希爾頓酒店 (HLT) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to Hilton Hotels Corporation third quarter Earnings Conference Call.

You will be on listen-only with an opportunity for questions at the end.

The conference is being recorded.

I would now like to hand the presentation over to Mr. Mark Grossman, Senior Vice President of corporate affairs for Hilton Hotels Corporation.

You may begin, sir.

Thank you very much and good morning, or afternoon for those of you on the east coast.

And for Jay Cogan, Jay and the rest of our friends in San Francisco, how about them Angels?

That is bad!

Anyway, I'm joined here in Beverly Hills by our senior management team as well as other members in other locations, here as to answer your questions.

We will spend most of our time, as usual, getting to your questions after some remarks from Stephen Bollenbach, but first, a little bit of housekeeping.

The press release that we put out this morning and this earnings call will contain forward-looking statements within the meaning of the federal securities law.

Including statements regarding business strategies and their results and similar statements regarding expectation that's are not historical facts.

The forward-looking statements in the press release and in this call are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed in or implied in the statements herein.

I also want to say that we have a playback number, so the call will be available until October 25 at 8:00 p.m. eastern time.

That playback number is 888-286-8010 and the code number is 275972.

In addition, we are webcasting this conference call.

To access the webcast, go to www.Hiltonworldwide.com.

Go to Investor Relations, and then click on the conference call link.

So, let me, for a few comments, turn it over to our CEO, Stephen Bollenbach.

Thank you, Mark.

I'm going to be general and fairly short.

I'd like to say that by sticking to the basics of our business and by doing things we need to do to take care of our customers, our owners and run our company in our hotels efficiently, I believe we're demonstrating a real ability to deliver solid earnings for our shareholders.

And we're doing it in a time that continues to be rather challenging for our industry.

Our business is solid and despite the current weaknesses, particularly in the area of raising room rates, we're really doing quite well.

I mean given all the uncertainties, the fact is that we're running over 75% occupancy in the third quarter.

That's really very, very good news.

There are lots of things that we can control, and we're operating our big city properties at very high occupancies.

We're managing our costs well and running at strong margins, our brands are taking market share and as a result we're getting more than our share of the business that is available.

We're also growing our time share business.

We also have the comfort in knowing that the introduction of new, competitive supply is minimal, and this puts our own hotels, especially, in a great position when the economy recovers.

The business today is about controlling your costs, using technology effectively, achieving economies of scale, and having the kind of distribution that allows you to spread your costs over a large number of units.

In short, it's really about operating our business efficiently and effectively.

And that's what our team is focused on, operations.

In fact, those of you who attended our investor meeting in June know we spent virtually the entire day talking about our operations.

Just kind of a subset of that, let me take just a minute and talk about technology, which for our company plays a very big roll.

There is no question that technological advances have enabled the entire industry to operate for efficiently, but specifically for Hilton, let me give you examples of how we're using the available technology to make our business better.

We've been working very hard on developing a consistent, fully integrated technology platform that encompasses all of the 2,000-plus hotels in our system.

We have about 90% of or hotels already on that single system, and we expect to have the rest by the end of 2003.

We'll have every one of our hotels fully linked on a single technology platform everywhere in the system.

Now, no other hotel company has that.

And clearly, there are significant benefits that to having our hotels on one system.

On the cost side, just to mention one specific benefit, we're able to centralize our entire accounting system, helping us be more efficient on all kinds of functions, a good example is payroll.

All payroll functions on one system.

Generally, just having a single platform helps you run your business more efficiently than it would be if you were a company that was operating on 10, 12, as many as 15 different systems.

Having this consistent system is also very important from a customer perspective.

No matter what hotel you go into, you will be greeted by name and receive much more personalized attention at the time of check-in.

Customers find real value in that kind of service and it helps us build customer loyalty.

In our owned and managed hotels, Hilton and Doubletree hotels, our major revenue generators, we have a new forecasting system that helps us forecast rates and be sure we achieve the highest yield possible.

We've got a great team here at the corporate office, at our hotel properties and sales and reservations offices in the field and we're all of the single mindset.

It is about cost controls and effective operations.

