希爾頓酒店 (HLT) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Hilton Hotels fourth quarter Earnings Conference Call. My name is Sarah and I will be your coordinator for today's event. Throughout the call you will be on listen-only with an opportunity to ask questions at the end. I would also like to inform everybody that this conference is being recorded. If you require assistance at any time during today's call, key star 0 on a touch-tone phone and a coordinator will be happy to assist you.

Now I'd like to hand the presentation over to Mr. Mark Grossman, Senior Vice President of corporate affairs. You may now begin, sir. Thank you.

Thank you, Sarah.

Before we get started, you might -- might want to check your phone connections. You were coming in cracky and staticky. You might want to check that.

Thank you.

Okay. We'll get started this morning or this afternoon if you're on the east coast. Thanks for joining us for our fourth quarter and year-end earnings call. I'm joined here in Beverly Hills as usual by some of our senior management and others calling in from off-site locations.

Before we get started, just a shout-out to our favorite analyst, Bill Crowe at Raymond James. So, congratulations, Bill. As usual, you know, we will have a -- [ INDISCERNIBLE ] -- on the outlook and spend most of the time on Q&A and see what's on your mind.

First, for a little bit of house keeping, the press release that we put out this morning contains forward-looking statements within the meaning of federal securities laws. And the statements concerning business strategies and our intended results and similar statements considering anticipated future events and expectation that's are not historical facts. The forward-looking statements in the press release are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed or implied by the statements herein. I'd also tell you that the call today will be available until on playback until January 31 -- [ INDISCERNIBLE ] -- that playback number is 888-286-8010 with the code 275972. This call is also available on our website, you can access that through www.Hiltonworldwide.com. Go to Investor Relations and then click on the conference call link.

Just one more thing, the press release today, something new in the section. We've introduced a section of operating income and that's in accordance with a new SEC regulation that states that the non-GAAP measures, like EBITDA, you have to have the corresponding GAAP measure such as operating income and that has to be mentioned just as prominently as a measure. So that's why we have operating income in there. This hasn't taken official effect, but we're getting a head start on it and expect that there will be more requirements put out by the SEC in the coming months. So, that's just our explanation.

So, let's get started as we normally do. We have some comments from our CEO. Let me turn it over to Stephen Bollenbach.

Thank you. [ INDISCERNIBLE ] I know everyone is anxious to hear thoughts on the current year. I will get to that in a minute.

First, a little bit on the first quarter. 2002 was a rough year for the industry. A REVPAR gains at our own hotels were up significantly, somewhat driven by 9-11. We brought in very solid margins. And the combination of these two factors helped us deliver good earnings for the fourth quarter. [ INDISCERNIBLE ] -- came in right on our expectations.

We've completed a few important transactions, selling time share receivables during our second deal with CNL and a very successful bond issue. And during the course of the year, we reduced our debt by over $450 million.

Hold on, we need to stop. We have a problem, it seems. Operator, can you hear me?

Yes, I can.

Okay, our audience cannot.

Okay, I will dial you back in again.

Okay, can you -- operator, can you call us back?

I certainly will.

Thank you.

Thank you. Ladies and gentlemen, please stand by. Thank you.

Ladies and gentlemen, thank you for standing by. And welcome to Hilton Hotels fourth quarter Earnings Conference Call. My name is Sarah and I will be your coordinator for today's event. Throughout the call, you will be on listen-only with an opportunity to ask questions at the end. I would also like to inform everybody that this conference is being recorded. If you require assistance at any time during today's call, please key star 0 on a touch-tone phone and a coordinator will be happy to assist you.

Now I'd like to hand the presentation over to Mr. Mark Grossman, Senior Vice President of corporate affairs. You may now begin, sir, thank you.

Thank you, sorry about that technical glitch. I understand there were some problems and no one could hear us. So, we will start again.

And just to make sure we get the legal requirements out of the way, let me tell you that the press release that we issued this morning contains forward-looking statements within the meaning of federal securities law, including statements concerning business strategies and their intended results and similar statements concerning anticipated future events and expectations that are not historical facts. The forward-looking statements in this press release are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed in or implied by the statements herein. Just also, to make sure you have have the playback information, the call this morning will be available until January 31 at 8:00 p.m. Eastern Time. The number is 888-286-8010. The access code is 275972. The call this morning is also available on our website, www.Hiltonworldwide.com. Go to Investor Relations and then go to the conference call link.

So, with that we'll try this again and turn it over to Stephen Bollenbach.

Thank you.

Since we're almost a month into 2003, I know everyone is anxious to hear our thoughts on the current year and we'll get to that in just a minute. First I'd like to take a little time to talk about the fourth quarter. 2002 was a tough year, but we ended it on a good note with a successful fourth quarter. We brought in very solid margins. The combination of margins and increased REVPAR helped us deliver good earnings for our shareholders in the fourth quarter. All of our brands continue to take market share. 2002 unit growth came in right on our expectations. We completed a few important transactions, selling time share receivables, doing our second deal with CNL and a very successful bond issue. And during the course of the year, we reduced our debt by over $450 million.

