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Edited Transcript of HGV.N earnings conference call or presentation 2-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Hilton Grand Vacations Inc Earnings Call

Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Hilton Grand Vacations Inc earnings conference call or presentation Thursday, March 2, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert LaFleur

Hilton Grand Vacations Inc. - VP of IR

* Mark Wang

Hilton Grand Vacations Inc. - President and CEO

* Jim Mikolaichik

Hilton Grand Vacations Inc. - EVP and CFO

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Conference Call Participants

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* Harry Curtis

Nomura Securities - Analyst

* Stephen Grambling

Goldman Sachs - Analyst

* Bradford Dalinka

SunTrust Robinson Humphrey - Analyst

* Chris Agnew

MKM Partners - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Hilton Grand Vacations fourth-quarter and full-year 2016 earnings conference call. Today's call is being recorded and will be available for replay beginning at 2 PM Eastern Standard Time today. The dial-in number is 888-203-1112, and enter PIN 3338221. (Operator Instructions).

I would now like to turn the call over to Robert LaFleur, Vice President of Investor Relations. Please go ahead, sir.

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Robert LaFleur, Hilton Grand Vacations Inc. - VP of IR [2]

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Thank you, Gina, and welcome to the Hilton Grand Vacations fourth-quarter and full-year 2016 earnings call. Before we get started, we would like to remind you that our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements, and the forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements.

For a discussion of some of the factors that could cause actual results to differ, please see the risk factors section of our previously filed Form 10 or our 10-K, which we expect to file later today.

In addition, we will refer to certain non-GAAP financial measures in our call this morning. You can find definitions and components of such non-GAAP numbers, as well as reconciliations of non-GAAP and GAAP financial measures discussed today, in our earnings press release on our website at www.investors.hgv.com.

This morning, Mark Wang, our President and Chief Executive Officer, will provide highlights from the fourth quarter and full year of 2016, in addition to an overview of current operations and the Company's outlook. Jim Mikolaichik, our Executive Vice President and Chief Financial Officer, will then provide more details on the fourth-quarter results and expectations for 2017. Following their remarks, we will open the line for questions.

With that, let me turn the call over to Mark.

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [3]

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Well thank you, Bob, and thank all of you for joining us this morning. We're pleased to be speaking to you for the first time as an independent company. As I'm sure you can appreciate, the spin process was a major undertaking. And so let me first take a moment to thank the HGV team for all their hard work and dedication that brought us to this point. I'd also like to thank Hilton and Park management for their partnership in making this spin successful.

Looking ahead, we will measure ourselves against the following strategic priorities, which we believe are critical to maximizing shareholder value: growing contract sales, expanding member base, enhancing member experiences, optimizing our capital efficiency, and pursuing opportunistic ventures.

Let me now update you on the progress we've made thus far under these priorities.

We saw fourth-quarter contract sales grow by 14% with full-year results up 10%. Our highly effective sales and marketing platform continued to source and engage the right customers and generated over 300,000 high-quality customer tourists for the year while achieving volume per guest, or VPG, of $3,600.

Our member base, measured by net owner growth, or NOG, as we call it, grew just under 8% for fiscal 2016, driven by strong new owner activity and low levels of owner attrition. This marks the 24th consecutive year where we've posted net owner growth.

As part of our commitment to enhancing member experience, we expanded our vacation options during the quarter by opening properties in two high-priority markets, Washington, DC; and Hilton Head, South Carolina. We also launched a new member website and corresponding mobile app that has significantly improved functionality and adoption, which is vital when considering that approximately 60% of our domestic transactions are now being handled online or via mobile.

We also continue to see improvements in customer satisfaction and quality assurance scores, evidenced by a stable, engaged, and loyal owner base that collectively forms among the lowest loan and HOA delinquency rates in the industry.

Eight years ago, we embarked on a transformational journey to make our business more capital efficient. In 2016, over 70% of contract sales were capital efficient. To break that down further, 56% of those capital-efficient sales came from our industry-leading fee-for-service program. This program operates on behalf of third parties who develop the inventory on their own balance sheets, thereby providing flexibility to ours. The remaining 18% represents inventory acquired and converted on a just-in-time basis, ensuring the proper timing of investment and avoiding [some] costs, thereby maximizing returns.