To be sure there are uncertainties and challenges affecting our industry, and makes it very difficult to be definitive in our predictions.

The economy and the world political situation are external forces that are currently keeping the lodging industry from returning to full strength.

So, we've taken a conservative view, both for the balance of this year and on into 2003.

I believe the business is getting better but improvement is not dramatic as I would have thought it would be at this time, and despite the current challenges, we're managing our business well and doing things that are necessary to deliver good results.

Thanks, Steve.

In this morning's press release, we provided estimates for the fourth quarter of 2002 along with very preliminary estimates for full year '03.

So, before we go to the Q&A session, let me take a minute and we will review that guidance with you.

Let's start with this coming fourth quarter.

As we said in our release, we have seen the anticipated quarter by quarter improvement in REVPAR for the first three quarters of 2002 and we expect that trend to continue for Q4.

Though the continued pressure on room rates in our view, warrants a more cautious outlook.

So, for the quarter, we are expecting a mid-single-digit percent increase in total company revenue.

Now, that's a result of an approximate 10% increase in REVPAR at our comparable-owned hotels along with property sales that we had in 2001.

Now we're looking at total company EBITDA in the range of $235 million with owned hotel EBITDA of approximately $160 million.

Owned hotel EBITDA margins are expected to be in the range of 30%, with some adverse impact on margins from higher insurance costs.

EPS for the quarter is expected to be in the 10-cent range.

That compares with pro forma EPS of 4 cents in the 2001 quarter.

We anticipate generating approximately $300 million of net cash flow for full-year 2002.

Now, that's based on our EBITDA guidance plus the proceeds from the sales earlier this year of Harrison conference centers and time share receivables and after all Cap Ex, interest, taxes, dividends and the cash portion of the lower transaction.

That excess cash flow will be used to reduce debt.

And for 2002, we are on track to add about 145 hotels and 18,000 rooms to our system ,which is consistent with the estimates we've put out in our last earnings call.

Now let's take a look at 2003.

We've just gone through a first pass at our 2003 budgets from our owned hotels, franchising and management business and our time share business.

The fact is the continued low visibility in our business makes the prediction game a tougher one to play.

But we do understand the importance of providing some guidelines to the investment community.

Let me emphasize, however, that the guidance we provided in this morning's release is very preliminary.

As we refine our budgets in the coming weeks and as we get a closer look into 2003, we will, on our next call, be in a position to offer somewhat more definitive estimates.

But at this time, we are estimating 2003 total revenue in the $4.1 billion range with total company EBITDA in the range of $1.06 billion.

At our owned hotels, we're systeming 2003 EBITDA of approximately $675 million with margins in the low 30% range.

We anticipate REVPAR at our comparable-owned hotels will increase in the low to mid-single-digit percent range.

In terms of diluted earnings per share, our preliminary estimate for '03 is in the mid to high 50 cent range.

We expect to spend approximately $325 million in 2003 on capital expenditures.

Now that would include approximately $175 million in normal maintenance Cap Ex and technology spending, about $110 million on time share projects, in particular, the projects we currently have under way in Las Vegas and Orlando, and approximately $40 million on a variety of special projects at our owned hotels.

Finally, in terms of unit growth, we anticipate adding between 100 and 115 hotels and 12,000 to 15,000 rooms to our system in '03 through franchising, management contracts and convergence.

So, with that as an overview into the fourth quarter and a preliminary look into '03, we are ready for questions.

Thank you very much, indeed.

Ladies and gentlemen, your question and answer session is about to begin.

If you wish to ask a question, please key star 1 on a touch-tone telephone.

If you wish to withdrawal that question, key star 2.

Now, once again, star 1 if you have any questions.

Thank you.

Our first question comes from Mr. Joe Grive from Fulcrum Global Partners.

Go ahead, sir.

Good morning, good afternoon, guys.

I guess my question on the last conference call was, you know, bookings on a group side and you mentioned that the association business was up 4% and average room rates on the business of 3% and, you know, still pretty positive for next year, can you give an update on that?

Then I have a follow-up question for Matt.

Yeah, I think for the fourth quarter, our definite booking was up about 2%, plus up.

And the wait is fairly flat.

