Hilton Grand Vacations, Inc. (NYSE:HGV) Q2 2024 Earnings Conference Call August 8, 2024 11:00 AM ET
Company Participants
Mark Melnyk – SVP, Investor Relations
Mark Wang – CEO & Director
Daniel Mathewes – President & CFO
Conference Call Participants
David Katz – Jefferies
Patrick Scholes – Truist
Brandt Montour – Barclays
Ben Chaiken – Credit Suisse
Chris Woronka – Deutsche Bank
Operator
Good morning, and welcome to the Hilton Grand Vacations Second Quarter 2024 Earnings Conference Call. [Operator Instructions].
I would now like to turn the call over to Mark Melnyk, Senior Vice President of Investor Relations. Please go ahead, sir.
Mark Melnyk
Thank you, operator, and welcome to the Hilton Grand Vacations second quarter 2024 earnings call. As a reminder, our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements, any statements are effective only as of today.
We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the risk factors section of our SEC filing.
We’ll also be referring to certain non-GAAP financial measures. You can find definitions and components of such non-GAAP numbers as well as reconciliations of non-GAAP and GAAP financial measures discussed today in our earnings press release and on our website at investors.hgv.com.
Our reported results for all periods reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606 required to defer certain revenues and expenses related to sales made in the period when a project is under construction and then hold off on recognizing those revenues and expenses until the period when construction is completed.
For ease of comparability and to simplify our discussion today, our comments on adjusted EBITDA and real estate results will refer to results excluding the net impact of construction-related deferrals and recognitions for all reporting periods. To help you make more meaningful period-to-period comparisons, you can find details of our current and historical deferrals and recognitions on table T-1 of our earnings release and a complete accounting of our historical deferral and recognition activity, can also be found in Excel format on the financial reporting section of our Investor Relations website.
In a moment, our Chief Executive Officer, Mark Wang, will provide highlights from the quarter in addition to an update of our current operations and company strategy. After Mark’s comments, our President and Chief Financial Officer. Dan Mathewes will go through the financial details for the quarter.
Mark and Dan will then make themselves available for your questions. With that, let me turn the call over to our CEO, Mark Wang. Mark?
Mark Wang
Good morning, everyone, and welcome to our second quarter earnings call. Reported contract sales in the quarter were $757 million, and EBITDA was $270 million with margins of 22%, which were below our expectations. We had a solid start to the quarter carrying and momentum we’ve built as we exited Q1 and saw trends in both April and May improve from the first quarter.
As we moved into June. However, we experienced a broad-based pullback in consumer spending behavior. This shift was evident across all our brands and customer segments, but it was particularly acute in our new buyer segment. We’ve noted on several prior calls or perception of increased consumer hesitancy which continues to influence purchase decisions and there’s no question this played a role in our results.
In addition, however, we also faced some execution challenges during the quarter. As part of the integration process with Bluegreen, we just completed an extensive restructuring of our sales and marketing organization to increase the flexibility with our new scale and improve our execution in two key areas, regionalization and staffing.
Regarding the first area, while we’ll continue using HGVs, more centralized marketing approach to large destination markets posting multiple HGV properties, we’ve also moved to empower those smaller regional markets with additional tools and resources to optimize their sales and marketing efforts at the local level, which we believe will generate both additional tours and improved VPGs.
In addition, over the past year, we’ve been keenly focused on driving new buyer tour flow, which creates significant lifetime embedded value for HGV, as part of our recent organizational design efforts, we’ve also reevaluated optimal staffing levels to allocate additional resources to our new buyer sales lines, which should enable them to more effectively handle the current and future tour volumes.
So while we can’t control the macro spending environment, we’ve moved quickly to address those execution issues as part of our new organizational design we rolled out across the business in June. These changes will take some time to flow through our business, however, which when combined with the quarter’s results in more challenging macro environment, led to us lowering our guidance expectation for the year.
Now let’s turn to our operational performance during the quarter. Contract sales in the quarter were impacted by a year-over-year decline in both tours and VPG. Looking at our tours, our owner segment remains a relative bright spot with consistent positive low single-digit growth in each month of the quarter, supporting owner sales they remain 15% ahead of 2019 and demonstrating the resilience of our owner channels.
Our new buyer tours remain lower as we rebuild our tour pipeline following the adjustments we made at the end of last year. In addition to seeing softer local marketing trends, new buyer tours from direct marketing packages will improve in the back half as the teams have done a great job rebuilding and activating the pipeline, but we also expect pressure on local marketing tours to continue in the back half as our recent operational adjustments work through the organization.
VPG for the quarter was just over $3,300 or 10% ahead of 2019 levels. Both legacy HGV and Bluegreen posted similar mid-single-digit declines versus the respective prior year metrics. And on a consolidated basis, we also saw similar levels of the year-over-year decline for both our new owners and new buyer channels owing to the combination of factors we talked about earlier.
But with the operational changes, we’ve made, we still expect to maintain the low end of our target range of 10% to 15% ahead of 2019 VPGs.
Looking at our forward demand indicators, occupancy in the quarter was in line with last year at 83%. And our marketing and rental arrivals on the books look strong for the back half, particularly in the fourth quarter. So as we’ve seen for a number of quarters, travel intentions remain strong among consumers, and we’re focused on improving our ability to convert those tours into transactions.
