Good morning, and welcome to Hilton Grand Vacations Third 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 13697043. At this time, all participants have been placed in a listen-only mode. The floor will be open 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 third 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 for a question-and-answer session. As a reminder, our discussions 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 in our 10-Q, which we expect to file after the conclusion of this call and in any other applicable SEC filings. We'll 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're 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 these 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 T-1 of our earnings release. 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 third quarter 2020 and all comparisons are accordingly against the third 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?

Morning, everyone. The results we released today improved substantially as we returned to a full quarter of operations at the majority of our resorts. As we sit here today, we're optimistic about the future while being realistic about the present. Our optimism stems from the fact that we continue to see improvements in demand for our owners reservations and prepaid vacation packages, which is an indication of pent-up desire to travel. Additionally, in markets that are unconstrained, this consumer demand is driving strong resurgence in occupancy and contract sales. I'm also encouraged that Hawaii, a key market for us has just restarted to reopen and we continue to see resilience from our owners who remain committed to HGV and are predisposed to travel. However, this must be balanced within near-term realities. The path of improvement will be pin on local markets where we operate and many of our markets today remain closed or constrained. For example, Las Vegas and Orlando, our largest markets that represent nearly 40% of our contract sales last year still have capacity restrictions at their important tourist attractions coupled with reduced air travel. And compared to our owners, new buyers will likely take longer to recover as consumers continue to divide their level of comfort with travel. Most importantly, though, we've adjusted as a company and have the financial flexibility to manage through the near-term environment and ultimately capitalize on the long-term opportunities that will return over time. Now let me take a few minutes to talk to you about what we're seeing in our different markets in consumer segments. Since we restarted our operations in late May, we've seen monthly sequential improvements in our key operating metrics. In the markets where we're open, our contract sales are recovered to nearly half of the levels that…

Thank you, Mark and good morning, everyone. As Melnyk mentioned in his introduction to our call, our results for the quarter included $13 million sales deferrals impacting reported revenue and net deferrals of $8 million impact in both adjusted EBITDA and net income. All references to consolidated net income adjusted EBITDA and real estate segment results on this call for the current and prior periods will exclude the impact of deferrals and recognitions. A complete accounting of our historical deferral and recognition activity can be found in Excel format on the financial reporting section of our Investor Relations website. Let's review the results for the quarter. Total third quarter revenue was $221 million, reflecting declines across our business segments due to the ongoing impact of global travel from COVID-19 pandemic, along with the absence of resorts in several major markets where we haven't yet resumed sale operations. Q3 adjusted EBITDA was $27 million as our financing resort and club segment generated positive EBITDA, with flat EBITDA at our rental segment and a slight decline in real estate. Our EBITDA was also impacted by $3.8 million of one-time charges, primarily due to restructuring and COVID related expenses during the period. In addition, as we laid out in our press release, there were another $6 million of COVID related items that were not adjusted from our EBITDA, including $7 million benefit from employee-related credits offset by a $1 million loss of club transaction fees that were refunded during the quarter for reservation charges associated with property closures Net income was $1 million and diluted earnings per share was $0.02 cents compared to net income of $58 million in diluted earnings per share of $0.67 cents in the third quarter of 2019. Within real estate Q3 contract sales were $117 million or one-third…

Thank you. [Operator Instructions] Our first question is from Jared Shojaian with Wolfe Research. Please proceed.

Hi everybody. Thanks for taking my question. On Hawaii, Dan, I appreciate your commentary that you're not expecting a meaningful contribution in the fourth quarter from Hawaii sales centers. But can you just talk about what you've seen since the quarantine was removed? What have you seen with arrivals? What do you have on the books today versus this time last year? And then I know you've still been selling Hawaii at other locations and you've have some success with that. Can you give us a sense for what Hawaii contract sales are currently run rating at right now on a year-over-year basis with obviously not being able to go to Hawaii in the third quarter?

