cabo, for instance, actually most of the renovation has been completed. We just decided, let's just pause and preserve that cash and push it into early next year. So we have a lot of flexibility and there's nothing that's going to take a long time to get back and going. But as you know, these projects take a long time to develop, and so even when we do restart Ka Haku, it's going to take a good couple of years to finish it. So it's going to push back our sales -- original sales date, which was originally set to be the back half of this year and we're going to have to push that sales start date to the latter part of 2021.

Got it. thank you very much and good luck.

Thank you.

[Operator Instructions] Our next question comes from the line of Patrick Scholes with SunTrust. Please proceed with your question.

Hi. Good morning everyone.

Good morning, Patrick.

Good morning. You folks are quite possibly the best capitalized timeshare company out there both public and private. And I'm wondering, how are you thinking down the road here opportunities for distressed acquisitions. I think back the Elara was one. I don't know if it might have been Centerbridge who did that, but certainly you own it now. What are your preliminary thoughts in that regard?

Yes. Great question. And as we've been talking about really over the last couple of years, we have a very robust pipeline of inventory. And so we're not at this point looking to put any of our capital to work today. But as you pointed out the last crisis really put us in a position where we had to go out and seek third-party capital, and we were very successful propping up and developing this fee-for-service model. And in fact we've done 10 deals to-date with really good partners. You mentioned one Centerbridge. We've done a number with Goldman and Strand and Blackstone. And so we think there's going to be a good amount of dislocation in the market. And I think we also believe that the highest and best use for a number of these assets will be timeshare. And so we will definitely are going to keep our eyes and ears open. And importantly, we've got great partners and we've been fielding some inbound calls already. It's still a bit early, but we think there'll be some opportunities and we just want to -- like we did out of the last crisis, we want to be really smart on making sure they're good assets that fit well into our -- in our brand standards and our portfolio and we have a really good partner that's working beside us.

Okay. Sounds good. To be clear in addition to possible existing timeshare location acquisitions, it could be conversions of hotel -- existing hotels or hotels that are in development as well that you might be interested in. Is that correct?

Absolutely. I think it could be hotel. We've recently been doing a number of hotel conversions. We did the units in Chicago with the DoubleTree. We did the number of floors in the Embassy Suites in Washington, D.C. We've done floors in Hawaii and New York. And so we think it's a really efficient model and in some cases it improves the hotel asset and that it reduces the overall size. So the overall yield and performance of hotel improves. And in some cases just converting the entire hotel over is an opportunity for us too.

Our next question comes from the line of Jared Shojaian with Wolfe Research. Please proceed with your question.

Hi. Thanks again for taking my follow-up here. So just to tag on a little bit to that comment. You are pretty well capitalized here. But do you have any desire to raise unsecured debt right now? I know we've seen a lot of other companies who don't really need capital, just go out and raise capital just because the credit markets have reopened. And then I guess along those lines too, can you talk about what you're seeing in the securitization market right now both public and private? Judging by Wyndham's terms this morning, it would seem that the private market is still quite good. But can you just help us think about that and maybe the timing on when you guys would do a transaction?

Hi, Jared it's Dan, and thanks for the follow-up. I'll answer your second question first. With the -- with terms -- with consideration in the ABS market, we still believe and we have a number of incoming calls is showing a lot of support for our ABS-backed paper both private and public obviously. I think everybody knows that S&P in particular paused on ratings over the last 30 or 45 days. We've had discussions with them where they are going to be getting back in. They may be adjusting their loss factors for obvious reasons just like we have adjusted our loss factors as well. So we are confident that we will be able to get a deal done in one way or another. Currently we clearly have enough availability under our warehouse facility to do the same kind of order of magnitude that we have done historically. We've also had a number of incoming calls from private institutions with regards to doing a deal similar to what you saw Wyndham announced today. So we're actually going down a dual path looking at both public and private as we speak today and we're very confident we'll get that done. The timing is probably late Q2 maybe early Q3. We're going to see how that actually unfolds. With regards to raising either senior unsecured or senior secured debt, look we talk to a number of advisers. We, obviously, listen to the opportunities that are out there. And when we sit here and we look at 22 months of liquidity, it's not the top order of our list right now. That's not to -- that does not mean that we do not look at this and analyze it on a routine basis. But I'll just leave it -- leave at that for now.

Okay. Thank you. That’s really helpful.

Thank you. Before we end, I will turn the call back over to Mark Wang for any closing remarks. Mr. Wang?

Well, thanks everyone for joining us this morning. Stay safe and we look forward to speaking with you over the coming weeks and updating you on our next call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.