Hilton Grand Vacations

Transcription

1 Q4 and Full-Year 2017 Earnings CORPORATE PARTICIPANTS Robert LaFleur - Vice President Investor Relations President and Chief Executive Officer Jim Mikolaichik Executive Vice President and Chief Financial Officer

2 1 PRESENTATION Operator Good morning and welcome to the Fourth-Quarter and Full-Year 2017 Earnings Conference Call. Today s call is being recorded and will be available for replay beginning at 2:00 p.m. Eastern time today. The dial-in number is and enter pin number At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question, please press star one on your touchtone phone to enter the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. If you should require operator assistance, please press star zero. If using a speakerphone, please lift your handset to allow the signal to reach our equipment. I would now like to turn the call over to Robert LaFleur, Vice President of Investor Relations. Please go ahead, sir. Robert LaFleur Thank you, Melinda. Welcome to the Fourth-Quarter and Full-Year 2017 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 factor section of our previously filed 10-Q 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 current press release and on our website at This morning,, our President and Chief Executive Officer, will provide highlights from the fourth quarter 2017 in addition to an overview of current operations and company strategy. Jim Mikolaichik, our Executive Vice President and Chief Financial Officer, will then provide more details on our fourth quarter and expectations for Following their remarks, we will open the line for questions. With that, let me turn the call over to Mark. Thank you, Bob, and good morning, everyone. It s hard to believe it s been a year since we held our first earnings call. As I reflect on the year, I keep coming back to how proud I am of the way the HGV team came together through the spin process into our first year as an independent company. The level of collaboration across HGV is the best I ve ever experienced in my 19 years. In 2017, we reached significant milestones, laid a solid foundation for future growth, and made progress in our ongoing commitment to create meaningful value. A strong fourth quarter capped an even stronger Our sales teams delivered 8.3% contract sales growth in the quarter, which brought the year to 8.8%, exceeding the top end of our guidance range by 30 basis points. Asia-Pacific had a standout year led by strong customer acceptance of the Grand Islander, which we opened in March.

3 2 Our new properties in Hilton Head and Washington, D.C. were also strong contributors. Our marketing team also delivered with 8% tour growth, including double-digit gains in NOG-building new buyer tours. On top of this, we increased package sales by 16%, which built a nice pipeline of tours for 2018 and beyond. Our operating teams had a great year in terms of their effectiveness and efficiency. On the effectiveness side, for the first time in our history, all HGV-managed properties received outstanding ratings in their annual quality assessments. Given the millions of customer service interactions that happened when taking care of nearly 300,000 owners and families each year, this was truly an exceptional achievement. On the efficiency side, our resort operations and club management segment continues to produce industry-leading margins, which again, exceeded 55% last year. Of course, our most meaningful measure how well marketing, sales and operations work together is NOG or net owner growth. Our marketing sales efforts in 2017 led to a record number of new owners joining the HGV family. And our success in targeting the right customers and keeping them engaged led to another year of high owner retention. As a result, last year s NOG came in at 7.2%, our 25 th consecutive year of growth. In 2017, we began to accelerate our capital allocation program, which was a key rationale for the spin, but as a newly independent company, this required a lot of heavy lifting to ramp-up our development efforts, particularly given the number of projects and new markets we re working on. We got Elara, Sunrise, and our first Japan deal in Okinawa done last year, and then announced our second Japan deal in Odawara early this year. This marks the beginning for us and I feel really good about our development story. In a few minutes, I ll go into some more detail about our pipeline and how we re thinking about capital allocation going forward. We accomplished quite a bit in our first year and have strong momentum coming into I mentioned Japan a second ago so let me talk about the opportunity we see here. We ve mentioned Japan on prior calls, but this is our first call since we announced our projects there. Japan has been part of the HGV story since we first started selling to them in early Today, this market represents about 20% of our business with approximately 58,000 owners. In November, we announced our project on Sesoko Island in Okinawa. Okinawa is the southernmost prefecture of Japan. It has a tropical climate, beautiful beaches and is a two-hour flight from most anywhere on the mainland. It s a rapidly growing destination, which in many ways is a Japanese version of Hawaii in terms of climate, geography, and even visitation. We ll be part of a mixed-use project that includes a new 300-room Hilton hotel. Our 132-unit HGV branded resort will be developed by Mori Trust on a just-in-time basis. Mori Trust is a well-established developer of high-end commercial, residential and hospitality real estate. We ve agreed to purchase inventory in four tranches over four years starting in 2021 for a total investment of approximately $190 million.