Moving to our non-real estate segments. Our financing team continues to do a great job managing through the higher rate environment and meeting the strong ABS investor demand with several well subscribed note offerings. Our rental segment also continues to see healthy demand from travelers and in our recurring club and resort business. We ended the quarter with over 720,000 owners and NOG of 1.7%.
I also think it’s important to highlight our cash flow generation. This quarter, we produced $370 million of adjusted free cash flow. So despite some of the near term challenges, our business is still able to produce a significant amount of cash, and we’re using that cash to support our commitment to capital returns, repurchasing 2.3 million shares of stock during the quarter for $100 million.
Turning next to our integration efforts, we’ll start with an update on Diamond. Through the end of the second quarter, we rebranded 40 properties representing 9,800 keys, and we remain on track to rebrand another eight properties this year for an additional 1,300 keys, bringing us to 70% of our targeted total.
We also continue to integrate and enhance our technology platform and have launched two major improvements this year, benefiting our consumers and team members. We recently combined our legacy HGV and Diamond, customer facing member websites into a unified experience, simplifying the booking process and management of their member points across our brands.
And we launched an integrated sales tool that is now being used across all of our sales sites, enabling our sales teams to more seamlessly sell both deeded and trust products from a single platform. On the partnership front, we’ve had strong traction with great wells out of the gate. We’ve already seen a number of our members using their points for stays with their families at Great Wolf Resorts.
And on the marketing front, early signs indicate strong interest in our vacation packages like Great Wolf guests across call transfer, digital and on property ambassador program.
Turning to Bluegreen, we continue to make good progress. The teams now integrated into our corporate workflow, and we’re tracking ahead of our schedule synergy realization, as Dan will cover shortly. There’s a lot of anticipation among the Bluegreen member base and sales force about the launch of HGV Max., and we’re working hard to get everything in place for the rollout.
Recall that until the launch of Max will continue to run Bluegreen sales organization in parallel with ours, which is also why we think that addressing these execution challenges now we’ll be key to ensuring a smooth sales integration during our rebranding.
While this has been a difficult quarter for us, we’re maintaining our long-term perspective on the business while acting with a sense of urgency on what we can control in the near term. Despite these challenges, I’m confident that we’ve identified the issue and are working diligently to address it. And I’m optimistic that we’ll improve from here and above all, I remain confident in our future path.
We have a much stronger business model than we’ve ever had with our best product offering. We’ve got more geographic diversity, we have a larger member base and we’re generating more free cash flow than ever before.
So with that, I’ll turn it over to Dan to walk you through the numbers. Dan?
Daniel Mathewes
Thank you, Mark, and good morning, everyone. Before we start note that our reported results for this quarter included $13 million of sales deferrals, which reduced reported GAAP revenues and were related decreased sales of our newest phases of our Maui Bay Villas and Ocean Tower projects. We also recorded $5 million of associated direct expense deferrals.
Adjusting for those two items would increase EBITDA reported in our press release by $8 million to $217 million. In my prepared remarks, I only refer to metrics excluding net deferrals, which more accurately reflects cash flow dynamics of our financial performance during the period.
I’d also note that our results today also include a full quarter of financial results for Bluegreen, which we closed on January 17.
Turning to our results for the quarter, total revenue, excluding cost reimbursements in the quarter was $1.1 billion and adjusted EBITDA was $270 million, with margins of 24% excluding reimbursements. EBITDA included $14 million of Bluegreen cost synergies recognized during the quarter for a run rate of $71 million annualized on target with our plan for $100 million of cost synergies within 24 months.
Turning to our segments, within real estate, contract sales were $757 million for the quarter with Bluegreen contributing $189 million of sales in the quarter. New buyer comprised 31% of contract sales in the quarter, improving over 300 basis points from the first quarter level.
Tours for the quarter were over 226,000, which was slightly below the prior year’s pro forma level and Bluegreen contributed just under 66,000 tours for the quarter. Our owner tours and low single-digit growth in the quarter and remain at levels over 15% ahead of 2019, demonstrating the continued resilience of our owner channels that want to explore our expanded resort network and benefits of HGV Max.
However, as Mark mentioned, the new buyer tours remain pressured as we’re continuing to work to rebuild our new buyer tour pipelines, along with making operational adjustments to improve local marketing. VPG for the quarter was $3,320 was just over 10% ahead of 2019 levels. Our own our new buyer VPGs declined by a similar amount, and both core HCV and Bluegreen saw a slight deterioration in year-over-year growth rates from Q1 or into slightly lower close rates from the macro and execution factors that Mark mentioned earlier.
Cost of product was 14% net VOI sales for the quarter and our provision for bad debt as a percentage of owned contract sales was just over 15% in the quarter. Real estate sales and marketing expense was $375 million for the quarter or 49% and contract sales. Real estate profit for the quarter was $128 million with margins of 22%.
And our financing business, second quarter revenue was $102 million and segment profit was $58 million with margins of 57%. Interest income and segment profit for the quarter were impacted by $28 million in contra revenue for the amortization of the non-cash premium associated with the portfolio of receivables that we acquired from Bluegreen and the acquisition coupled with the non-cash premium still being amortized for the Diamond transaction.