Yes, Jared. This is this Mark. I'll take part of that and I'll let Dan take part of that question. You had a few questions in that question, so we'll try to connect on everything, but I think – if we think about Hawaii, first of all excited that the quarantine enforcement is finally been lifted and that the state reopened on the 15 for domestic travel. We're still waiting to hear on Japan and bounds that recent indications suggest that the State is probably going to be opening up for Japan visitors sometime in November. So happy about that. We also think Hawaii is going to be our next catalyst for the recovery as we enter 2021. And we've talked about it numerous times, but we have amazing assets in prime locations there and historically Hawaii has been one of our highest demand of market for both our U.S. and Japanese numbers. So as far as what we have going there – going on there right now, we have a few very small properties that are open, but really no sales going on in Hawaii right now, the plan is that we plan to open up our sales centers on the big Island by mid-November, and that we're going to open all of our properties and sales centers in mid-December and a Oahu. So I think, you mentioned Japan and Hawaii inventory, we are having great success and had a great success in Japan during this crisis, they never really closed down though the business gets dropped back considerably early on when the pandemic first started. But we mentioned, I think in our prepared remarks 34% of our sales for the quarter were Hawaii and compared to 37% last year, and that really has a lot to do with the work that our Japanese teams are doing. This month in October we’re training at about 75% prior year's levels. So that's looking really good, as far as forward-looking bookings for next year we’re showing about 70% on the books at the same time last year. And I know we've had about a 15% pickup over the last four weeks as people have gotten a better line of sight on when we think we're going to be opening. I don't know if there – are there anything else Dan that you…

Yes. I think just to quantify part of your question on Hawaii. Jared, if you look back to Q2, obviously, as we were coming out of the shutdown scenario, we did total contract sales of $35 million, just over $10 million of that was associated with Hawaii. If you look at Q3 that number has jumped to just south of $40 million and we would anticipate that to be probably a hair better, because we do believe operations to be open to some extent in Q4. So we believe there'll be slightly better than that in Q4. But compared to run rate historically prior year, you're looking at Q2 and Q3 being close to $130 million. So still substantially down, but obviously we’re making tracks and then going in the right direction.

Yes. And then I’d just add one more thing. I think when you think about Hawaii, obviously, airlift is really important and from what we're seeing the airlines are starting to get their airlift back in place. And so there is a lot of choreographing that goes on when you open up Hawaii versus other markets for us because of this flying component that you have to deal with. The other thing that you have to think about is a number of our biggest resorts in our properties co-exist on campuses that also have major hotel assets that park, resorts own. So we have to work in conjunction and get aligned with them around staffing and the such. So generally we think Hawaii is going to – we're happy, it's finally going to reopen, we thought it was going to be reopened late in Q3, so it would benefit us in Q4. It got pushed back, but at the end of the day, we're just pleased that it's going to reopen and hopefully the process they put in place is going to endure and create a very safe environment for visitors that are going to Hawaii and we’re very optimistic that our business is going to bounce back stronger.

Okay. Thank you. That's very helpful. I think you got all that from my convoluted question. Just switch gears here, could you talk about how you're thinking about inventory spend for next year? And I know a lot depends on the demand environment, but is it fair to think that next year is not going to be a free cash flow year and then by 2022, you're starting to just meaningfully ramp on free cash flow. Is that the right way to think about it? Anything you can share there.

Hey, Jared, it's Dan. It's a great question. And I think we've talked about this all year. I mean, just to take a step back as you've heard us say it on two calls now. The original amount that we expected to spend in 2020 was north of $400 million, we've contracted that below $200 million. And what I want to emphasize is that contraction is not just moving it from 2020 to 2021. That contraction is really putting things to the side and allowing us to analyze and make the best choice when it comes to a course of action on that inventory spend. The most notable example of that is cooptive right. We've had a contraction in Hawaii in particular on sales, and now the question is when do you need cooptive, which is the Waikiki is equal to actually come online. And we'll continue to analyze that. When you fast forward to 2021, the flexibility that we saw in 2020 is not the same in 2021. In 2020, our contractual obligations i.e., the just in time projects that we had were roughly $25 million. When you look at 2021, those contractual obligations are closer to $200 million. Now, the thing to emphasize here is they are just in time projects. So they – from a capital efficiency standpoint, they've proved out to be very good for us. In particular, as you can imagine, right now, we've got developers spending money on projects, most notably the center on New York, and Suzuka in Japan, that otherwise would be on our balance sheet. So we have had the benefit of that, but what you will see in 2021 is those obligations will start to kick in. So that flexibility and contracting inventory spend does come down and like I said, it's roughly $200 million in contractual obligations in 2021. When it comes to free cash flow, look, it's all about the recovery. How does 2021 recover versus where we are in 2020. We see some nice trends now that – some of our larger markets are on a steady march although, albeit slower than we would like, but on the steady march to recovery, Hawaii is just about to open up. So it's really going to be dictated around the recovery itself on what 2021 shows. I think I'm trying to give you a lot of color, we're not trying to give specific guidance on 2021, but hopefully that context is helpful.

Yes. No, that’s helpful. I appreciate that. Maybe just quickly follow-up on that. I mean, if we assume this recovery that we're seeing here continues and you kind of extrapolate that out through all of 2021, so that 2021 is kind of a transition year, you're still far below peak levels, but we're moving in the right direction, we're improving. Under that scenario should we be assuming that next year is not a free cash flow year? I guess I'm really just trying to help set that expectation on how you're thinking about it. And then by 2022, assuming this recovery is just continuing that, you start to see that meaningfully build again, is that under that context, is that kind of how we should be thinking about it?