Moving forward, we expect capital efficiency levels of over 70% under the same inventory structure of either fee-for-service or just-in-time sources. As an example of our current pipeline, yesterday we opened the spectacular Grand Islander, a brand-new $400 million property located at the Hilton Hawaiian Village on Waikiki Beach. This project is a fee-for-service deal with Blackstone and ADIA, and it illustrates both the quality of our developers and the opportunities for expansion in priority markets.

Finally, regarding opportunistic ventures, we are consistently evaluating expansion opportunities which will grow our footprint in a disciplined and accretive manner, both domestically and internationally.

As an example, we see great expansion potential in Asia, given the success of our Japanese operation. To that point, we're excited about our evolving relationship with China-based HNA Group, a leader in global travel and tourism industry. As Hilton announced, HNA will be acquiring a 25% stake in our Company from Blackstone. While this relationship is in its very early stages, we believe over time there may be opportunities to leverage both HGV's and HNA's respective strengths once this deal closes, which, as Hilton reiterated on its earnings call last month, is expected in the first quarter.

Before turning things over to Jim to discuss the financials, I'd like to spend a few minutes walking through the performance of our real estate and resort club business in the fourth quarter and for the full year.

For real estate, our fourth-quarter contract sales were up over 14% with positive trends seen across all geographies and markets. We saw double-digit gains at Myrtle Beach, Hawaii, and Japan, and mid- to high-single-digit growth in Orlando, Las Vegas, and New York. Company-wide growth in contract sales were supported by improvements in both our tours and VPG. Fourth-quarter tours were up 4% and VPG was up 9%, with solid gains across all of our core markets.

Even though our VPG was very strong in the quarter and the year, we'd like to remind everyone that reported VPG is a blended average, and it's influenced by market mix and mix between owner and first-time buyer sales. And while VPG is relevant to our business, it's only one of the many management tools we use, and we tend to use NOG as a more accurate illustration of our performance.

In our resort and club business, we had strong results in 2016, with recurring revenues up 14%, driven by increased transactions and initiation fees and continued strong NOG. NOG for the year was 7.7%, with Millennials making up 18% of first-time buyers, up 50% year-over-year. While we've seen new owner growth emerge as an initiative across the industry, this has always been a core focus at HGV.

In closing, we are excited about the opportunities which lie ahead of us as a newly independent company. We're experiencing strong results; developing priority partnerships, domestically and abroad; and continue to evolve as a profitable, highly capital-efficient business. This year's off to a great start and we are confident in our ability to deliver on the financial performance we illustrated at our Investor Day and reiterated today.

We continue to believe that HGV is uniquely positioned in the timeshare industry to create meaningful value for our owners, our team members, and our shareholders, through the full activation of our business as an independent company.

With that, I'd like to turn the call over to Jim for some more details on our quarter and the full year. Jim?

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Jim Mikolaichik, Hilton Grand Vacations Inc. - EVP and CFO [4]

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Thank you, Mark, and good morning, everyone. Over the past six months since I joined the Company, I have had the opportunity to meet with many of you, and I look forward to meeting new faces in the quarters ahead. Part of what attracted me to HGV is the industry-leading business model, world-class management team, dedicated employees, and loyal customer base. As you've already heard Mark talk about, and which our financial performance and outlook supports, we have a tremendous opportunity ahead to continue creating value for all of our stakeholders.

That being said, let me now turn to a review of our financial results, which were released yesterday after market close, and are available on the Investor Relations portion of our website. We also expect to file our 10-K later today, which will contain additional details.

As we discussed, HGV presented full-year net income, earnings per share, adjusted EBITDA, free cash flow guidance that was consistent with the fourth-quarter forecast that was in effect when we issued our guidance. And I am pleased to announce that our actual results for 2016 were at or above the midpoint of all of our full-year guidance for all four metrics previously mentioned.

Looking at our 2016 full-year and fourth-quarter results, our financial and operational results demonstrated continued growth and momentum in revenue across all of our business lines. We finished the fourth quarter with revenues of $415 million, an increase of $34 million, or approximately 9% in comparison to the fourth quarter of 2015. This growth was driven by a $24 million increase in real estate revenues, which was evenly split between owned and fee-for-service projects. This was coupled with a $5 million or 12.5% increase in club and resort management revenues.