These items will continue to decline over time as our acquired portfolio pays down. So to more clearly distinguish them from our core underwriting business, we’ve updated the tables for our financing business in our press release. Excluding the temporary impact of these adjustments, the core underwriting business had interest income of $116 million and margins of 68%.
Going forward, we expect the non-cash premium amortization of these portfolios to continue to create some noise in reported financials. For the core business remained steady with the originated weighted average interest rate of 15.21%, up slightly from the first quarter.
Additionally, the recent easing of benchmark rates should help reduce some of the interest cost pressure on the new ABS issuances. Combined gross receivables for the quarter were $3.85 billion or $2.84 billion. Net of allowance. Our total allowance for bad debt was $1 billion on that $3.85 billion receivable balance for 26.2% of the portfolio.
Our annualized default rate for our consolidated portfolio, inclusive of Bluegreen, stood at 9.68% for the quarter, our provision was 15.4% as a percent of contract sales in the quarter as is consistent with the expectations of steady-state provision level in the range of mid-10s.
Currently, we expect the provision for the year to remain in the mid-10s with sequential uptick in the third quarter, followed by sequentially lower provision in the fourth quarter due to seasonal trends. It is important to note that this assume similar levels of new buyer and owner mix. Recall that new buyers carry a higher provision levels than owners which can impact provision levels in any given quarter.
Digging deeper into the drivers of our provision. Generally, the HGV underwritten deed of trust folks are holding steady. For them to Bluegreen portfolio, we’ve seen higher losses from some originations that were underwritten prior to our integration and have increased our provision accordingly.
While we’ve addressed much of this in our opening balance sheet process, we do expect some headwinds in the near term while we work to consolidating and aligning underwriting procedures, sales practices and risk-based pricing much like we did for Diamond. In our resort and club business, our consolidated member count was 720,000 and our NOG was 1.7% at the end of the second quarter.
Revenue was $171 million for the quarter and segment profit was $123 million with margins of 72%. Rental and ancillary revenues were $195 million in the quarter, with segment profit of $7 million and margin to 4%. Revenue growth was driven by higher available room nights offset by slightly lower RevPAR, expenses on our low legacy business continued to be elevated due to the impact of additional inventory and developer maintenance fee expense, along with inclusion of Bluegreen’s, much lower margins, rental business.
Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA of HGV EBITDA added $5 million, offset by G&A expenses of $44 million, license fees of $40 million, and EBITDA attributable to non-controlling interest of $4 million.
Our adjusted free cash flow in the quarter was $370 million, which included inventory spending of $86 million Cash flow conversion rate exceeded 130% this quarter owing to the timing of inflows from our two recent ABS deals. And for the year, we anticipate that we will be able to maintain a conversion ratio that is roughly in line with our expectations as well as last year’s conversion in the low 50% range.
During the quarter, the company repurchased 2.3 million shares of common stock for $100 million. And through July 31, we repurchased an additional 1.1 million shares for $46.3 million, leaving us with 114 million of remaining availability under the 2023 repurchase plan.
We also received approval from our Board of Directors authorizing us to repurchase an aggregate of $500 million, which is in addition to the remaining amount of our 2023 authorization. We remain committed to capital returns as our primary use of excess free cash flow, and we’ll maintain our existing base of approximately $100 million per quarter and share repurchases.
Turning to our outlook, as Mark mentioned, owing to the more challenging quarter and outlook, we are lowering our guidance for adjusted EBITDA to a range of $1.075 billion to $1.135 billion, $425 million lower than our prior guidance.
Our own primarily to the pressures that we mentioned on our VPG and tour trends and to a lesser extent, the continued headwind from bad debt normalization that we had mentioned on prior calls, as of June 30, our liquidity position consisted of $328 million of unrestricted cash and $446 million of availability under our revolving credit facility.
Our debt balance at quarter end was comprised of corporate debt of $4.9 billion and a non-recourse debt balance of approximately $1.7 billion. At quarter end, we had $750 million of remaining capacity in our warehouse facilities, of which we had $647 million of notes available to securitize and another $324 million of mortgage notes we anticipate being eligible following certain customary milestones such as first payment dating and recording.
From a timing perspective, we anticipate coming to the market with another ABS deal this coming fall, which should provide incremental adjusted free cash flow in our second half. And as I mentioned, we still feel comfortable with our prior assumption around our adjusted EBITDA to our adjusted free cash flow conversion rate ratio.
Turning to our credit metrics at the end of Q2 and inclusive of all anticipated cost synergies, the company’s total net leverage on a TTM basis was 3.67 times as we continue to make progress towards our target leverage range of 2 times to 3 times while still repurchasing shares. I’m also happy to report, we successfully repriced our 2031 Term Loan B from a spread of 275 basis points to a spread of 225 basis points, generating nearly $5 million per year in cash interest savings.
We will now turn the call over to our operator and look forward to your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions].
Our first question comes from the line of David Katz with Jefferies.
David Katz
Hi, good morning, everybody. Thanks for taking my questions. Two from me, please. I mean, with respect to the guidance adjustment and isolating the discussion around execution issues. Can you just talk a bit more about your comfort that you’ve sort of got your arms around that? The question will all have is have you have you taken out or not. Right?
And how do we get comfortable that there isn’t more? And the follow-up is I’m not sure if you sort of update or touched on Maui and I would love a little more sort of update on what you’re seeing and sort of feeling. Yeah, thank you.