Yes. We’ll say in a different way, if you were to look at what a lot of the analysts are saying about the recovery in 2021 and build in that contractual and the – not only contractual, because keep in mind there is contractual inventory payments and then there is also other projects that are under our control, admittedly. But they are also further inventory spend projects like Maui and Ocean Tower Phase 2. There is flexibility there, if the recovery then play out as we expect. But once – if you go with analyst consensuses speak and you building that kind of inventory spend, you are looking at cash and adjusted free cash flow neutral to down here with the path really building in 2022.

Okay. Super helpful. Thank you very much.

Our next question is from Stephen Grambling with Goldman Sachs. Please proceed.

Hey, thanks for taking the questions. Two quick ones. First I know you referenced that with the cost cuts that you've announced, you feel like you can get back to call it prior levels of EBITDA without getting to prior levels of contract sales. Is there any more that you can provide in terms of quantifying that and perhaps I missed it earlier? And then the second question, which is unrelated is just, if you can give any more details on what you're seeing in terms of the demographic of new owners arriving? Is that similar or different to what you saw pre-COVID, are you seeing a truly a different type of customer base younger maybe coming in?

Great questions. I'll take the first one and then I'll turn it over to Mark on some of the demographic information. So we did say in our prepared remarks that we have done a lot, we have taken out various layers. We – as we sit here today, and you saw last week, it might have been the week before where we found 8-K disclosing that we did do a reduction in force. But over the course of 2020, we took out a significant amount of costs. Initially temporary furloughs, now we've gone to a reduction in force. We also still have an excess of 2,000 individuals furloughed today. But based on what we've seen today and the course of the recovery we see now out of everything – out of all the actions we've taken, we believe that there's between 20 and 25 in recurring cost savings associated with that reduction in force and other ancillary expense items.

Yes, Stephen. I’m Mark, on the demographic side, if you look at Q3, millennials made up 26% of our new buyers Gen X 38%. So it's approximately 65% of our new domestic buyers in Q3. We're fit in that Gen X millennial age group.

And did that move materially year-over-year? And also, I guess, with the restraints on the sales centers, are you seeing any changes or making any changes in terms of thinking through digital sales?

Yes, good question. Well, as far as the year-over-year PCO, the millennials continue to grow as Gen Xs do, and boomers are basically falling off. And we're seeing that sequentially really over the last three or four years. And so millennials are building and Gen Xs are building. As far as digital sales go, look, we've – the team has done a lot of good work around innovating on the digital side. I just got a report in this morning that we've done over $1 million in the last couple months in Japan on a pure virtual platform that we put in place. We're also using a lot more technology and our cloud direct capabilities are improving. We started seeing the benefit of selling Maui that way direct sales represented about 60 million of our sales last year. We've now recovered to approximately about 70% of what we were doing last year. So that part of the business is recovering well. And while it's still a minor piece of our business, our capabilities are growing and we're excited about what that'll mean for us in the future.

Great. Thanks so much.

Okay. Our next question is from Patrick Scholes with Truist Securities. Please proceed.

Hi, good morning, everyone. My first question concerns Orlando, one of your larger markets. We heard yesterday from a competitor, how Orlando sort of pre-bookings for next year are really coming on very strong, curious what you folks are seeing in that regard? Thank you.

Yes, Patrick. We're seeing the same thing. And in fact, just looking at the numbers this morning, we've got nine steady weeks of improved pace in Orlando and in Vegas. So, we're seeing improved pace in those markets and we expect is the capacity restrictions diminish in this market. We'll see more and more visitors come here. So Orlando is a tried and true market. It's going to come back. It's just a matter of time. And but we're seeing some very positive trends of late.

Okay. Good to hear. And then my next question, hopefully you can answer this, it's a bit of a follow-up to the first question that was asked today. On your earnings release, you noted that owned inventory represents 80% of your total pipeline while only 32% of that owned inventory pipeline is currently available for sale. Where would you expect that percentage by the end of the year to be that 32%? And how would that trend into 1Q?

From a pipeline perspective, I want to see significant movement there, Patrick, from a sales mix perspective, as the owned inventory comes online, you'll naturally see that compress so that 57% should naturally come down. And as you roll into 2021, depending on the pace of recovery, we would also see it fall. And I would imagine, or we would expect it to fall below 50% in 2021, depending on what the recovery plays out. I think what you see here today, where we are still in the high 50s on a fee for service mix is really speaking to some of the locations that have performed really well in a COVID environment, such as Myrtle Beach, which is a fee for service center, if you will. But hopefully that lays that out for you pretty well.