You know, going into next year, 2003, the definite booking pace is down somewhat, but the tentative booking base is up substantially, so that really shows you the trend that is really a short window of booking pace and it is getting shorter and shorter.

We still believe we're going to convert our tentative bookings into definite in the next couple of months, we will beat our target.

And then, a question for Matthew Hart.

If you could review your year-end for next year, debt to EBITDA target ratios and maybe get us a range of where you estimate free cash flow for next year?

Yes, the target hasn't changed.

We still want to get to the 3.75 times debt to EBITDA, and I think we will be at just about that at year-end.

And the free cash flow, you know it kind of depends on a lot of things.

One of the things that we did earlier this year is we sold some of those time share receivables.

We have a lot of interest from third party investors on to do another deal like that.

Other asset sales play a big part in that.

I think it is just a little bit early to say exactly what we expect those numbers to be.

But I think with a lot of the guidance that Mark gave in terms of EBITDA and Cap Ex and so on, you can pretty much determine on your own.

Thanks, guys.

Thank you very much.

And your next question is from Mr. Jay Cogan from Banc of America Securities.

Please go ahead, sir.

All we need is a few more people on the bandwagon, Mark.

You know, I used to be a Dodger fan, but I changed!

I heard.

I wondered if you could talk a little bit, yeah, I know it is early, but a couple of questions for you, nonetheless.

Can you talk a little bit about what gives you the expectation that REVPAR will be positive next year?

Can you say are you weighting it more toward the second half of the year?

Are you seeing anything with negotiated corporate rates?

We hear that group rates, on the other hand, are kind of flattish, but we've also been hearing things about, you know, maybe additional specials being thrown in at certain hotels an certain markets to attract groups.

Can you give us a sense of what is it that's giving you guys the expectation that revpar will be positive next year?

Yeah, particularly on the corporate negotiated rate.

This year, we have been able to increase our market share by almost 15% in room nights.

Now, granted the rate is flat, it's competitive, but we've been focusing really on increasing our occupancy.

I think you will see there in the third quarter, I believe from the initial feedback I have from the field, because that's where the mix of negotiating right now, the same trend will prevail next year.

We will maintain and slightly increase our market share and keep the rate fairly flat.

In group bookings and association bookings, a similar trend.

I think we have -- 15% up in tentative bookings, that's a very positive sign.

We can convert quite a bit of these room nights.

So, the same would apply there.

We will increase our market share.

I think, Jay, we will also be looking in the year, you can expect another sequential quarter by quarter improvement in revpar, so, you know, probably more in the back half than in the front half of the year.

Okay, thank you.

Thanks.

Thank you.

And your next question from Mr. Steve Kent from Goldman Sachs.

Go ahead, sir.

Good morning.

Two quick questions.

One, what percentage of your revenue or your expense structure is, you know, insurance or health expense?

I know it is rising, but what is it as a percentage?

And maybe, Steve your pipeline of 50,000 rooms is strong, you're seeing a lot of activity there.

Are you accelerating your position, your equity positions or mezzanine loans or doing any of that stuff?

Are you finding you need to do it or are more attracted to doing that kind of stuff to boost unit growth?

I think where we've put our bet is on building the systems and the system that is the -- the computer system and then just the entire sales system of our franchise organization.

So, that's where we put our bets.

We don't think we need and we don't offer equity as a major incentive to join up with our -- our system.

You know, we hadn't changed our view on that.

We have, from time to time, you know, made some loans.

But, you know, really on an exception basis and it's not -- we think, the way the grow the system.

It is not a dramatic way of growing our system.

Let me jump in, too, Steve, this is Tom.

If you think about each of our brands and the consistent market share growth story we've been telling for two and a half years now, that's probably the biggest incentive for people to build more hotels with us.

Because our brands perform and they perform in the marketplace.

And that -- that's how we've gotten our growth so far and that's primarily how we will get it in the future.

Okay.

In terms of your question on the insurance costs, it's about 3 to 4%.

Okay.

Thanks.

Thanks, Steve.

Thank you very much.

Your next question is from Mr. Mike Wheatrock from Salomon Smith Barney.

Go ahead, sir.

Hi, guys.

Hi, Steve.