Mark Wang
Yeah, David, this is mark. So look, I think, obviously, we’ve spent a lot of time going through the from a bottom up on the components that are going to drive the rest of the year’s performance. And we expect when you think about guidance, should we expect a continued macro pressure on the consumer in the back half of the year, as you know, where we’re competing for their discretionary dollars.
And given the outlook and the second quarter’s performance. The pullback in the guidance really reflects lower contract sales versus what our expectations were, right. And so when you look at the guidance, what’s really been pressuring us has been our new buyer close in for the top two thirds of. And we look at we look at the data constantly up when you look at it, top two-thirds of our new buyers that VPG has stabilized, right.
And I’m talking about looking at it from a net worth cohort from. But the bottom third continues to underperform, and we’ve seen more variance than we’ve seen in quite a while between the top two-thirds in the bottom third. So we expect pressure on new buyer close rates as far as tour flow goes we’re expecting flat new buyer tour flow as we continue to ramp up our direct marketing, our direct marketing, we’re going to see growth in the back half of the year, but it will be offset by some softness in our local marketing.
From an owner perspective, the business again is intact. It’s performing well in it. When we look at owners on the books, we feel pretty good about the arrivals there. Now we’re seeing a normalization in owner conversion rates versus our prior expectations, and it’s still above 2019. So still outperforming what we saw in the past since our owners or are intact and doing well. But ultimately, we see pressure on contract sales on the new buyer side.
Well, Dan, if you want to cover off on any additional components around the bad debt piece of it.
Daniel Mathewes
No, David, it’s a great question. Especially the logical one being is have we de-risk the guide to the extent that we need to. And I think just from a modeling perspective, the way to think about it when we were looking at it and the pull back was majority driven by VPG. And as you know, that has a high level of flow through to the bottom line.
Tours from our previous expectations did have a minimal impact. And then to the fact that we’re calling about contract sales, that will obviously have an impact to revenues associated with financing. Bad debt is a piece of it as we talked about, we’ve seen some increase in defaults, delinquency rates, most notably on the broking side, and it’s up that provision accordingly.
I would say that is still consistent where we ultimately always thought we were going to end up in that mid 10s range, but obviously accelerated. We previously thought that we’d probably exit this year and go into next year.
In that mid-teen range and we’re there today. So a bit of a pull forward on that front. But it’s and there’s a little bit of savings on CMP, but just generally speaking, if you were to look at the pull down in guide, it’s effectively 80% associated with contract sales, most notably on the VPG side and 20% associated with bad debt with some offset from a lower cost of product. But we clearly tried to de-risk this guide based on everything we are seeing as of today.
Mark Wang
And then Dan, on the valley of update. So first of all, it’s hard to believe it’s that today is the one year anniversary, the tragic wildfire Valley. And so still a lot of recovery happening there. On deposit note, both our resorts are fully operational. Now that being said, a lot of our new buyer tour generation were locations that were for all intents and purposes are shut down and those won’t be reopening anytime soon.
So but the other business has come back. It’s still lagging where we thought it would be pre-fire, but part of it is in our sails from a sales marketing standpoint, some of the pressures really related to rehiring staff housing values is challenge, especially for our property that’s in West Valley near [indiscernible]
But I would say on the other side of the island in Kihei. Valley Bay Village, where we’re building new product there, that project is performing well and not only in Maui, but also selling well throughout our network.
Operator
Our next question comes from the line of Patrick Scholes with Truist.
Patrick Scholes
Please proceed with your question by Good morning, everyone. On a number of questions here. I’ll actually start out with potentially a positive one then move into some other questions. Mark, what are your thoughts on with the Japanese yen now strengthening?
When might you expect to see that show up in increased demand to your Huawei product and or certainly the yen having gone the other way for a year or so was a big headwind, but really has. And directionally, what’s your thoughts on that and the possible impact? Thank you.
Mark Wang
Yeah. Well, first of all, it’s nice to see it’s nice to see the yen strengthening variety and it’s pent-up. It’s been quite a of a quite a challenging period from a from a currency standpoint for our Japanese members and for the Japanese tourism overall for Hawaii.
Now the good news is our members. The timing was really good for us when we opened our property into Selco in Japan and owners are traveling there and using property. We have very, very high occupancies there. But I said the be there will be a lag effect as far as the euro, the yen strengthening and But hopefully, where we’re really off on the Japanese business is the new buyer Japanese business from the talk tourism that’s coming into Hawaii.
Our owners have come back and they’ve actually come back faster than the general population that’s coming back to why? And that’s really because of the commitment level they’ve made and being another with us. But overall, we’re hoping that this improvement and will strengthen that. It’s part of the business.
Patrick Scholes
Okay. We will see. My next question. You had said that you had talked about a sales reorganization. Can you give us more color on that? What exactly is that about? And where within sales north that’s more of the middle senior level? Or is that specifically in some of your acquisitions, which tends to happen when you purchased companies from more color, please. Thank you.
Mark Wang
Yes, sure. No, we there — quite a bit of disruption in the quarter as we were in those, we’re integrating blue rain and but a very positive outcome of that is we spent a significant amount of time in the quarter restructuring our sales and marketing organization and it really restructured for the next wave of growth.