4 3 I m excited about this project, it s going to be a great property in a beautiful location. Then, a few weeks ago, we announced Odawara, which will be our first project in Japan to actually open. We acquired ten cottages and land for future development adjacent to the Hilton Odawara Resort and Spa. This award-winning property is located on the coast, 30 minutes Southwest of Tokyo by bullet train. We made a relatively small initial investment and have already started renovating existing cottages. After the initial ten cottages, we can develop up to 100 more units in phases over time. We will fund the project on balance sheet and pace construction with demand. We ve spent 18 years cultivating our Japan business and methodically building it step-by-step. Our owners have told us they d like vacation options closer to home and now we re beginning to provide those options. When you think about it, our business today draws from those with an affinity for Hawaii. There are over 100 million Japanese who vacation domestically each year and there s virtually no timeshare competition in the market. In ten years, I can see us with half a dozen properties, doubling the sales we re doing today. Shifting from the specifics of Japan, I d like to spend the balance of my time talking about the bigger picture and how we re looking at our business a year after the spin. As we move through 2017, our focus increasingly shifted from becoming an independent company to actually being an independent company. As this happened, we revisited our strategic priorities, we refined five priorities down to four highly focused priorities that will guide our success going forward. I d like to share them with you and talk about how each one impacts our business. Our first strategic priority remains grow our sales and member base. As you ve heard me say, NOG is a holy grail around here. This priority is about the first half of the NOG formula: adding new customers. HGV is a direct-to-consumer business, which means that we have to go out and find our customers every day. What determines our success is our ability to source customers, not where we are in the economic cycle or the lodging cycle, or any other cycle. Where will tomorrow s customers come from? They ll come from new products and markets. New markets connect us to buyers we weren t reaching before, whether we re talking about destination markets, like Mexico or the Caribbean, or drive-to markets that let us tap a regional customer base who might not have considered us before. And when you re in the customer sourcing business, it helps to be fully aligned with a partner like Hilton. On a recent earnings call, Chris said that in 2017, Hilton opened over one hotel a day, had the most rooms under construction, and grew the Honors program by 20%. Having full data access to this rapidly growing base of Hilton loyal customers is extremely NOG friendly. Our next strategic priority of maximizing customer engagement and experiences is about the net and net owner growth, because retaining customers is as important as creating them. When owners make a substantial investment in our brand, and we deliver a great ownership experience, they stay satisfied and highly engaged. For two and a half decades, we ve achieved positive NOG, which embeds future value in our real estate business and drives reliable fee-based revenues. It is why our resort and club segmented EBITDA has nearly doubled in just four years.

5 4 Our third strategic priority is focus on talent and operating effectiveness. This reaches across our organization and was incredibly important in 2017 as we stood up the public company. We added great leaders in 13 new departments like tax, payroll, benefits, risk, and IR to do the things Hilton used to do for us, successfully making this transition depended on the efforts of thousands of individuals working towards a common goal. With full alignment on values, skills, and competencies, we were able to bring first year G&A expenses in under guidance. Entering 2018, it s nice to have this heavy lifting behind us and we re expecting G&A to be relatively flat. Our final strategic priority, strengthen and expand our brand presence, is about growth and widening our footprint in the US and globally. This is the area where our thinking has evolved the most during our first year. A key reason for us going out on our own was giving us the freedom to develop capital allocation strategies, to grow our business and optimize return. So, the spin is behind us and we have good operation momentum. Because of this, we re able to put our cash to work sooner than we envisioned a year ago. You can see the first step of this process with the $510 million to $530 million we ve committed to spending on inventory this year, investments that we believe will positively impact long-term growth and returns. So what changed in 2017? We saw an abundance of opportunities that offered the strategic benefits of expanded geographic and customer reach in addition to compelling return profiles. And today, we have the resources and capabilities to capitalize on these opportunities that we just didn t have before Accelerating our move towards more owned inventory will yield more real estate and financing revenue from each dollar contract sales, which should improve our growth trajectory. But, we also believe in striking the right balance between growth and returns. So we are confident that we can accomplish this, and drive returns well above our cost to capital. But, this is still a multi-year process, not something that you will see happen overnight. Timeshare is a build ramp build business; 2017 and 18 are definitely build years with accelerated growth expected in 19, 20 and beyond. At the same time, keep in mind that we have large-fee projects in Hawaii and Las Vegas that are still in active sales, so fee-for-service will be at least half of our sales for another few years. We re also not changing our commitment to capital efficiency and pipeline flexibility. Developed, just in time, fee-for-service, and hybrid deal structures will always be part of our strategy, which should give us a competitive edge in adapting to changing market conditions and the ability to take advantage of a wide range of development opportunities. So to wrap up, we re a year past the spin and the headwinds of standing up a public company. We re operationally sound, our new buyer and owner sales are balanced, and our 25-year track record of NOG drives a growing base, which consistently embeds future value into our business. A year out, we ve got our own capital and a robust pipeline. We re well-positioned to put our money to work investing in wider distribution, expended sales capacity and more owned inventory. As our mix shifts, more contract sales should flow into real estate revenues and we ll capture more financing revenue, which should help the bottom line. As we get that right, we should continue to create meaningful value for our team members, our owners and our shareholders.