Mike, George, Al.

Okay.

Let's start over! [ Laughter ] Hi, guys!

Hi.

Just trying to get behind next year's guidance, you know, understanding, it is hard to get real specific, just as a follow-on to Steve's question, what's your sense of how fast the REVPAR, the owned hotels, would need to grow next year to offset the cost of inflation and keep the same store EBITDA at the owned hotels flat?

Is it 2%? 3%?

What's your feel for that?

It's going to be 1 to 2%.

Yeah.

In 29% range.

1 to 2%.

You think less than 2?

Yeah.

Okay.

And last question, as Las Vegas and New York and I guess there is another phase in Orlando, come along on share in the time share business, what kind of growth should we be thinking '03 over '02 in the time share business, roughly?

Well, yeah, I think it also depends certainly on terms of what we decide on our receivable sale.

And, you know, we do have, you know, new products -- we are, you know, pre-selling the new projects in Las Vegas and Orlando.

So, you know, right now I would expect pretty much comparable EBITDA year-over-year.

Yeah.

Because we have projects that are selling out.

We have new projects that are coming on board.

And the thing keep in mind, Mike, is, you know, no decision made yet, but what we do on the receivables that would impact that.

Okay.

So, now barring any receivable sales, we're probably looking at flat.

Okay, that's what's behind the 1.06 guidance?

Yeah.

Okay.

Thanks a lot.

Thank you very much.

And your next question from Joyce Minor from Lehman Brothers.

Go ahead, ma'am.

Hi, guys, two questions.

First, if maybe Tom could take a little about about your unit growth pipeline, what you're seeing there?

Are you seeing more conversions?

What do you have in the unit growth number for next year in the way of conversions?

And are you see less Embassies and more Hamptons?

That kind of color.

And can you talk about any issues you guys is seventeen with respect to owners where you manage the hotels having concerns?

My sense is that you're approaching to settle the issues when they've come up in the past and not litigate them.

Is that correct?

Not always.

We've had issues where it did -- it was litigated, but we don't -- we -- we don't honestly have that much in the way of issues much we have a solid relationship with our owners, they're our customers.

There is pushing and shoving from time to time, but it is not a constant area of difficulty for us.

I think, Joyce, you know, one of the big things we have is we're a big owner of hotels ourselves.

And so, any kind of programs or initiatives that we have on the so-called operating side, we, as owners have, to pick up our share as well.

So, we're just empathetic to owner concerns because we're an owner ourselves.

It's a little different.

Have you had differences where you've settled them with owners, though?

We have issues that we settle all the time, but not -- [ OVERLAPPING SPEAKERS ]

You know it would be more like a customer complaint kind of issue.

But --

I think the bottom line, Joyce, is really not an issue, I mean in terms of our company or things that are impacting the company.

So, you know, that's about as simple as we put it.

Okay.

Maybe Tom can focus on the unit growth question?

Let me go to the pipeline, Joyce.

As we said in the release, we have about 365 hotels and 60,000 rooms in the pipeline.

This year, we've -- out of our 145 openings, we will have a little more than 20 that are conversions and in that pipeline we've probably got another 25 or 28 hotels that are conversion hotels.

Obviously the thing about conversions is that they happen a lot more quickly, both in terms from approval to opening than does hotels under construction.

So, I would expect that that 23 that we know about in the pipeline will be a bigger number perhaps next year, which could get us to the higher end of our range.

Most of these hotels,percentage terms, are clearly Hamptons and Hilton Garden Inn, although, there is still a lot of activity in terms of some Embassies being built.

John Q. is starting construction on another couple Embassies this year.

And we do have interest in some conversions, one of the hotels we've opened is going to be converted to Hilton and Myrtle Beach next to our Embassy at Myrtle Beach.

So, I think as our full circle -- yeah, we have Homewoods and opened three Doubletrees conversions this year.

And as our story gets out about market share growth of all of our brands, but particularly Doubletree, which we indicated in the press release was year to date, I think 91-1 to the whole system, but if you look at comparable hotels, we're over 100 year to date.

We've added hotels over the last year not in the comparable number.

As we tell that story more and people understand it more, I think we will have more opportunities for conversions.

