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Hilton Grand Vacations Reports Second-Quarter 2018 Results; Raises Guidance

August 1, 2018

Hilton Grand Vacations Inc. today reports its second-quarter 2018 results. (Graphic: Business Wire)

ORLANDO, Fla.--(BUSINESS WIRE)--Aug 1, 2018--Hilton Grand Vacations Inc. (NYSE:HGV) (“HGV” or “the Company”) today reports its second-quarter results. Highlights include:

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Hilton Grand Vacations Inc. today reports its second-quarter 2018 results. (Graphic: Business Wire)

Diluted EPS was $1.10 and net income was $107 million for the second quarter. Adjusted EBITDA was $175 million for the second quarter. Contract sales for the second quarter increased 10.5 percent from the same period in 2017. Net Owner Growth (NOG) for the 12 months ending June 30, 2018, was 7.2 percent. Acquired the Quin in New York City for $176 million with plans to convert existing hotel rooms into 212 timeshare units. Announced it made a $41 million deposit to purchase 87 of the 375 hotel rooms within the Hilton Los Cabos Beach and Golf Resort in Los Cabos, Mexico. Opened The Residences by Hilton Club in New York City and began sales at Ocean Enclave in Myrtle Beach, South Carolina. Adoption of ASC 606 increased second-quarter reported revenues and operating expenses compared to the previous accounting guidance. Under the previous accounting guidance, second quarter revenue, net income and adjusted EBITDA increased 8.9 percent, 27.5 percent and 12.3 percent respectively.

Overview

For the three months ended June 30, 2018, diluted EPS was $1.10 compared to $0.51 for the three months ended June 30, 2017. Net income was $107 million for the three months ended June 30, 2018, compared to $51 million for the three months ended June 30, 2017, and adjusted EBITDA was $175 million for the three months ended June 30, 2018, compared to $106 million for the three months ended June 30, 2017.

Total revenues for the three months ended June 30, 2018, were $563 million, compared to $439 million for the three months ended June 30, 2017.

Adoption of ASC 606 increased revenue for the three months ended June 30, 2018, by $85 million compared to the previous accounting guidance. The comparable increase was $42 million to net income, $0.44 per diluted share to EPS and $56 million to adjusted EBITDA.

“The solid execution of our teams in the U.S. and Japan has delivered consecutive quarters of strong operating performance, including contract sales, Net Owner Growth and strategic deployment of capital,” says Mark Wang, president and CEO, Hilton Grand Vacations. “As a result, we are raising guidance based on the momentum we’re experiencing across the company and from sales of our new Ocean Tower project, which demonstrates how the investments we’re making position us well to accelerate continued growth.”

Segment Highlights – Second Quarter

Real Estate Sales and Financing

Real Estate Sales and Financing segment revenue was $435 million in the second quarter of 2018, an increase of 34.7 percent, compared to the same period in 2017. Real Estate Sales and Financing segment adjusted EBITDA was $163 million in the second quarter of 2018, compared to $99 million in the same period in 2017. Real Estate Sales and Financing segment adjusted EBITDA margin as a percentage of Real Estate Sales and Financing segment revenues was 37.5 percent in the second quarter of 2018, compared to 30.7 percent for the same period in 2017.

Contract sales were $357 million in the second quarter of 2018, an increase of 10.5 percent compared to the same period in 2017. Fee-for-service contract sales represented 54.1 percent of total contract sales in the second quarter of 2018, compared to 51.4 percent in the same period in 2017. Tours increased 8.2 percent to 94,269 in the second quarter of 2018, compared to the same period in 2017. Volume Per Guest (VPG) for the second quarter of 2018 was $3,597, an increase of 2.7 percent compared to the same period in 2017.

Under the guidelines of ASC 606, sales of Vacation Ownership Intervals (VOIs) and all related direct expenses for projects under construction are deferred until construction is fully complete. In the second quarter of 2018, HGV completed construction at The Residences in New York City, and the property received its certificate of occupancy. As such, during the quarter, the Company recognized deferred revenues and expenses related to sales at The Residences that were made prior to May 2018, including sales that occurred prior to 2018 that had been recognized on a percentage of completion basis under the previous accounting guidance. As part of the adoption of ASC 606, those recognitions had been reversed at the beginning of 2018.

During the quarter, HGV also continued to defer recognition of revenues and direct expenses related to sales at its Ocean Tower property in Waikoloa, Hawaii, which remains under construction. The company expects to recognize these revenues and expenses in the fourth quarter of 2018.

Under ASC 606, HGV’s second quarter 2018 real estate margin reflects the net recognition of $87 million in sales of VOI revenue, $20 million of cost of VOI sales and $11 million of sales and marketing expense, net compared to the previous accounting guidance.

Additionally, second quarter of 2017 real estate results were positively impacted by a non-recurring benefit from forfeiture revenue realized on marketing packages, which reduced sales and marketing expenses by $10 million.

Financing revenues were $39 million in the second quarter of 2018, an increase of 8.3 percent compared to the same period in 2017.

The weighted average FICO score of new loans made to U.S. and Canadian borrowers at the time of origination was 749 for the six months ended June 30, 2018, compared to 745 for the six months ended June 30, 2017. For the six months ended June 30, 2018, 65.1 percent of HGV’s sales were to customers who financed part of their purchase.

As of June 30, 2018, gross timeshare financing receivables were $1.2 billion with a weighted average interest rate of 12.2 percent and a weighted average remaining term of 7.7 years. As of June 30, 2018, 2.2 percent of HGV’s financing receivables were more than 30 days past due and not in default.