We experienced similar growth on an annualized basis, with revenue increasing by 7.3% to approximately $1.6 billion. Our full-year revenue increases were driven by fee-for-service projects and club and resort management, which had growth rates of 9.2% and 14.4%, respectively.

Net income declined in both the quarter and for the full year to $38 million and $168 million. This represented an $11 million decline in the quarter and a $6 million decline for the full year. These decreases were largely due to transaction and spin-related general and administrative costs of $15 million and $35 million for the quarter and full year. The majority of the cost increase was associated with legal, banking, advisory, and internal resources necessary to effectuate our spin-off and become an independent public company.

To a lesser extent, the $6 million decrease in full-year 2016 net income was a result of higher effective tax rate resulting from nondeductible transaction costs.

Turning to our operating segments, which exclude expenses related to our 2016 spin-off, we experienced segment adjusted EBITDA growth in the fourth quarter and for the full year of 2.2% and 9.4%. Looking to the fourth-quarter results in the real estate business line, contract sales and mix trends highlighted earlier by Mark, combined with new projects in Hilton head, South Carolina, and Washington, DC, led to an 8.5% increase in real estate sales revenue. However, revenue lagged contract sales due to a shift from favorable deferrals realized in fourth-quarter 2015 versus unfavorable deferrals in fourth-quarter 2016 related to our New York City project.

Fourth-quarter real estate margin was down $12 million or 18%, as both product costs and sales and marketing expenses were higher. Product costs were higher due to a mix shift in -- between fee-for-service and owned. And sales and marketing costs increased as we established our distribution pipeline in Hilton Head and Washington, DC.

However, when viewed as a percentage of contract sales, our SMG&A expenses were only 20 basis points higher this year. And as we've previously indicated, quarter-to-quarter real estate results may show some variability, given completion timing on developed projects and product cost true-ups. For the year, real estate margin was up $13 million or 5.6%, and margin percentage was up 10 basis points or 27.6%.

Our high-margin financing business continues to post steady growth, with revenues up 6% and margin up 8% in the fourth quarter. Finance margin percentage was up 150 basis points in the quarter and 130 basis points for the year. At the end of the quarter, our consumer finance portfolio stood at approximately $1.1 billion, and carried an average interest rate of just under 12%.

Delinquencies remain low, at 1.5%, with a default rate of 3.7% for 2016, and our long-term allowance stood at approximately 10.7%.

Combining these two business lines into our real estate and financing segment, fourth-quarter segment revenues were up 9%, and segment adjusted EBITDA was down 4% due to the product cost and marketing and expense trends discussed earlier. Real estate sales and financing segment EBITDA margins declined 410 basis points to 29.7%. And for the year, real estate segment adjusted EBITDA was up 6% as margins declined 10 basis points to 30.4%.

Turning to our resort and club management business line, revenues were up 13%. This increase was the result of net owner growth, higher rates, higher activation fees, and management fee increases from newly opened properties. Resort and club margin rose 10% in the quarter as higher costs related to new initiatives and the roll-out of the new club website modestly offset some of the revenue gains.

In our rental and ancillary business line, fourth-quarter revenues declined 3% as higher rental rates only partially offset the impact of higher internal marketing use and lower occupancies. Ancillary revenues were also down modestly. And rental and ancillary expense decreased 10% on lower program costs and lower resort operational expenses due to mix shift between transient and marketing rooms. Rental and ancillary margin increased 22% in the quarter, and rental and ancillary margin percentage expanded 580 basis points.

Combining these two business lines into our resort operations and club management segment, fourth-quarter segment revenues increased 7%, segment adjusted EBITDA increased 16%, and resort operations and club segment EBITDA margin rose 440 basis points to 56.8%. For the year, resort operations and club segment adjusted EBITDA increased 17% on a 300 basis point increase in margin percentage.

Bridging the gap between segment EBITDA and adjusted EBITDA, fourth-quarter license fees were flat, and general and administrative costs increased $5 million or 36%, reflecting the additional overhead costs necessary to effectuate the spin. This resulted in fourth-quarter adjusted EBITDA of $101 million, a 2% decrease from fourth quarter last year. And on a full-year basis, adjusted EBITDA was $402 million, an 8% increase year-over-year.