So, the big challenge in forecasting, though, is our pipeline has shifted in terms of being more weighted toward things in design and less weighted toward things under construction over the last two years as financing has gotten tougher, but remember, every one of those brands or every one of those projects in the pipeline, people have paid us a hefty application fee thinking we're going build it, and our track record has been pretty good.

So, I'm pretty comfortable about our guidance next year, even though it is pretty3 preliminary.

That's helpful.

Thank you.

Thanks.

Thank you.

Your next question is from Mr. Keith Mills from UBS Warburg.

Go ahead, sir.

Good morning.

A few questions for you.

On the full year 2003 expectation, you indicate that you think the owned margins are going to be in the low 30% range, and it looks like for this year they will be around 30%.

Which would suggest you think you're going to have flat costs for next year.

Just trying to get my arms around that.

I know Steve and Mike asked some of the questions, but is there anything else going on that would suggest that you could keep your costs flat, especially considering what's going on in Chicago with the increased wages with the new union contract there?

It's ongoing cost controls, certainly.

With -- Bob, you want to --

I think, Keith, Chicago, number one, it's not a big number, you know, it's short for that hotel, when you think about $2.5 million for the hotels we own as an increase, of course, you would have given 2 or 3% increase anyway.

But we are still, you know, we are looking at our affiliations in terms of productivity.

Now, Steve mentioned technology is one area where we can drive a higher productivity, the scale we have in our company and our opportunities to further consolidate one example reservation office and one of our local areas, we want to consolidate, that's half a million dollars saving.

We're energy-conservation procurement of energy and using the revenue management systems and other systems, I think we will be able to bring in the margins.

And that will help counterbalance, you know, an impact on margins from what is continued pressure on rates.

Okay.

Then just a question for Tom on the conversions during the third quarter for the Homewood Suites and the Doubletrees, who did you convert from and how old were the properties on average?

Well, let me talk for the, you know, the full year that we've opened.

We've really converted five Homewoods this year.

Four of those actually came from the Hawthorne Suites brand, they were brand-new hotels that thought they could perform better as Homewoods, and we've converted three Doubletrees, one in Ashville that was a -- a very nice Ashville, North Carolina.

It was a very nice Quality Inn, probably better served as a Doubletree.

One was independent.

And the third Doubletree was an independent in San Diego.

The second was in Key West.

One in San Diego, one in Key West, one in Ashville, North Carolina, two independents and one from a choice organization.

Okay, and finally, Matt, could you comment on the insurance charge in the third quarter related to the tower in Hawaii.

Do you expect you will be reimbursed for that at some point in the future?

It is not really an insurance charge.

It's a charge we took for remediation effort there.

That was destroying the furniture and stripping out the carpets and so on.

And we are going to pursue third parties in that situation.

But I wouldn't want to comment on it here in the call.

Okay, thank you, appreciate it.

Thank you very much.

Your next question is from Zachary Cherry from Newburgh.

Go ahead, sir.

Morning, guys.

Good morning.

I had a quick quo the tax structure going forward.

I noticed the tax rate came down to 7.5% related to tax laws carried forward.

Can you talk a little bit about that.

You mean going forward?

Yeah.

I think next year, first, the fourth quarter we will go back to our normal effective tax rate which is about 38%.

Next year we expect the effective rate to be in the 38 to 39% range.

Those are basically down, then?

It depends on transactions.

If we generate or generate transactions that result in tax capital gains, then we will be able to use our -- some more of the carry-forward losses we have from the red lion transaction to offset the gains.

Thanks, guys.

Thank you.

Thank you.

Your next question is from Mr. Bill Crowe from Raymond James.

Good morning, guys.

Just a couple of quick questions.

First of all, Mark, you indicated you thought REVPAR would show a sequential improvement quarterly next year.

Is it fair to say you anticipate positive REVPAR for every quarter?

I -- you know, at this preliminary stage, we believe that would be right.

Okay.

And second of all, given kind of the -- the lag in the economic and corporate profit recoveries, is it fair to say any anticipated share repurchase program would be pushed ut to at least '04?

You know it depends what the EBITDA is and, you know, how our debt position is, but we really wouldn't be looking at that until we got to that 3.75 times debt to EBITDA.