And importantly, with the acquisition of where they were a much larger company with a much broader sales marketing footprint, just to give you a little historical data here. If you look at us historically, we were very centralized. When ’19 we were doing $1.5 billion of contract sales, 20% of that was outside of our five core markets.
So it was really five distribution, smaller distribution centers out of our five core markets. Today, we’re $3 billion in contract sales with 40% of our volume outside of that of what we would call big destination markets. So those destination markets have grown up by 60%, I mean the 40% represents a move from five our sales centers to have 44 sales centers on a regional basis.
So our footprint in the makeup of our business has changed materially and to support that debt, larger destination market and to support those smaller regions, we went from two regions to five regions in multiple subregions. We strengthen our mid-level leadership to really increased focus and execution and to create better oversight for the sales and marketing activities out there.
We also named a new Chief Sales and Marketing Officer, Dusty Tonkin, who was leading Bluegreen’s operations. And dusty has a great a great background, great experience running large organizations. And so all in all, a big move, it did create quite a bit of disruption as you can imagine we rolled out a new structure in the middle of June, but I’m happy to say that the work has been done. And I think and I’m very confident as Dusty is our new leader, and I’m very confident this new structure will improve our execution going forward.
Patrick Scholes
Okay, thank you. I ask one more question here before I get back in the queue on question. First one is for Dan, you’re taking your percentage up on the loan loss provision and maybe this is getting into the weeds and policies making but I think it’s important.
Why do you have to take that percentage up going forward as opposed to doing what your competitor did this quarter and a couple of quarters ago as opposed to increasing your sales reserve or taking a charge or however you want to call it. What’s the decision making thoughts around all of that? I hope that makes sense. Thank you.
Daniel Mathewes
Yeah. No, that all makes sense. I mean, I think as well, when we’re talking about the bad debt provision, I mean, we could go into a lot of variables. I’ll tried it. I tried to keep it as simple as I can. First and foremost, what I would tell you is we have not fully integrated grouping the equilibrium is operating as a separate entity, the Bluegreen credit processes not fully integrated into the legacy HGV first diamond process yet we’re also still in the realm of purchase accounting, but to put things in perspective just as a level set.
When you look at when we acquired Diamond, they had a reserve on their books that gave, but that was roughly 30% of their portfolio once we completed our due diligence, acquired them and then applied fair value to their portfolio.
That reserve went from 30% to 37%, similar on Bluegreen their reserve was a post their last audit, which was before we acquired them, which, as you recall was early January, their reserve was roughly was just under 30% is about 28%, 29% and doing the same exercise that we did with Diamond. The reserve is now that acquired portfolios right at 36%. So very consistent with Diamond so you have that component.
The other thing I would tell you is when you look at how we run our bad debt provision and I don’t have insight to any of our competitors. But our bad debt is based off of a very robust static pool model that utilizes in excess of 15 years of historical loss data that takes in consideration by loan FibreCo levels and even country of origin.
And those loss models are updated on a monthly basis. And any changes that occur this month are applied to the previously originated loans and then also are applied on a prospective basis that helps to capture current trends quickly and mitigates wild swings in the provision to the extent we can. And then in addition to that, we account for various seasonal items like prepayments and even later stage defaults.
And that’s the third bucket that goes in. And again, this is done on a monthly basis. That when it comes to Bluegreen, we alluded to it in our prepared comments, but the movement in Bluegreen, they’ve been upgrading and 2023 and 2022 to some extent they were upgrading their owners of a quicker than they were previously.
The balances were getting larger. We knew those defaults and delinquencies would increase. I think that’s true for any timeshare operator, whenever you upgrade people faster and increase loan balances, you can expect a uptick in delinquencies and defaults.
And I think I got here sooner than we originally expected but we still anticipate that long-term run rate in the mid-10s percentage. But that did obviously impact our expectations for this year because we’re there sooner than we expected. That was a very long-winded answer, but I think I captured everything you were looking for.
Patrick Scholes
I appreciate, from having gotten into the weeds on such things. I appreciate it. We can at a high level, and I’m going to jump back in the queue with some more questions. Thank you.
Operator
Our next question comes from the line of Brandt Montour with Barclays.
Brandt Montour
Good morning, everybody. Thanks for taking my question. So Mark, if we could just go back to the beginning of the year when you when you were exiting ’23 the tone and the message was that the new that you guys had sort of overwhelmed the sales, our resources and manpower at these smaller sales centers that were concentrated in the legacy diamond footprint.
And so we could sort of bridge that adjustment you made it sort of year and going into ’24 with this adjustment now it seems like, it’s sort of an extension of the same problem, maybe compounded by a deterioration in the lower third in terms of purchasing propensity. Is that how you would characterize it or is it sort of a different element of the resources and understaffing of those of those of those sales centers?
Mark Wang
Yes, Brandt, I think that characterizes that pretty well. I think in a week. As you know, as I mentioned from a previous answer, we had we went through this of this rework, right? And that performance was in fact it by this integration work and we work through the quarter.
We completed the redesign, we rolled it back out in June. And this process, unfortunately distracted a lot of our leadership teams until the final structure is all about as you can appreciate a lot of people on pins and needles trying to figure out whether they’re going to be on the team or what position they’re going to play and where they’re going to be living in here so on.