At year-end, our inventory pipeline remained full, with just under seven years of sales at our current pace, including 2.5 years of owned inventory and 4.4 years of fee-for-service inventory. Over 70% of our pipeline is capital-efficient, coming to us from either fee-for-service or just-in-time sources.

Turning to the balance sheet, as many of you are aware, we were in the market during the fourth quarter with several transactions that were required to execute the spin. We raised $300 million of fixed rate, eight-year bonds; and $200 million and a five-year, variable rate term loan. We also expanded our receivables warehouse facility to $450 million from $150 million, and fully drew the $300 million in extra capacity.

We are also pleased to announce that we priced a $350 million securitization deal last week, which serves to fix the rate on those borrowings. And we'll use the proceeds to pay down a portion of the warehouse, creating future capacity in that facility.

As a result, we ended the year with $490 million of corporate debt and just under $700 million in nonrecourse debt. And at year end, our leverage was approximately 1.2 times on a trailing 12 month basis. We had approximately $151 million in cash at year end, comprised of $48 million in unrestricted cash and the remaining $103 million in restricted cash. And in the fourth quarter, we generated $30 million of free cash flow, bringing our total for the year to $132 million.

In closing, we are reiterating our 2017 guidance. We continue to expect full-year contract sales growth of 5.5% to 7%, delivering adjusted EBITDA of $390 million to $415 million, net income of $170 million to $186 million, and free cash flow of $140 million to $160 million.

That completes our prepared remarks. I will now turn the call back to the operator, and we look forward to your questions. Gina?

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Questions and Answers

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Operator [1]

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(Operator Instructions). Harry Curtis.

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Harry Curtis, Nomura Securities - Analyst [2]

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The first question is, in the quarter, [what was] the growth of new owners and net owner growth?

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [3]

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Are you asking what our net owner growth was --? Are you looking at the percentage between the two, or are you looking at net (multiple speakers)?

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Harry Curtis, Nomura Securities - Analyst [4]

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Just the year-over-year percentage growth. 7.7% for 2016; I'm just wondering what it was in the fourth quarter.

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [5]

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Harry, we don't look at our NOG on a quarterly basis. For the year, it was nearly 8%, above our three-year guidance of 6% to 7%. In fact, it was a record year for us in attracting new owners. The difference between the 2016 and 2017 growth rate was really attrition. But defaults were actually down 11%. We made a strategic decision to buy back more inventory off the open market last year. In fact, we bought back three times as much off the open market. We view buybacks as a good source of high-margin business. Our long-term view is if we can keep our NOG above 5%, we can maintain a healthy and sustainable business.

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Harry Curtis, Nomura Securities - Analyst [6]

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Okay. And the second question is, if you could discuss the pipeline of your new projects where you're collaborating with Hilton and third-party developers.

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [7]

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I think, Harry, as you saw in our report out, we've had a few asset transfers that were part of the spin transaction; really excited about those. We ended up receiving inventory for New York, a great project for us; two floors at the New York Hilton. That's under development right now. We'll get a slight drag in 2017 from that, but we'll be able to fully recognize that in 2018.

Washington, DC, which is a new market for us -- we converted three floors of the Embassy Suites into 108 units there. We've had great success in the urban markets in New York, so we're really excited about DC. And that will ramp up in 2017, throughout 2018, so excited about that.

And the other asset we received was -- we received half of the Waikoloa Hotel. This is a spectacular property over on the Big Island. It's a market we've been in. This property sits on over 66 acres. It's got water gondolas and a dolphin quest there. It's a beautiful property. It's been a strong market for us over the years, but we've been on the golf course. This is the first time we're going to be able to offer product on the ocean. Excited about that.

So we're going to convert 600 hotel rooms over to approximately 350 units. This is going to be a long-term conversion, though, as we're going to phase it. It will be a capital-efficient project because we're going to phase the units over multiple years.

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Harry Curtis, Nomura Securities - Analyst [8]

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That's great. And maybe if you can give a little bit of color, to the extent that you feel comfortable, about projects that are not in the pipeline now, but where you would like to see product in the pipeline.

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [9]

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That's a great question, Harry, because geographic expansion for us is really important. We have a relatively small footprint compared to the industry. And we're focused on large, urban resort markets with strong inherent demand. And we're going to continue to build on our existing markets, but new distribution is really important for us, both domestic and international.