And even then, we'd have to look at what the share price was and so on.

Great, nice job, guys.

Thanks.

Thanks, Bill.

Thank you very much.

Your next question is from Will Marks from JMP Securities.

Go ahead, sir.

Good morning.

A couple of quick questions.

On the new rooms, new hotels, do you have an idea of the net growth this year?

That one is hard because you really don't know when you might -- I don't think we're going to see a lot of terminations.

We have terminated very few hotels this year.

You noticed in the release today that we took out about 13 hotels that are independents that never became one of our brands, that were the Commune Royal hotels.

But beyond that, I doubt we will have removed more than 11 or 12 hotels for the entire year, other than the Harrison conference and --

We're looking for next year.

And next year is about the same.

We're in good shape in terms of license agreements that come to their end.

There are not many of those.

So the hotels that we move generally are removed for one of a couple of reasons.

They're in product quality default.

They're not prepared to fix it up or it is financial default if we're not getting paid properly.

Or if they're at the end of their license and management agreement and they choose to go elsewhere, we choose them to go elsewhere.

I don't expect a big change next year, if you look back this year, it was a lot less than the year before.

We worked hard to be sure that the Doubletree brand was right.

In the year before, we removed some Doubletrees.

We think this year it will be 12 to 13 hotels other than the exceptions we mentioned and next year will be a lot like this year and different.

What was the reason for the Communal Royal hotel coming to a close?

We had a strong, I think 15 hotels in Mexico, and one in the U.S., all of them are gone.

We had a pretty strong capital improvement program that they chose not to spend the kind of capital on that we had expected and they had indicated they would.

And if the hotels couldn't live up to the Hilton or Doubletree name, we would rather not have them.

They were part of the red system, they were limited fees coming to us, it's not a fee issue.

Okay, a couple of other quick questions, one, I think it was Matt that mentioned that you mentioned this debt to EBITDA target of 3.75, is that a year-end '03 target?

Is that what you said?

No, the question is when would be in the mode to repurchase our shares?

What we've been consistently saying for the last couple of years is until we got that ratio of debt to EBITDA to 3.75 or there abouts, we wouldn't be in a position to repurchase our shares.

We want to get to and have a solid and low investment grade rating.

There are a lot of factors that go into that.

That's one of the important touch points for us.

So...

Did you not mention a time you thought you'd be at that?

I think we will be there by year end next year.

Okay.

And one final question.

On the -- can you shed any light on the time share sales to date at some of the new projects besides what you mentioned in the release?

Yeah, we're doing really well at our -- our new venues in Las Vegas and in Orlando.

You know, we've had, as we mentioned in the release, we had 22% of our unit sales in the quarter were related to those new venues.

So, they're off to a very, very good start with very strong customer awareness and --

Why don't you explain how the accounting goes that you can't really get all of that?

Well, basically it's -- you know, we're on -- I think I described this back in the investor presentation, we're on the percentage of completion method for recognizing the revenues and expenses from those new venues.

So, we only got to pick up a small portion of revenue and EBITDA related to those sales.

In the quarter.

Okay.

Thank you very much.

Thank you.

And your next question is from Mr. Bill Moore of Hamilton Investment Management.

I thought I pulled myself out of the queue.

You guys got my questions.

Thanks.

Thank you.

Your next question is from Ashley Craig from Morgan Stanley.

Hi, I was wondering if can you clarify, are your revpar growth expectations for next year, is that rate, occupancy or a combination thereof?

It is about 50/50.

About equal occupancy and rate.

On the side of occupancy as opposed to rate at this stage.

Okay.

And then of the three, kind of I guess main business segments, group, business and leisure, which of those now are, if any, are used -- in which of those are you seeing any pricing improvement?

I've seen improvements, well, demand for a group and association business is still very good.

The leisure business, international business will pick up, hopefully by next year, there is a pent up demand.

People want to travel and go San Francisco, hopefully Hawaii or other places.

So, you know, it's a question of supply and demand.

We're watching this on a daily basis.

So, at this point you're not seeing higher rate in any of those segments.

No.

Okay, thank you.

Thank you.