6 5 With that, I ll turn things over to Jim. Jim Mikolaichik Thank you, Mark, and good morning, everyone. Before we discuss our fourth-quarter and full-year results, our 2018 guidance, I d like to mention a few housekeeping items. As expected, we are now implementing accounting changes regarding revenue recognition that will affect our financial reporting and guidance going forward, specifically in our real estate business. We ve provided additional disclosures in the press release and the 10-K that will help you with year-over-year comparisons and understanding the differences between the current and previous reporting methods. But the bottom line is that the operations and the economics of the business are unchanged and only the reporting is different. You may also notice a difference in our real estate margin calculations. In our year-end review, we made certain adjustments to better align the margin calculations to how we evaluate the business. We ve provided you with comparative quarters to adjust your models. Finally, the fourth quarter and 2017 results reflect the impact of recent changes in the tax code, which I will discuss later in my remarks. With the housekeeping out of the way, let s jump to our results. As Mark highlighted, we are pleased with the results. We exceeded the high-end of our contract sales guidance, finished at the midpoint of our elevated adjusted EBITDA guidance, and announced our first two projects in Japan. We have a full development pipeline, and the company is well-positioned as 2018 gets underway. Fourth quarter total company revenue was $447 million, an increase of 8% compared to last year. HGV diversified business illustrated operational momentum with strong topline growth across our real estate and finance segments and our resort operations and club management segments. For the year, total company revenue increased 8% to $1.7 billion. Moving to net income, fourth-quarter and full-year results include a deferred tax benefit of approximately $132 million, which is mostly related to a re-measurement of deferred taxes on installment sales using the lower rates contained in the recent tax bill. Including this tax benefit, our fourth quarter net income was $183 million compared to $38 million last year. For the full-year 2017, net income was $327 million compared to $168 million. G&A expenses declined $2 million in the fourth quarter to $29 million as the ramp-down in nonrecurring spin-related items outpaced the ramp-up in recurring public company expenses. For the year, G&A expense increased $12 million to $104 million. One-time expenses declined to $10 million in 2017 from $35 million in 2016 as expenses that were below the line pre-spin moved above the line post-spin. In our operating segments, total segment adjusted EBITDA increased by 8% in the fourth quarter to $147 million as segment-adjusted EBITDA margin declined 10 basis points to 35%. For the full-year, segment adjusted EBITDA increased by 7% and segment adjusted EBITDA margin declined 30 basis points to 35.1%.