So you have that. And then from a staffing standpoint, it’s kind of a knock-on effect from the disruption because it did lag in some of the hiring of sales and marketing staff, which then had a knock-on effect and eliminating limiting tour slot availability.
And so really this disruption is we’ve identified what the issues are. And quite frankly, we’re just behind on staffing. We’re behind on hiring behind on recruiting, but we have now got the organization and the structure to go fix those things. And then on top of that is just coming out of last year, we did see stabilization in US from a customer standpoint of four new buyers other than the bottom third, but the bottom third of the new buyers is just falling apart for us.
And we’ve seen a lot of pressure there, and we’re seeing more of the variability in that performance on the bond side than we’ve seen in a long time.
Now good news is we saw some stabilization. And as it relates to July, performance at VPG contract trends stabilize in July, more in line with what we saw in April and May. So I think once we’ve got this, this reorg passed us. It helps stabilize some of what we’re seeing from just the disruption standpoint. But there is pressure on the consumer pressure to make commitments at the level of discretionary spend that are required to be part of our club and talking to the sales teams are just sick, no increased customer hesitancy.
I think people are taking a more wait-and-see approach, but that being said, we continue to have to work hard, and I think we’ve identified some of the issues and we’re going to improve them. But with the current macro situation, we’re we just felt it was important to bring back. I’ll bring our guidance down for the rest of the year.
Brandt Montour
Okay. Thanks for that. And that’s actually a good segue into my next question, which was just really a follow on to David’s question earlier. When you look at the second half guidance for VPGs, but what I’m really trying to get to is close rates. Are you assuming something similar to what you saw in that July level? Or did you bake into that back half VPG. something more conservative?
Mark Wang
With regards to the guide on the back half of the year takes into consideration the VPGs that we had been experiencing. It didn’t assume some uptick and on an outperformance it didn’t, but let me say it a different way. It does nullify what we saw happen in Q2. So it does take risk into consideration.
Operator
Our next question comes from the line of Ben Chaiken with Credit Suisse.
Ben Chaiken
Hey, thanks for taking my questions. I’m sorry, there’s a lot going on this morning. So I just want to clarify something for the guidance cut. Did you provide a mix between macro and execution issues? And then on the execution side, I guess I don’t totally follow the sales and marketing adjustment commentary is the point simply that you’re a bigger company today and need to align the sales force accordingly to maximize efficiency? And then just one follow-up.
Mark Wang
Yeah, with regards to the guidance that we did not break it down between macro, and I think we’ve referenced it as disruption on the sales force and ultimately, there’s macro pressures and it’s clearly difficult to estimate specific amounts that are built in just because of macro.
And ultimately, I think you probably heard us say just from a breakdown, it’s driven primarily by VPGs that has a high flow through to your bottom line and to a lesser extent, bad debt with a little bit of offset on COP.
So just the breakdown that we want to talk about is really the 80-20 split between contract sales, notably the VPG and the 20% being at that flow offset on COP.
Daniel Mathewes
Yeah, there have been on the execution side we restructured your number one to prepare ourselves for the next wave of growth, but importantly and to really improve the overall execution when you look at our business, again, I talked about our big destination markets.
They’re outperforming the regional markets. And again, we went from five regional markets, five regional sales center markets in 19 to 44 today, right? And I think we’ve learned over the last couple of years and also looking at Bluegreen’s model that we needed to reinforce critical mid-level leadership areas.
We needed more dedication and greater oversight on these smaller sales centers. And we also made the decision to realign all of our sales organizations under one leader. So on in the execution part of the execution problem was disruption because of all the noise around the restructuring arm. But part of it was also around just lagging in certain key areas that are important for our sales organization.
Our marketing organization performed well and that’s around staffing levels. We got out of we got out of sequence on our on our ratios and we lost efficiency. And so those are things that we identified and we’re working on. And I think some of that the miss there and the missteps that occurred there will not occur with this new structure because now we have the proper oversight.
Ben Chaiken
Okay. I guess related — sorry, with this restructuring plan and the rollout was choppy or is this something you noticed intra-quarter and then needed to kind of scramble and reactive. And I’m sorry, —
Daniel Mathewes
This was a let’s put a number of people in a room for 90 days and figure this thing out. And so it was planned and we spent a lot of time there was a lot of thoughtful work that went into this. So there were a lot of leaders that were not focused necessarily on the execution, why we’re going through this because it took a lot of discussion and a lot of work to do to get to the optimal design.
So I would say, again, the again, April, May were decent June just kind of fell apart. And but the rework was announced I think on June 11 and again, that shift that we saw a bounce back in July. So actually July from a sequential standpoint was as good a month as we’ve had so we feel good about that now that being said, we’re still being pressured on the new buyer side with particularly the lower well cohorts out there.
Mark Wang
And look, just to add something to that or just some additional color. I think it’s also worth contrasting methodologies compared to Diamond. When we acquired Diamond and we closed on Diamond, we did a restructuring literally on day one, we had the sales leaders picked out.
We had the headcount picked out. Everyone knew where they stood on day one with the acquisition of Bluegreen to Mark’s earlier point, there was a team that builds over a sense of I sat in a room for 90 days to identify the right talent and the right leaders for the right region now what that does is it’s a bit of a distraction, as Mark alluded to, but ultimately you should end up in a better run business because you’ve identified clearly the right time to run at the consolidated entity.