Resort Operations and Club Management

Resort Operations and Club Management segment revenue was $98 million in the second quarter of 2018, an increase of 6.5 percent compared to the same period in 2017. Resort Operations and Club Management segment adjusted EBITDA was $58 million in the second quarter of 2018, compared to $52 million in the same period in 2017. Resort Operations and Club Management segment adjusted EBITDA margin as a percentage of Resort Operations and Club Management segment revenues was 59.2 percent in the second quarter of 2018, compared to 56.5 percent for the same period in 2017.

Inventory

The estimated contract sales value of HGV’s pipeline of available inventory is approximately $7.8 billion at current pricing or approximately 5.8 years of sales at the current trailing 12-month sales pace. The estimated contract sales value of HGV’s pipeline of available owned inventory is approximately $5.1 billion or approximately 3.8 years of sales. The estimated contract sales value of HGV’s pipeline of available fee-for-service inventory is approximately $2.7 billion or approximately 2 years of sales.

Of the current pipeline of available inventory, 42 percent is considered just-in-time and 35 percent is considered fee-for-service. As such, the Company considers 77 percent of its pipeline of available inventory to be capital efficient.

Balance Sheet and Liquidity

As of June 30, 2018, HGV had $637 million of corporate debt outstanding with a weighted average interest rate of 5.2 percent and $604 million of non-recourse debt outstanding with a weighted average interest rate of 2.7 percent.

Total cash and cash equivalents was $203 million as of June 30, 2018, including $72 million of restricted cash.

Free cash flow, which the Company defines as cash from operating activities, less non-inventory capital spending, was ($163) million for the six months ending June 30, 2018, compared to $156 million for the six months ending June 30, 2017. Adjusted free cash flow, which the Company defines as free cash flow less non-recourse debt activity, net was ($143) million for the six months ending June 30, 2018, compared to $111 million for the six months ending June 30, 2017.

Outlook

Full-Year 2018

2018 guidance reflects the modified retrospective adoption of ASC 606 and may not be comparable to prior year presentations. Net income is projected to be between $285 million and $300 million. EPS is projected to be between $2.91 and $3.06. Adjusted EBITDA is projected to be between $489 million and $504 million, which includes $67 million of net deferral impact related to a project under construction in 2017, due to the adoption of ASC 606. Full-year contract sales are expected to increase between 9 and 11 percent. Fee-for-service contract sales are expected to be between 50 and 55 percent of full-year contract sales. Free cash flow is projected to be between ($240) million and ($280) million. Adjusted free cash flow is projected to be between ($20) million and ($80) million. (1) Inventory spending, which is included in cash flow from operating activities, is projected to be between $510 million and $530 million. In addition to ongoing and previously announced projects and initiatives, this amount includes approximately $140 million of anticipated spending on new projects during 2018 that have not yet been announced.

Transactions and Subsequent Events

During the second quarter, HGV acquired the Quin, a 208-room hotel located in New York City for $176 million. It plans to convert the existing rooms into 212 studios and one- and two-bedroom timeshare units. The property will remain open during renovations and, pending registration, sales are anticipated to begin in the fourth quarter of 2019. The Quin is the latest addition to HGV’s New York City portfolio of urban timeshare properties, which also includes The Residences by Hilton Club, The Hilton Club – New York and West 57th Street by Hilton Club.

HGV has made a $41 million deposit to purchase 87 of the 375 hotel rooms within the Hilton Los Cabos Beach and Golf Resort in Los Cabos, Mexico. It plans to convert the 87 rooms into 74 timeshare units. The total project investment is expected to be approximately $50 million, including the deposit, renovations and start-up costs. Pending completion of the condominiumization of the entire resort, HGV expects to obtain title and begin renovations to its 87 units in mid-2019, with sales expected to commence by the end of 2019. The AAA Four-Diamond oceanfront resort is situated on 11.3 acres along the San Jose-San Lucas corridor at the tip of the Baja California peninsula and offers access to one of the area’s only swimmer-friendly beaches.

Conference Call

Hilton Grand Vacations will host a conference call on Aug. 2, 2018, at 11 a.m. (EDT) to discuss second-quarter results. Participants may listen to the live webcast by logging onto the Hilton Grand Vacations’ Investor Relations website at http://investors.hgv.com/events-and-presentations. A replay and transcript of the webcast will be available on HGV’s Investor Relations website within 24 hours after the live event.

Alternatively, participants may listen to the live call by dialing 1-888-312-3049 in the U.S. or +1-323-794-2112 internationally. Please use conference ID# 2656130. Participants are encouraged to dial into the call or link to the webcast at least 20 minutes prior to the scheduled start time. A telephone replay will be available for seven days following the call. To access the telephone replay, dial 1-888-203-1112 or +1-719-457-0820 internationally and use conference ID# 2656130.

New Accounting Standards and Adjusted Results

HGV adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASC 606”), on Jan. 1, 2018, under the modified retrospective method of adoption. The following are some of the significant changes to the Company’s consolidated financial statements:

Revenue and direct expense related to sales of VOIs under construction will be recognized when construction is completed, as opposed to recognizing revenue and related expenses under a percentage of completion method; Revenue on prepaid discounted vacation packages will be recognized proportionately as packages are redeemed, as opposed to when the likelihood of redemption is considered remote; and Revenue and expense related to certain sales incentives where HGV acts as the agent will be recognized on a net basis, as opposed to recognized on a gross basis.

The following tables show the estimated impacts that the ASC 606 adjustments would have had to HGV’s quarterly and annual 2017 operating results, EBITDA and adjusted EBITDA, if HGV had adopted ASC 606 utilizing the full retrospective method of adoption.

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