Okay. Thank you. That's it for me.

Our next question is from Brandt Montour with JP Morgan. Please proceed.

Good morning, everyone. Thanks for taking my question. I was wondering if you could maybe give us the year-over-year contract sales growth by month in the third quarter?

Yes. So hey, Brandt, this is Mark. What we saw sales growth – we didn't have sales growth but if you look at the performance on a sequential basis, in markets that we were open, we were down 59% in July, down 58% in August and down 47% in September. So those – that's based on the markets that were open in.

Great. Thanks. And then just you gave us a great snapshot on your cancellation rates now versus cancellation rates in the spring. And I think that – and I was just curious, and I hate to split hairs and ask a really short-term question, but just because we're sort of in the first or second stages of this broader uptick in infection rates and potentially sort of mobility slowing down is that moved – is it gotten worse over the past – in the very near-term, I guess is what I'm asking?

Yes, no, a great question. I can tell you that we're just not seeing the same correlation between cancellation and spikes in COVID that we did over this summer. And look, when we look at our owner arrivals on the books, they remain strong indicating that there continues to be strong demand. I think when you look at our package – marketing package, our new buyer pipeline, the majority of the consumers who are making changes or travel dates with us are rebooking for a later period of time. So right now, again, obviously there's a lot of activities, a lot of uncertainty out there around the infection rates but we're not seeing the same type of spikes and activities that we have in the past. And I think part of it is just, people are adapting to this situation and they're – I kind of look at it. Either people are looking at travel or they're not looking to travel right now. And those that are looking to travel are adapting to ways to travel safely. And when you look at the entire sector, the travel sector, I think the entire travel sector is doing a really good job. And from the airlines to our properties in the Hilton brands of collectively working together. And I think that is making a difference in the consumer confidence to travel. And but I think in the near-term absent, containment of the virus, I think the pre-testing requirements like we're seeing in Hawaii could also encourage a lot of people that start flying. And so there's a lot going on. Everybody's working together collectively to make travel, especially leisure travel open up again and so we're going to have to see it, we're going to have to watch it closely, the reality is, this is a dynamic situation. But right now, I can't say that we're seeing any spikes right now. Sorry for the long-winded answer, but a lot to think about there.

Yes. Very helpful. Thanks a lot, everyone and good luck.

Thank you.

Our next question is from David Katz with Jefferies. Please proceed.

Hi, morning and thanks for including my question. Number one I just wanted, and I apologize if you've touched on this a bit, but I wanted to get just a clear update on your capital allocation philosophies. There's always discussion around the company in terms of returning capital versus not. And then I have one quick follow-up.

Hey, David, it’s Dan. Look, from a capital allocation strategy, we've been fairly consistent on this. We talked about investing in inventory. We've clearly done that. We're in the process of that and you can see us further taking, we took a pause in 2020 and reanalyzing what the best way to use that inventory spend is, the second would be return capital to shareholders, and obviously M&As are always on the books. It's always interesting to me when we report a quarter where contract sales are down quite dramatically, right. And people want to talk about capital allocation. So we're focused on it. I went and look for us to be in the market repurchasing shares in the immediate future, but I think that lays out our plans.

Thank you for that. Go ahead. Sorry.

No, sorry. I just wanted to say very consistent with how we've always spoken about it.

That's correct. And I was not trying to imply that you should be in the market, buying back your stock as necessarily as a choice avenue. From a much longer term perspective, as so much of our coverage is focused on attracting younger and younger consumers. Do you have any updated thoughts on shorter duration product offerings or any sort of alternative structures that might attract that group in a more fulsome way?

Yes, no, great question. And look, we have and I think we've mentioned it in the past that we are experimenting with some shorter term product. And as you can imagine, we're very focused on getting the business back in order and getting that trajectory back in order so that the focus has really been around our core business. But we believe that there's a great opportunity to expand our offerings and introduce term products. And some of that's being tested right now as we speak, but it's really too early to provide any guidance, especially in this reduced volume environment. But we'll make sure to keep you posted as we move forward.

I appreciate that. Thank you very much.

We have reached the end of our question-and-answer session. But before we end, I’d like to turn the call back over to Mark Wang for closing remarks.

Well, thanks everyone for joining us this morning. And I know I mentioned in my prepared remarks, but I want to give another special thanks to all of our team members for their hard work and dedication to providing our guests with a safe and memorable experiences when traveling with us. We look forward to speaking with you over the coming weeks and updating you on our next call. Have a great day. Thanks.

Thank you. This does conclude today's conference. You may disconnect your lines at this time.