So I don’t know if I would call it choppy. I would say, hey, this was a more thoughtful process. But when you run thoughtful processes. Sometimes you have a bit of disruption as you complete those.
Ben Chaiken
And then really quick follow-up. So it sounds like you’ve got some new leadership and some new middle managers. If I interpret you correctly, what does the ramp up of those positions will look like? Is this something that’s going to percolate through the rest of the year or into ’25 or any color?
Mark Wang
So everybody has been named it. We do have some people are still, dealing with U-Haul, getting stuff moved, but there’s a relocation that’s involved here, but most of the people that have been identified and put in their new positions are in place. There’s still a little disruption with their family moves and stuff like that. But for the most part, that’s all behind us.
Operator
Our next question comes from the line of Chris Woronka with Deutsche Bank.
Chris Woronka
Hey, guys, good morning. Thanks for taking the questions. I was hoping maybe we could spend a minute talking about kind of buyer behavior on the financing side and obviously generally more a question about first-time buyers. And so are you seeing any change there? I mean, are you are you trying to alter your strategy or are you offering lower positive initial deposits or anything like that trying to figure out now? Is this just trying to get them over the finish line or are they? No, I’m not getting not getting anywhere close to the finish line and financing incentive dollar no matter at that point.
Mark Wang
No, great question Chris from time to time. And it’s not I would say it’s fairly routine where we’ll run various promote promotions to see if it moves the needles, sometimes it helps. Sometimes it depends on which sales distribution center you’re looking at it one promotion works or one doesn’t. I’d say when it comes to the new buyer, that the financing element as work in some cases and hasn’t and in others, it’s not a definitive answer that when it comes to deposits really do not drive a lower deposit required because we definitely want our owners to have a level of equity that’s meaningful as they take over as a step into ownership.
It also has implications for rev rec because our internal policies we deferred rev rec until 10% is down. So we always look for that bare minimum and when it comes to upgrade, there’s different metrics will run as well just from a potential where existing owners might not have to put additional equity down depending on how much equity they built, et cetera. So I don’t think that is the definitive solution to uptick new buyer close rate. But from time to time, we run them and they can be helped.
Chris Woronka
Okay. That’s helpful. Thanks. Thanks, Dan. And then just as a I guess, as a follow-up, do you think is you evaluate all these changes you’ve made in the sales centers kind of post Bluegreen. And yes, obviously, there’s a little bit more you want to do, but does it make you think you need a new product for this current environment?
We are whether it’s kind of a something that fits into a smaller budget or implicitly kind of a shorter vacation, which we hear from other travel companies is something like that on the table if we’re going to be in this environment for a while?
Mark Wang
Well, actually, Ben, I think the acquisitions that we made actually really puts us in a great position. We’ve widened our product offering at or. Chris, I apologize, Chris. We’ve diversified our product, right? And we’ve widened our scale and on. And so I think we’re in a really good place from a inventory standpoint in our brand offering.
So and we got a broader customer base. And importantly, we’ve diversified our lead flow and with some of these world-class partners out there. I do want to make a comment on that on the new buyer side that you know to new buyers at the top, a third of our cohort is still performing well and the middle is performing.
Okay. And if you look back, we’ve been taking good pricing on this where our average transaction price for a new buyer today is 19% higher than it was in 2019. So it’s not like the new buyers falling apart. And as the top cohort is still intact, it’s really the biggest challenge is been that bottom third. And when you when the bottom third falls apart, it makes it challenging. And so we are looking at ways to adjust our product to meet that bottom.
Third, that right now, we believe once we get the blue green system in our overall system when we roll out Max, that will make a big difference because there is some hesitancy on the blue-green business right now as they’re waiting for communication from us on what this means, what this whole acquisition of Bluegreen means.
At this point, of course, we’re communicating to them but there’s a process that we have to go through and that introduction will probably not be made until we get toward the end of the year as we’ve got a number of legal steps that we have to walk through. And we have a number of other considerations that you have to walk through to make this a successful rollout.
Operator
Our next question is a follow-up question from Patrick Scholes with Truist.
Patrick Scholes
Okay, thank you. I do have a number of follow-up questions here to talk, Mark and Dan, a little bit more about some of the demand in local markets or if you’re seeing is some of this related to local market softness? And if so, how does the reorganization address that? Thank you.
Mark Wang
Yeah. No, that’s a really good question, Patrick. So it’s we’ve talked a lot about our owner business our on our pipeline and what we see on the books. We talk about our direct marketing pipeline and our direct marketing pipeline is related to new buyers for 40% of our tour flow for new buyers is actually comes through local marketing.
And we have a we have seen a pullback there and I think it’s less about the current macro and more about them, some of the execution challenges we’ve had. And this is an area that we can do better and we’re very focused on right now.
And just to give you a definition of what local marketing is. It’s our guests that are rental guests staying on the property. It’s guests that are frequenting, the markets that we’re in. And this is an area that we saw softness in the first half. We’ve identified it. And as I talked about, we’ve been lagging on some of our hiring, but that all of those hiring agendas are in place. And so we believe we’ll get that turned around as we move into the back half of the year. But it will take a little bit of time.