We are particularly interested in building on our strengths around our Japan operation. We've got over 60,000 members there. And China has caught our attention, so we're looking at China. We've looked at it over the years. But I was just recently there, just after -- just in the middle of January, and so excited about the potential opportunities there.

To be more specific, again, it's the urban cities. We like San Diego. We like Chicago. We definitely are light on the West Coast. We think there's opportunities there. And we're also looking at some midmarket opportunities, too, to widen our ability to reach a bigger customer base.

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Harry Curtis, Nomura Securities - Analyst [10]

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Guys, that's a great start. Thanks very much.

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Operator [11]

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Stephen Grambling, Goldman Sachs.

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Stephen Grambling, Goldman Sachs - Analyst [12]

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What percentage of the existing members currently are from China? And what does your conversations with HNA and due diligence on that customer potentially tell you about the potential of that market versus the US or even Japan?

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [13]

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China, Stephen, makes up a very, very small percentage of our owner base at this point. We're selling a few Chinese nationals in Hawaii, but we have not -- we haven't developed a full marketing and sales strategy around that. Japan is really where we have experienced the biggest growth; again, 60,000 members. They make up about 20% of our base. They're our most profitable customer. They obviously -- they love Hawaii.

We started developing this market back in 1999. We've got eight sales centers in Japan now. Our most recent, we opened a couple of months ago in Kobe. They are very engaged with our high-quality product in Hawaii.

But as far as the HNA connection, again, as I said in my preferred remarks, we're very, very early on in the discussion. But as I said, I was in China; I feel good about the opportunity. I think China is moving toward our product. As you know, there's a lot of opportunity from an inventory standpoint in China, a tremendous amount of real estate growth.

And I was in Hainan Island on my recent trip. I saw a lot of great potential projects there. And what's interesting is there's a lot of lights off in China, so there's a lot of inventory. And I think our business is about usage, and I think our product form would fit really well in China. And you can see the demographics of the Chinese has been moving up, and moving towards what we consider the right customer type.

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Jim Mikolaichik, Hilton Grand Vacations Inc. - EVP and CFO [14]

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And, Stephen, I'd just add that, given Mark's comments on the percentage being de minimis, we're underserved, given the Chinese population. And I think we are very excited about a possibility to address the consumer in China. But first things first; we want the deal to close with HNA. We'll pull on two more Board members with direct connection there. And I think we'll have a very tempered approach as to how we address the Chinese market. But we're excited about the possibilities and starting to work with a new business partner like HNA.

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Stephen Grambling, Goldman Sachs - Analyst [15]

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Thanks, that's helpful. And then on -- sticking with inventory and the new inventory specifically, how does the recently acquired inventory, as well as any completed but unsold inventory, compare to the average over the past couple of years? Whether it's related to the average sale price, potential customer mix, or management fees that could go along with it.

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [16]

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Stephen, the new inventory is very consistent with what we have in our system. It follows our brand standards. And our inventory strategy is to be in highly desirable and sought-after markets, and ensuring that our product appeals to a wide range of customers, both first-time buyers and existing owners. And so the new inventory really supports our sales and our net owner growth guidance that we provided.

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Jim Mikolaichik, Hilton Grand Vacations Inc. - EVP and CFO [17]

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And I think the pricing, it should remain relatively stable with what we've seen historically, as most of these properties are coming in behind existing markets. Although several of them are in higher-priced markets, I think the pricing we would, as of right now, see as stable moving forward; not really shifting one direction or another from the new inventory.

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Stephen Grambling, Goldman Sachs - Analyst [18]

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Great. And then if I could just sneak one other one in, on margins. You mentioned a couple of things -- or I guess margins and sales. But you mentioned a couple of things weighing on the real estate segment specifically in the quarter, including deferrals, a shift towards owned, and incremental selling and marketing costs for the DC and Hilton Head markets. Could you just help quantify some of these and give us a sense for how similar type of shifts could impact the quarterly cadence of your guidance in this year?

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Jim Mikolaichik, Hilton Grand Vacations Inc. - EVP and CFO [19]

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Right. The shift -- look at top-line growth of 14% and 9% for the quarter and the year in contract sales, that's very pleasing to us. We converted the annualized lift in contract sales to revenue at a faster pace. But in the quarter, what we saw are two impacts. As we start to move to owned sales, we have two things that occur. We've got some reportability that comes through, and those are loan losses, recisions, percentage of completion deferrals -- really timing issues around our owned and developed property.