7 6 In our real estate business, fourth quarter contract sales increased 8.3% with owned sales down 9% and fee-for-service sales up 28%. Sales performance in Las Vegas, Hawaii, Japan, and Myrtle Beach were strong in the quarter and Hilton Head and D.C. continue to ramp-up nicely. Orlando increased modestly while New York continued to experience some challenges from inventory availability. Total real estate revenues were up 8% in the quarter led by a 31% increase in commissions and other fees and sales strength this quarter was concentrated in several of our larger fee markets, which led to higher fee bands. Real estate margin was up $9 million in the quarter and the real estate margin percentage increased 140 basis points to 32.1%. Product costs were up on a percentage of sales basis due to mix and higher fee-for-service upgrade activity. Sales and marketing costs net increased on an absolute basis by $10 million, and as a percentage of contract sales, the increase was only 10 basis points as we have started to anniversary some of the investments we made to build up our tour pipeline last year and the early ramp up of sales centers in Hilton Head and Washington, D.C. For the full-year, contract sales increased 8.8% which exceeded the high-end of our guidance range. Real estate revenues and real estate margin both increased 7% for the year. Real estate margin percentage increased a modest 10 basis points to 32.4%. Turning to our financing business, fourth quarter revenues increased 12% on higher interest income and servicing fees. Financing margin increased 4%, as higher consumer finance interest expense offset some of the revenue gains. Fourth quarter financing margin percentage was 71.1%. For the year, financing margin increased 2% to $104 million, and the financing margin percentage was 70.7%. At year-end, our consumer finance portfolio was $1.2 billion with an average interest rate of 12.2%. Our loans over 30 days past due but not in default remained low at 2.1%, a 60 basis point increase from last year. Our default rate was 4.1% compared to 3.7% a year ago. The long-term allowance stood at 11.6%, up from 10.5% last year. Fourth quarter revenues in our real estate and financing segment increased 8%, and segment adjusted EBITDA increased 12%. Segment adjusted EBITDA margin increased 100 basis points to 29.7%. For the year, real estate and finance segment adjusted EBITDA increased 7% to $359 million, and the margin decreased 40 basis points to 29%. Our resort and club management business line had a solid fourth quarter. Revenues increased 11% driven by a 7.2% NOG, price increases, and management fees from recently opened properties. Resort and club margin increased 15%, and the margin percentage increased 240 basis points to 78%. For the year, resort and club margin increased 8%, and club margin percentage decreased 200 basis points to 72.8%. In our rental and ancillary business line, fourth quarter revenues increased 8%, as rental revenues increased 9% and ancillary revenues were flat. We had some cost headwinds in the quarter as rental and ancillary expenses increased by $7 million due to subsidy and developer maintenance expenses. Rental and ancillary margins declined $4 million. For the year, rental and ancillary margin decreased $3 million, and the margin percentage decreased

8 7 290 basis points to 31.8%. Combining these two business lines into our resort, operations, and club management segment, fourth quarter segment revenues increased 10%, and segment adjusted EBITDA increased 2% due to the expense headwinds just discussed. The margin percentage decreased 420 basis points to 52.6%. For the year, resort operations and club management segment adjusted EBITDA increased $15 million with the margin decreasing 20 basis points to 55.6%. Bridging the gap between segment-adjusted EBITDA and adjusted EBITDA, in the quarter, license fees increased $3 million, G&A increased $6 million, and the Elara joint venture contributed $1 million, bringing total adjusted EBITDA to $101 million, a $3 million increase over last year. For the year, G&A on the EBITDA schedule was $85 million, up from $55 million. Total 2017 adjusted EBITDA increased 1% to $395 million. We remained capital efficient last quarter with 75% of contract sales coming from fee-for-service or justin-time inventory. For the quarter, 55% of contract sales were fee-for-service, and our full-year fee mix was 54%, near the mid-point of our guidance range of 52% to 57%. Our year-end inventory pipeline represents 4.7 years of sales at our current pace, including 2.7 years of owned inventory and 2 years of fee-for-service inventory. Approximately 89% of our pipeline is capital efficient, fee-for-service, or just-in-time inventory. Based on the higher spending that Mark detailed in his remarks, you should expect to see our pipeline shift toward more owned inventory over the next several years. Our leverage remains low, and our capital structure remains flexible. We ended the year with $482 million of corporate debt and $583 million of non-recourse debt. Corporate leverage is 1.2 times on a trailing 12 basis or 0.6 using net debt. From a capacity standpoint, our $200 million bank revolver remains undrawn, and we have over $320 million of capacity on our timeshare facility. We have $297 million in cash, including $246 million of unrestricted cash. Fourth quarter free cash flow was $47 million versus $37 million last year. Full-year free cash flow was $309 million compared to $156 million in As we ve discussed on prior calls, this year s elevated free cash flow is related to three primary items; the timing on spin-related payments, shifts in inventory spending, and extensions that were granted on estimated tax payments to companies affected by Hurricane Irma. Moving on to our 2018 guidance, full details are in the release, but the key points are the following. We expected contract sales to increase to 6% to 8%. Other than modest incremental contribution from Odawara, this largely comprises same-store sales growth. We expect fee-for-service sales will represent 50% to 55% of total contract sales, largely concentrated in Las Vegas, Oahu, Myrtle Beach, and Orlando. Total G&A should be flat to slightly down in We ll have a few one-time expenses related to the final steps of the separation from Hilton and the recurring comps will be a bit tougher in the first few quarters of 2018, as we weren t fully ramped up in early The Elara joint venture is expected to contribute $8 million to $9 million 2018 adjusted EBTIDA, as we will report under the new accounting rules, should be in the range of