And your next question is from Mr. Harry Curtis from JP Morgan.

Go ahead, sir.

Good morning.

Could you guys address whether or not you did sell any time share receivables in the quarter?

And then 2003, if interest rates go up using just a ballpark figure of 100 basis points, what would it do to the profitability on the time share receivables?

We didn't sell any time share receivables in this past quarter.

We sold 52, I think in the second quarter, and as I said earlier, we have a lot of interest in doing more of that.

We had not made a decision of whether we will or not.

And how does a change in interest rate affect the profitability of the company or of the time share group?

Of the time share receivable sales that you have reported so far in 2002.

How would that change?

Oh, it probably would increase the yield that the buyer --

No, as to the ones that we've sold, it wouldn't have any effect.

Right.

I'm sorry.

So, they have a fixed rate and we've got --

That deal is done, right.

So, that wouldn't impact us at all.

What is it, Harry?

What I'm after is if you have 100 basis point change or increase in interest rates, does that impact the profitability on time share receivables that you sell?

Well, you mean new ones?

Yes.

Probably not.

Probably not because this is a -- really a new and developing market and it's -- to me it's quite a surprise that it's not a very efficient market.

So, it's not one in which there's big discounted premium paid for the paper based on marking to market.

It is not like the mortgage market.

And, you know, I don't think that it would -- I think that the market so far generally buys at about par, you know, around par.

And bigger, much bigger fluctuations in interest rates than you're talking about.

Probably either pull people into the market or drive people out of the market.

But it's not like the mortgage market where it is just priced every single day based on interest rates.

It is a new and developing arena.

Does that help?

Yeah it does, thank you.

Thank you very much.

And your next question from Mr. David Anders from Merrill Lynch.

Go ahead, sir.

I'm all set, thank you.

Thank you.

Your next question is from Mr. Rod Petrick from Legg Mason.

Go ahead, sir.

Good morning.

What percentage of your reservations is coming through the internet now?

What's the breakdown of Hilton.com and the discounters?

Have you seen a change throughout the year?

Tom here, Rod.

First of all, the -- the internet is changing dramatically and we're seeing growth both in our sites and in third party sites.

In terms of reservations across all of our brands, between 7 and 8% of all reservations are coming through our dot-com sites, and another 2 to 3% of reservations are coming through third party sites.

Both of those are growing dramatically.

Obviously if you looked on a revenue basis, even less on a revenue basis is coming from third party sites.

And so it's -- it's a rapidly-growing part of our business and we're seeing the other side of that, which is the call volumes to the res centers are actually declining because people are shifting the channels they're booking through.

How does it play out in the next 12 to 18 months?

What kind of growth do you think you have there?

I think we're going to grow the internet business probably 50% a year every year.

The same for both components?

I think as the -- I think both of them will grow at least at that level.

And I think as the business and the economy get stronger, probably we'll be able to grow our dot-com sites maybe even stronger than the third party sites.

What happened kind of pressure do the third party sites put on right?

Obviously they're at a lower rate because some of them are the opaque sites like Priceline and hotwire, where really distressed inventory gets placed on them.

Again, if you look at a percent of reservations, it is 2 to 3%.

As a percent of revenue, it is even smaller.

They're a much lower price than either the Expedias or the HRNs or certainly lower priced than our own dot-com sites.

It is a question of how we manage our own inventory.

The lack of business travel or the decline in the business traveler, do you think any of that is kind of hidden over in the discounter numbers?

I -- you know, I think business travelers are looking in a lot of different places -- but not the discounters, looking at different places...

Okay.

Okay, thanks.

There are currently no further questions.

Ladies and gentlemen, if you wish to ask a question, key star 1 on your touch-tone phone.

Operator, there anything else?

Yes, one more question from Mr. Paul Coupe from CIBC.

Good morning.

You just answered my question.

The only thing I wanted to follow you that, what's the difference in your revenue contribution or I guess the rate or what's the -- the spread of discount between your direct versus indirect and internet side right now?

Is it running around 20, 30% or so or narrowed or how big is it?

Ask that again?

The difference between the rate on the internet direct, on hotelhilton.com direct and the third party sites right now?