The other impact that we saw was where you have -- if we are selling more fee-for-service, that tends to push out our owned sales, which means we allocate owned construction costs over a longer period with rising prices, so it tends to bring your cost of product down. As we shift back to more owned versus fee-for-service, we have the opposite effect occurring.

So in the fourth quarter, you saw both of those things impact the net sales, because we had unfavorable deferrals versus favorable deferrals, 2016 over 2015, with our New York City project that Mark mentioned earlier. And we saw a lift in product costs because of bringing on more owned sales. So over time, we expect moving to owned drives higher revenues and greater EBITDA growth because we have a higher revenue on the top line. And to the extent we control the product costs, we drop that to the bottom line.

So it's a good outcome overall. On the medium- and long-term, it will do exactly what we expect it to do. Short-term, there's a little variability in the quarter.

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [20]

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Then, Stephen, on the sales and marketing expense, those expenses are tied to tours and sales that grow relative to those items. So as a percentage, our sales and marketing expense were only up 20 bps in the fourth quarter, so we were at 42.5% versus 42.3% last year. So this was really driven and related to the opening of the two new distribution centers in Washington, DC, and Hilton Head.

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Stephen Grambling, Goldman Sachs - Analyst [21]

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Great. I will jump back in the queue. Thanks so much.

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Operator [22]

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Bradford Dalinka, SunTrust.

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Bradford Dalinka, SunTrust Robinson Humphrey - Analyst [23]

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Congratulations on the spin. Appreciate the help on the proceeds from the securitization. Was curious if that was contemplated in guidance, and also just broadly your thoughts on capital allocation plans going forward.

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Jim Mikolaichik, Hilton Grand Vacations Inc. - EVP and CFO [24]

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The securitization -- we don't include financing transactions right now in our free cash flow guidance. So while we absolutely intended to address securitization early in 2017, we didn't include the impact of that in the $140 million to $160 million in free cash flow. So that will be an add. It's a net add based on -- we borrow forward at 90% on the warehouse and 98%, so it will give us a small lift of I think $20 million to $25 million of additional cash flow. And as we push forward, we started with $50 million, roughly, of unrestricted cash.

Our intention is to build cash flexibility in the near term, looking to deploy toward growth. And I think we want to take the first 12 to 18 months, maybe two years, to really study what additional spending we can do in capital projects, sales center development, some more owned inventory spending, and looking at some possible inorganic opportunities, either small tail purchases of fee-for-service deals to owned deals or potential M&A.

And as we look through those types of transactions, I think we're looking to continue to accelerate our growth from the cash and the flexibility that we build. To the extent we get out towards the tail end of that and we don't feel like we're getting the types of opportunities to accelerate growth off of our balance sheet, I think we'll consider longer-term -- potential dividends or buybacks, but that's not in the plan right now. Right now it's about building the flexibility and deploying for growth.

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [25]

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I'd also say, Brad, we have had sequential years of low investment into our business. And we had to concentrate our capital on fewer markets, and it really restricted our ability to expand geographically. So in our investment for -- will take some time, but -- to make it into our results. But this is a build-ramp, build-ramp business. With that being said, we've been waiting for this day. We have a number of markets that we've done advanced work on. And you should expect that we'll signal to the market once we've solidified these deals.

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Bradford Dalinka, SunTrust Robinson Humphrey - Analyst [26]

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Thank you. And then one more, if I can. I guess I have to ask on different markets, or I don't get to fit in with the other analysts. When do 48th Street and Maui come online? And have you guys started sales there already?

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [27]

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Yes; 48th Street, no. We haven't started sales there. I think we're looking at the tail end of 2017, early 2018 for 48th. And Maui, we still don't have a start date for that property.

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Bradford Dalinka, SunTrust Robinson Humphrey - Analyst [28]

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Got it. Thanks, and congrats again on the spin.

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Operator [29]

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(Operator Instructions). Chris Agnew, MKM Partners.

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Chris Agnew, MKM Partners - Analyst [30]

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Wanted to ask about the mix of fee-for-service sales, and noted that it was low relative to the full year and the fourth quarter this year, and also in 2015. And then in both years, the mix of fee-for-service was also high and above the full-year, in the first quarter of both years. Is there any seasonality to this mix, or is that just coincidence? And how much control do you have over driving that mix quarter to quarter, given that it does influence margin and the absolute EBITDA? Thank you.