9 8 $480 million to $500 million. This includes an estimated positive net deferral impact of $68 million. This reflects the net revenues and expenses related to a project that was under construction during the last two years that, under the current rules, we can t recognize until this year when the project is complete. During this transition year, in order to compare to prior periods, if you subtract $68 million from our 2018 adjusted EBITDA guidance, you d have a reasonable approximation of what our guidance would look like under the previous accounting rules. Finally, on the income statement, recent tax reform should result in an effective tax rate of 26% this year. Moving to 2018 cash flow, we are expanding our guidance. First, in addition to free cash flow, we will now guide to adjusted free cash flow, which will include the net proceeds from securitization activity. Second, this year you will notice a meaningful operating cash deficit. This reflects two items; reversing the previously mentioned timing issues and the $510 million to $530 million of inventory spending. In addition to projects like Odawara and Ocean Tower that we ve already disclosed, the $510 million to $530 million includes approximately $390 million of anticipated spending on new projects that we expect to announce over the course of this year. We ve always said that our first priority use for cash was investing to grow the business. In 2018, we are well-positioned to begin executing multiple deals in our existing pipeline. When accounting for this increased spending, our 2018 free cash flow guidance range is negative $235 million to negative $275 million. When reflecting our expected net securitization activity of $150 million to $160 million, our adjusted free cash flow guidance range is negative $75 million to negative $125 million. I d also like to note that we began the year with approximately $300 million of cash and sufficient liquidity on our balance sheet to fund this anticipated increase in inventory spending. This completes the prepared remarks, and we ll now turn the call over to the operator. We look forward to your questions. QUESTIONS AND ANSWERS Operator Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will go to Bradford Dalinka, SunTrust. Bradford Dalinka Hi. Good morning gentlemen. Just a few quick ones from me today. I appreciate you ve long talked about investing in growth and inventory spending isn t really a surprise, but can you help bridge us from the $180 million to $200 million of average annual cash flow you talked about last quarter to the $17 million to $37 million now? How much of it, you know, there s cash tax savings, how much of the inventory spend is incremental?

10 9 Brad, you broke up a little bit. Do you mind, the front end didn t quite come through. It was a little garbled. Bradford Dalinka Yes, sorry about that. Can you hear me now? Yes. Bradford Dalinka I appreciate you ve long talked about investing in growth and the inventory spending isn t really a surprise, but can you bridge us from the $180 million to $200 million of average annual cash flow in 3Q to the $17 million to $37 million you re talking about now? I know there s some cash tax savings in there and also some incremental inventory spend. Just the pieces would be great. You re talking about the pickup in the fourth quarter to the $309, or are you talking about year-over-year full year 2017 to 2018, how we re moving? Bradford Dalinka Year-over-year. You ll recall we picked up a few items as we went through the year, going from roughly about $150 million, which was our average free cash flow guidance as we spun. We had one less license fee payment, because that was swept in 2016 before we got public. We moved some spending on Ocean Tower, because we were still working through the model room, it took us a little longer than initially expected. We always expected to complete the construction in We ve probably moved about $35 million related to Ocean Tower from 2017 to And we also picked up, I think, roughly $65 million or so in tax deferrals related to Hurricane Irma. So, all of our estimated tax payments in Q3 and Q4 will be paid in Q1 and Q2 this year. So, if you put that all into the mixing bowl, that s really how we went from a guidance of about $150 million to that $300 million. There are a couple other odds and ends in there. As we move to the next year, all of those items will have four license fee payments this year, so we will pick up the one extra one. The Ocean Tower spending will all be made this year and we intend to complete that first phase of that project construction by the end of We will pay the tax deferrals. So, that kind of rounds you out to the kind of $200 million or so spending on the inventory side. And then, if you add in the $300 million or so in undisclosed projects, that s how you get up to that $500 million mark and hopefully that kind of reconciles you on free cash flow from year-to-year. Bradford Dalinka That was extremely helpful. I think I may have asked it a little imprecisely; I ll follow-up off-line. And then just another one, hopefully this will actually be a quick one. If you guys were to enter another market, one of the $100 million plus contract sales potential things you guys target, what s a reasonable expectation for ramp-up? Just want to make sure we don t get too far in front of our skis here.

