Hilton Grand Vacations Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. HGV operates timeshare sales and financing, resort and club management, and rental and ancillary services across more than 150 properties. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1,007 | $948 | $1,941 | $1,727 |
| Net income | $80 | $73 | $153 | $124 |
| Diluted EPS | $0.71 | $0.60 | $1.35 | $1.01 |
| Adjusted EBITDA (non-GAAP) | $248 | $273 | $466 | $475 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $220 | $530 |
- Revenue increased 6.2% in Q2 and 12.4% in the first half; net income rose 9.6% and 23.4%, respectively. Adjusted EBITDA fell 9.2% in Q2 and 1.9% in the first half.
- Q2 segment Adjusted EBITDA: real estate sales and financing $189, down from $218; resort operations and club management $123, up from $119. First-half amounts were $358 and $232, respectively.
- Q2 non-GAAP real estate profit margin was 30.9%, versus 37.6%; financing profit margin was 68.4%, versus 65.6%; resort and club management margin was 66.9%, versus 70.2%; rental and ancillary margin was 11.0%, versus 12.3%.
- Cash and cash equivalents were $252 at June 30, 2023, with an additional $336 of restricted cash. Six-month operating cash flow declined $310 year over year, primarily from inventory purchases and higher working-capital use.
- Debt, net, was $2,942 and non-recourse debt, net, was $882, compared with $2,651 and $1,102 at December 31, 2022. The company reported $671 of revolver availability and $710 of Timeshare Facility availability, and compliance with applicable debt covenants.
- HGV repurchased $206 of shares in the first half. Remaining authorization under its repurchase plans was $522 at June 30.
Material changes and operating trends
- Q2 contract sales were $612, roughly flat year over year. Tour flow rose 21.0%, but volume per guest (VPG) fell 16.3%. For the first half, contract sales increased 0.8%, with tour flow up 25.7% and VPG down 17.0%.
- Real estate sales and financing revenue increased, reflecting higher fee-for-service commissions and financing income. However, real estate Adjusted EBITDA declined as marketing costs rose, including costs associated with adding new owners.
- Resort operations and club management revenue benefited from higher rental revenue and occupied room nights. Management cited increased personnel costs to service greater arrivals and transactions.
- HGV acquired a New York property for $136 for inventory during the first half. Inventory rose to $1,280 from $1,159 at year-end 2022.
- Interest expense increased to $44 in Q2 and $88 for the first half, from $35 and $68, respectively, reflecting higher rates and borrowings. The weighted-average rate on debt was 6.598% at June 30.
Outlook, risks, contingencies and unusual items
- The filing does not provide a specific earnings or revenue guidance range. Management states that its capital allocation strategy and available funding are expected to support operations, development plans and inventory needs.
- Management identifies risks from interest-rate and currency movements, timeshare loan defaults and consumer demand, among other risks. It says market-risk exposure had not materially changed from the 2022 Form 10-K.
- Disclosure controls were deemed ineffective at June 30 because of a previously identified material weakness in Diamond’s process-level and IT controls. Remediation was ongoing, and management expected it to be completed by year-end 2023. The weakness had not resulted in identified financial-statement misstatements.
- Legal liabilities accrued were approximately $119, including about $99 related to a judgment against Diamond. HGV recorded an $82 insurance receivable related to that matter; the company cautions that litigation outcomes remain uncertain.
- Remaining inventory purchase obligations were $57 over two years; other commitments were $36. Surety bond commitments were $356. Total contractual obligations were reported at approximately $4,861 over nine years.
- HGV transitioned its credit facility reference rates from LIBOR to SOFR and amended $550 of interest-rate swaps during Q2. A further $184 of swaps had not been amended at June 30.
Important facts for investors to verify
- Whether tour growth can translate into improved VPG and contract sales, and whether higher marketing costs moderate.
- The sustainability of operating cash generation given lower first-half operating cash flow, inventory spending and working-capital needs.
- Debt costs, floating-rate exposure, covenant headroom and availability of revolver and timeshare financing capacity.
- Timeshare receivables credit quality, including past-due balances, defaults and allowance adequacy.
- Progress and testing evidence for Diamond control remediation, and developments in the litigation and related insurance recovery.
- Potential effects of share repurchases and inventory commitments on liquidity and capital allocation.