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [31]

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Chris, we tend to probably be a bit over-focused at the beginning of the year, ensuring that we meet our third-party obligations and objectives. So in the case of 2016, we got out in front of it quite a bit. So to get to our full-year guidance, we shifted a lot into owned. We have quite a bit of flexibility, but we're always mindful to ensure that we are meeting the objectives of all of our third parties out there.

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Chris Agnew, MKM Partners - Analyst [32]

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So is it fair to assume that that -- there is some seasonality, and that continues? Am I hearing you correct?

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [33]

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I'd say it's less about seasonality. It is more about a concerted effort to get out in front of our obligations and objectives for our third parties, versus any type of seasonality.

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Chris Agnew, MKM Partners - Analyst [34]

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Okay, okay. And then if I look at tour flow, I know that you had a great start in the first-half last year, particularly the first quarter. Can you share what was behind the strength last year in that? It's a data point the market probably shouldn't obsess about, but can react to. So, expectations for the first quarter, given that you had a plus 9 last year -- should we expect flat to maybe slightly down this first quarter? Thank you.

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Mark Wang, Hilton Grand Vacations Inc. - President and CEO [35]

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As you know, we spend a considerable amount of energy drawing people into our product. And we've had an extended growth cycle, and we're coming off of three years of extraordinary growth, at a 14% CAGR over the last three years. And so we're starting with very high comparables, and our outlook right now is truly organic. We think our guidance is reasonable starting -- we think it's a reasonable starting point for a new public company. As I mentioned earlier, this is a build-ramp, build-ramp business.

A number of our key marketing initiatives that we put in place a number of years ago are maturing, but we have a number of new initiatives that we're putting in place. And I think the spin and the ability to invest more into both our distribution, including our marketing platform going forward, is really important. And those are initiatives that we are working on now. So I think in our guidance, really when you look at next year is more about coming off of extremely high comparables; considering we're about 40% bigger than we were three years ago, so we've had tremendous growth.

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Chris Agnew, MKM Partners - Analyst [36]

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Thank you.

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Operator [37]

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Stephen Grambling, Goldman Sachs.

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Stephen Grambling, Goldman Sachs - Analyst [38]

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Just given you're moving to more owned inventory, to a degree, what are the unit economics you target for these properties, such as year-one cash-on-cash returns? And how does that compare when you have financing versus not having financing? Thanks.

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Jim Mikolaichik, Hilton Grand Vacations Inc. - EVP and CFO [39]

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Stephen, what -- give me the unit economic question again?

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Stephen Grambling, Goldman Sachs - Analyst [40]

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So how do you think about the owned inventory unit economics? So thinking about cash-on-cash returns, or a payback period for owned property that you're selling.

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Jim Mikolaichik, Hilton Grand Vacations Inc. - EVP and CFO [41]

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It's going to depend a bit on the manner in which we developed it, for sure. So to the extent we're building it out of the ground and constructing it, the payback period obviously is elongated. It's got returns that generally live really in the low teens, midteens from a return structure.

If we are buying it just in time, we have the ability -- Mark talked about East 48th in New York. That's a situation where we won't start paying for it until 2019. So we'll start to sell ahead in 2017 and 2018, where we will have cash flow coming in; the upfront costs will really be around some sales center development.

There we get, over time, economics that start to get into the 20s, mid-20s, maybe high 20s, depending on sales pace and the premium that we have to put in to buy the property. Then when you look at fee-for-service, we spend money -- $5 million, $10 million, maybe $20 million -- on branding, signage, sales center. And we immediately are in the sales cycle and the management cycle, so the returns there go much higher. There are really no upfront costs for us whatsoever.

So that's what really boosted our return parameters into the 40% on a blended basis. Those have shifted down a little bit more recently as we've started to retain earnings and some cash flow. But those are how the three buckets work and how they time out.

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Stephen Grambling, Goldman Sachs - Analyst [42]

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That's very helpful. Thanks so much.

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Operator [43]

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Ladies and gentlemen, at this time, we will conclude the question-and-answer session. Thank you for attending today's presentation. This concludes today's conference, and you may now disconnect your lines.