Well, you know, each one of the major four third party sites are all different.

But our rates on our dot-com sites are on average probably 20% higher.

Okay.

Is there -- I mean objectively of a long-term is the goal to narrow that or something you think will continue over time?

Well, one of the reasons we went into travel was to lower the margins that third party merchant models get and leave more money in the hotels.

And our goal is to, yeah, lower it, but not by lowering our rates.

It's also a function of the opaque sites, you know, the rate is lower, but it is extra business, it is filling business and, you know, we can't control that for unit management.

Right.

Right.

Okay, that makes sense.

And then if you discuss the number of calls from whether it is the agencies or the online sites, they're siting lower room rates, higher last-minute contributions, October bookings that seem to be similar to that of July and August, which was very good in general.

Association just trying to give me -- what are other signs other than group bookings being up 15% that allows you think that REVPAR could be sequentially better in the first quarter and positive?

You know, anything else you can tell me or is this really just a sense that we have hit bottom here?

Let me -- you know, Dieter has spoken to the owned or managed hotels, but remember the other 1700 hotel that's we've got, not all of them, most of them are not in the big markets and never been hurt as bad as the big markets were, either because of the recession or because of 9-11.

And they are drive-to markets, the occupancies have been strong.

We've taken market share across all of our brands and think along those hotels, we're looking at the same thing, but not looking at necessarily the stepped up growth here.

I think it will be more consistent throughout the year.

Okay.

Great, thanks a lot.

Thanks, Paul.

Thank you.

We have a further question from Ping Ying Lang from Invesco.

Yes, I just wondered in your press release, you mentioned that in your owned hotels there are -- you list the leading markets in terms of REVPAR growth.

I wondered, which markets are the weaker markets?

And the bottom?

In terms of REVPAR.

We mentioned that in the press release, too.

Really in terms of the cities that are important to us, where we own hotels.

It really continues to be the San Francisco and San Jose market and the Phoenix market is fairly soft at this point.

Yeah, I was wondering if you have any, I mean numbers?

We don't break out hotels or markets with specific REVPAR.

Okay.

So, going forward, what do you see as being the stronger markets for the next three to six months in terms of REVPAR?

Clearly in San Francisco, where we're improving because we're -- the bay area in general.

We still believe that all our markets we're in right now will incrementally improve.

So --

So, outlook is pretty similar across-the-board?

Yeah.

Okay.

Thanks.

Thank you.

We have another question from Mr. Will Marks from J&P securities.

Yes, quickly, can you repeat, I think you gave two numbers, one on the tentative bookings for next year and the other on was it corporate?

Competitive and definitive.

We talked about corporate negotiated rate and the group market.

So, the corporate negotiated rate on market share hasn't increased substantially and the number of room nights we booked this year is up closer to 15%.

And for the group section is going into next year the definite booking phase is slightly down, but the tentatives are up substantially 15%.

We believe we can,the next couple of months, be able to convert a big chunk of that into definite bookings.

Tentative is up 15%?

That's right.

And then just, the number you said, the corporate negotiated rate, up 15% for next year's bookings?

For this year, for 2002.

For this year?

Uh-huh.

And what about the rate for next year?

Well, I think the rate will be sensitive, you know, and it's competitive, so, we're negotiating right now so I couldn't tell you right now.

Great.

Thank you.

Thank you.

Thank you very much.

We have another question from Mr. Bill Crowe from Raymond James.

Real quick follow-up to the last question.

On the definitive group bookings for next year, how does the first half stack up versus the second half?

Is this just a shortening of the window or is the first half down, as well.

Actually, the first half is looking pretty good.

Is it up?

I don't have that.

It's slightly up, I think.

But it's based upon our booking pace of what we had this year.

It is slightly up.

Bill, we're not trying to be coy about it, but, you know, when we did say that the numbers and guidance we gave for next year are preliminary, that's really what we meant.

So, I think, you know, very to stick to that.

Yep.

Thank you.

Okay?

I think that probably just about wraps it up, so, you know, any follow-up questions, you know, please call my office and we will be talking to you later on.

Thank you.

Thank you, ladies and gentlemen.

That now concludes your conference call for today.

Thank you very much for your participation.