Patrick Scholes
Okay, thank you. Just three more questions here. First one from a high level, have you any initial indication what maintenance fee growth might be for next year? And the reason I bring this up, your competitor had a very large maintenance fee increase up for this year and in our normal 15%-ish and some resorts over 20%.
And I’ve sort of come to of the belief that when you put a very large surprise, the maintenance increase isn’t going to cause a certain comfort customers to quit your product and now result in loan losses and shocks and surprises. Any initial indication what yours might be? Would you expect it sort of just been normal mid-single digits next year?
Mark Wang
And so we’re expecting we’re expecting normal mid-single digits. And you know that I’m not sure what the competitors are doing, but weak consistently utilized even during the pandemic, we in the during COVID, we continued to move our maintenance fees up kind of that mid-single digit. So there’s no catch-up requirement now. So we’re not going to be surprising. Anybody with the with anything and more than a mid-single digit increase this coming year.
Patrick Scholes
Okay, good. Then two more questions here. You talked about the bottom third really not doing well. Does this unfortunately imply that you’re underwriting for Bluegreen is tracking behind initially at this point. And related to that, where do you stand with your synergies versus your targets for that acquisition? Thank you.
Mark Wang
So I’ll take the front end and then I’ll let Dan talk to you about the synergies. So look, we’re looking at our KPI’s and VPGs across all the brands and HGV and Diamond legacy and everything is moved down on a similar basis. So there’s really no discernible difference or declines across any of the businesses. I would say that there is some pressure on the Bluegreen customer. I think I just mentioned that a few minutes ago around just kind of waiting and seeing what HGV is going to roll out, that’s going to benefit the Bluegreen members and that the that we’ll be announcing later this year.
As far as synergies, Dan maybe you could take us through where we’re at on that.
Daniel Mathewes
Yeah, no, absolutely. When it comes to the cost synergies, we are right on track from our original expectations. We are at a run rate of 71-ish — $70 million-plus on run rate from a cost synergies as of today. That includes the primary item that you take when you think of cost synergies, a headcount reduction, et cetera.
So for the balance of the year, I don’t expect that run rate to materially change will be driving towards that $100 million more in 2025 when you consolidate such items and health benefits to you start realizing the savings from consolidations of office space, things like that, but that’s more of a ’25 issue from a revenue synergies perspective, keep in mind, we have yet to even start rebranding any sales centers or resorts at this point, which is in line with our original expectations.
So although it’s not a bit, it’s zero, it’s in line with expectations. And so I think we’re on track and actually in a good place from a synergy perspective on as of June 30.
Mark Wang
And then as of today, whether Patrick, I’d just add on that first. We feel really good about both deals that we did and the long-term benefit that it’s going to provide the company with. We’ve talked about our ability to leverage our brand across all of these nonbranded resorts. And when you think about I talked about the just the scale of our distribution network, how much larger it’s become and importantly, how much we’ve diversified our lead source, especially with the Bluegreen acquisition and Bass Pro and the partners there.
We feel great about these acquisitions. We’ve tripled our resort size. We’ve got all this built-in demand. We’ve got 700,000 members over 700,000 direct marketing packages. We’ve increased our recurring EBITDA from 42% to 57% today. And as you know, our free cash flow conversions moved from 15% above 50% today. So ultimately, we feel really good that that this really supports a great return of capital to billion of this additional cash flow is going to we returned a lot more capital to our shareholders throughout the cycle.
Patrick Scholes
Okay. Thank you. And then one last question here and I’ll preface this with. It’s a question I don’t think I’ve ever quite asked before on an earnings call, but I have received a number of in [indiscernible] regarding this topic this morning, and this really is around I’m questioning the qualifications and experience of the new Board member announcements this morning. How would you respond to those concerns? Or alternatively, was that person join your Board really and not in your control? Thank you.
Mark Wang
If I well you know, at the end of the day, Apollo has the rights to have two board seats and we believe and we did a background check and we believe that the new Board member. There was a we just announced this morning is more than qualified. She’s been a He’s a strong leader within Apollo. But importantly, she was very active in the diamond deal understands our business.
She had our first Board meeting with her yesterday she was in our first bar and her first Board meeting with us yesterday, and she was very thoughtful in our approach and quite frankly, very up to speed on the business. So we think I think we take the follow-up made a really good choice.
Daniel Mathewes
I can only I can only echo those sentiments. I mean, I think just to add a little bit more on, she has been involved. We have known her since 2011 back going back to 2019. So she has been involved in the industry for a number of years. She’s very much engaged on. So we’re excited that she’s on the board.
Patrick Scholes
Okay. Thank you. That’s good to hear. I think that’ll alleviate some of the folks who had reached out to me if this morning with those concerns. Thank you.
Operator
Thank you. Before we end. I will turn the call back over to Mark Wang for any closing remarks. Mr. Wang.
Mark Wang
All right. Well, thank you. Before we wrap up, I’d be remiss not to acknowledge it today is the one year anniversary of the tragic wildfires and Valley. As we mark this a sombre occasion, I’d like to thank all of our team members for their hard work and service to the community to our guest and to one another. They show tremendous courage and resolve as we work through the initial tragedy.
But we know that it will take time for West Valley to fully recover, and we will be there to support our teams and local communities for the long term. Again, thank you for joining us today. And we look forward to speaking to you soon. Thank you.
Operator
Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.