11 10 Yes. Brad, you know every market is going to vary, so it depends. If it s a market where Hilton has a tremendous amount of presence and we re able to create a strong ground game and be able to access customers sooner than later, that would help ramp up the market quicker. But there are markets out there that we re looking at where Hilton may not have a strong presence that we know strategically would benefit our overall value proposition for our owners and we also know from our current owners that there is some inherent demand and we think the real estate play is a positive one. It s really hard to pinpoint ramp-up, so I think every market s going to vary. And this year guidance is largely same-store, because the spending is out in front of us. We ve announced a few projects and they move out into the future. Odawara will start seeing some modest incremental lift this year from but really we re looking at the outer years as we get the spending done and the deals executed. Bradford Dalinka Got it. That s it for me. Thanks again for taking my questions. Thank you. Operator We ll next go to, Goldman Sachs. Hi, thanks for taking the question. I guess one kind of strategic question. At this point do you have to pump the brakes on additional investment and/or development or do you still feel like you have ample capacity to look for additional development, or is that equally as important as it was maybe a year ago? Yes. Stephen, I think we ve been very, very surprised by how fast our teams have been able to accelerate some of these opportunities. So, I think back in late 2016, when we were spending and we had our investor day, we weren t expecting to be able to accelerate this quickly. So, some of this has come at us pretty quick and we re really pleased about it, because it s going to allow us to really move into that next phase of growth for us. That being said, I think we have and I ll let Jim talk about the capacity with that being said we re out still looking at new markets continually to fill our core markets and looking at opportunistic markets. Core markets are important because we ve got to fill sequel projects, so they re really, really important for us. On new markets this adds and creates additional distribution. And as you know we re very narrow right now. We re really only in eight markets when our competitors are two, three, five times that, so we have tremendous opportunity for expansion going forward. So, I would say that we re not going to slow down, but I would say that part of what you re looking at this year is, part of it s carryover from last year, part of it is our development teams have been allocated maybe $75 million, $100 million a year and they got pretty excited about the opportunity that we had more capital to spend this year, so they went out and aggressively have done a good job identifying deals. Jim, maybe you can take him through the capacity question.

12 11 James Mikolaichik Stephen, we ve got plenty of room on the capacity side right now. As I mentioned, we have $300 million in cash coming into the year. That capacity between the securitization market and our consumer receivables and our revolver is $500 million plus right now. We re putting off operating cash absent the inventory spend we discussed around $300 million as well. And, we ve got net debt at 0.6 turns, so a lot of room on the leverage side, a lot of room and dry powder with cash. Operating cash flow is robust and beyond that, it s still a really constructive debt market if we needed to go out for extra if we needed to go out for extra, so I feel very comfortable with the spend we re making this year and feel we have room if we needed to do more. Great. As you think about the faster than expected use of capital, how does that get reflected in some of the three-year targets that you outlined at the investor event? I guess you ve kind of hit the numbers this year, next year you ve provided guidance, so maybe it s more a question of what is the faster use of capital due to your 2019 and beyond numbers. Well, we re not really prepared to provide any forward guidance though. I think I stated in my prepared remarks that this year and last year were really build years and we re looking to ramp. So, depending on which projects get done this year, and we re pretty confident we ll be able to get all these deals done, but if the conversion deals that we re looking at get done early enough this year, it means we ll be able to put them in place next year, which means we could be accelerating our growth profile next year. So it really depends on the timing of these deals. If we can get them done early enough then we can get them registered and converted into the market soon, it could benefit us starting next year. So maybe if I ask the question another way, how should we be thinking about the returns of these projects versus history and how has tax reform generally impacted your post-tax returns on projects? Thanks. James Mikolaichik Yes, our return parameters are generally in the mid-teens on these projects. Some like the Elara project was high-teens, it could even push above 20, depending on how we leverage the project and what the cash flow return is on them, but I think about most of the returns and our hurdle rates being sort of the mid-teen range. And that s after tax. James Mikolaichik Tax will give us a slight boost on that but you ll recall we re also impacted just on we ll use the installment method on that also, so tax isn t as much of a near-term driver, given the fact a lot of these are mortgaged and are paid over time. That s helpful, thanks. I ll jump back in the queue. Operator And we ll next go to Brandt Montour, JP Morgan.

13 12 Brandt Montour Good morning, guys. Thanks for the taking the questions. So, on the inventory spend just kind of one more there. Kind of given the magnitude of the outlay, I just wanted to understand maybe the mix of what this is, is it just-in-time versus developed? And then, how your philosophy has kind of changed there, if at all. And then a follow-up on that quickly would be how many kind of deals are implied in the $390 million? Yes, Brandt. It s really across the spectrum. We haven t changed our strategy as it relates to being capital efficient. So we re looking at a number of different deal types here. I would say mainly the majority are conversions. What we re really excited about is the majority are new markets. And when you look at the deal types, just-in-time and take-down is our preferred, though we do have a greenfield deal here too that would require a ground-up build. So anyways, it s kind of across the board but we haven t changed our philosophy in trying to do very capital efficient deals. James Mikolaichik put an exact number on the amount of deals in there right this second. As Mark said, they re moving around a little bit, but there s a handful of them and we do have a mix of fee-for-service, just-in-time and developed. Brandt Montour Got it. Great, that s helpful. And then, shifting gears a little bit to kind of top-line contract sales. Now that you ve sort of fully lapped those tougher VPG comparisons you had in the back half of last year, can you just tell us where you see the majority of contract sales growth coming from in 2018, more from the tour growth side or the VPG side? Thanks, and that s it for me. Yes. It s weighted more to tour flow. Our VPGs are, I think, the highest in the industry though I have to say we ve gotten off to a really good start this year. I feel really good about the customer, pleased with our results last year. So, all in all, I think demand creation is strong. We re seeing solid traffic to our sales center, and the conversions are good too, but it s still going to be weighted more to tour flow. Brandt Montour That s great. Thanks again, guys. Operator And as a reminder that is star one on your touchtone telephone to ask a question. We ll go to a follow-up from, Goldman Sachs. I m back. Just on the strong tour flow, any color you can give on either the source of where those are coming from or the demographics of that customer? Are you seeing any change in the types of customers essentially? Thanks. Stephen, really we re not seeing any really difference in the quality of the customer; I think we ve been pretty consistent. Our relationship with Hilton has some really strong benefits for us and we continue to source customers from Hilton.

14 13 Beyond that we ll continue to expand our footprint in Japan and that footprint is yielding really strong results, not only from Hilton, but from third parties that we re working with there. I m really excited about the opportunity in Japan in a few years. If you think about what we re doing in Japan today, we ve got nine existing sales offices, but all of our product that we re selling is in Hawaii, so everything is off-site. If you look at where we are in the US, 95% of our sales occur at the property level. So there s a big opportunity. Once we start opening up product and resorts in Japan, then we ll be able to start yielding sales on an on-site basis which typically drives even higher VPGs. And one last one, do you have any latest thoughts on the consolidation in timeshare, whether there s opportunity for that from your standpoint or not? Thanks. I think we expect to see some more consolidation; the field s narrow. We ll evaluate the opportunities and we ll do what we think will maximize our shareholders returns. But that being said, it s a narrow market but we do expect that you ll see some more. And how do you think about the synergies that you would be able to provide or bring to a transaction? Well, I think we re uniquely positioned as really an aggregator because we ve got, we believe, the bestin-class new customer acquisition model, right, and we have a very effective inventory sourcing structure. So I think at the end the day, though, you ve got to address the brand affiliation and sometimes that s very, very challenging. And you also have to address the expectations out there on what these companies think they re worth. But that being said, we ll continue looking at the field and seeing if there s a fit for us. Awesome. Thanks for all the time. Best of luck this year. Thank you. CONCLUSION Operator Ladies and gentlemen, at this time we will conclude the question and answer session. I would now like to turn the call back to Mr. for any additional comments and closing remarks. Alright. Well thanks, everyone, for joining us this morning is shaping up to be a very exciting year for us and we re looking forward to sharing more information with you in the months to come, especially around our new projects. Thank you for your continued interest in HGV and I look forward to speaking to you after Q1. Operator

15 14 And this concludes today s call. Thank you for your participation. You may now disconnect.