It is true that the industry had easy comparisons in the fourth quarter and this is part of the story. But this shouldn't detract from what was a very strong operating story in some of our most important markets. New York is the best example. Our owned hotels in New York ran at over 90% occupancy in the quarter and at very strong room rates. We also saw really good results in Hawaii and Chicago. Now, on the other side, San Francisco continues to struggle with weak demand and also some additional supply. We are confident in the fourth quarter and for all of 2002 and did it in the face of a difficult environment. That continues to speak to the benefits of having a story and a strategy that are straight-forward and easily understood by our investors. We are executing well on all of our stated strategies and running our business effectively and efficiently.

As we look at 2003, I have to report to you that this is shaping up to be another difficult year for our industry. The external factors that impact this business in the year 2002 will do so again in the year 2003. Largely, these are factors beyond our control. The U.S. economy, which is slowly improving is still in a very fragile state and the impact that -- and that impacts travel across-the-board but especially in the very important individual business travel segment and effects our ability to raise room rates. Corporations are being very careful with their travel budgets. Also overhanging the industry is the prospect of war. If, in fact, a war occurs, it's unclear just what that impact will be. But the uncertainty is weighing heavily on the travel industry. The significantly-increased cost, particularly in the areas of healthcare and insurance, will be factors again in 2003, along with higher property taxes. When you combine this with the continued pressure on room rates, our ability to maintain our margins will be adversely impacted. In this environment, then, we have to focus on the things that we can control.

The core strategies that we've talked to you about so often over the last few years will be the same in 2003. We will maximize REVPAR in our own hotels to the extent possible. Most likely through occupancy gains our own hotels will continue benefiting from the full service hotel supply. We will keep your properties in good shape and we will continue focusing on managing cost to bring in the strong margins. We've been doing very well in the regard, but there is limits to which we can go without impacting adversely the customer's experience. We don't intend to ad adversely impact our customer's experience. By keeping our customers happy, our brand should continue achieving rate and occupancy premiums and result in the addition of new units to our system. We're investing strategically and prudently our time share business and debt reduction will continue to be a priority we're also investing in new technology that will bring customer service and our internal operating efficiencies to a new and even better level.

On our last earnings call, I talked to you about our development about the system integrated technology platform linking almost all of our 2,100 hotels. We're on track to have it fully in place by the end of the year and pleased with the development. I'm convinced that the development and full implementation of this technology is something that will further separate the haves and have nots in our industry. None of our competitors will have the kind of integrated systems that I just described. So, our strategy is pretty straight forward. Our focus is continuing to execute on the strategy it in a year that's going to present real challenges. But I'm confident that our strategy is right and we will be able to manage our company well within the things our control and have put in place the framework to help us meet any challenges. But, when you put it all together, it is our feeling that a cautious outlook for 2003 is warranted.

So, I will turn it back over to Mark to review that outlook.

Thank you, Steve.

My guess iso couldn't hear me earlier on the new piece of information we added to our press release this morning. We talked about operating income. That's to comply with the new requirement being put out by the SEC, saying whenever you discuss a non-GAAP measure, like EBITDA, you have to have a corresponding GAAP measurement operating income and have it in equal prominence to the mention of EBITDA. So, that's why that's in there.

Now, that requirement and regulation hasn't taken official effect, but we are getting a head start on it by putting it in this press release and we expect that there will be more regulations coming from the SEC in the next few months. That's why that's in there. Since we talked to you a few months ago, we have had the opportunity get more feedback from our hotels, giving us a better view into 2003 than we had before. So, therefore we've paired back the guidance we provided in October and as Steve said, we've taken a very cautious view of 2003. So, starting with our guidance of the first quarter of '03, we're looking at total company revenue in the $930 million range with total company EBITDA in the range of 200 to $210 million.

In our owned hotels, we're estimating first quarter EBITDA of approximately 120 to $130 million with margins in the mid-20% range. We anticipate comparable-owned hotel REVPAR to be approximately flat with last year's first quarter. In terms of diluted EPS for the quarter, our estimate is in the 5 cent range. Then turning to our current guidance for full year 2003, we expect total company revenue in the $4 billion range with total company EBITDA in the range of $980 million to $1 billion. Owned hotel EBITDA is expected to be 615 to $635 million with margins in the high 20% range. We expect REVPAR at our comparable-owned hotels to be about flat with 2002. Our current guidance for 2003 diluted EPS is in the mid to high 40-cent range.

Now, you know, I know some of you have already gotten First Call notes this morning and, you know, that is a pretty significant Dorp ward revision from our previous guidance, so, let me take just a minute and talk about the things that have occurred since October that we expect will impact earnings this year. Certainly the biggest factor is that we are now estimating flat REVPAR for the year and every point of REVPAR equals roughly $17 million in Nebraska our own hotels and about $3 million in our fees. A point of REVPAR is about 3 cents a share. So, reducing rep par -- REVPAR, of course, increases margins, especially with pressure on ranks. On top of this, you will recall that late in 2002 we sold some time share notes and we mixed more of our debt.

Now, these are very good moves for our company and consistent our strategy but they also have an impact on earnings. So, that's generally how we get to the range we've provided this morning.

Now with all of that said, we will turn it over to your questions.

Thank you very much. Ladies and gentlemen, your question and answer session will now begin. If you would like to ask a question, please key star 1 on a touch-tone phone. If your question has been answered or you wish to withdraw your question, please key star 2. All questions will be taken in the order in which they are received. And our first question today is from Mr. Steve Kent of Goldman Sachs. Please go ahead, sir.

Good morning. I just had a couple of questions about your conference bookings and conference activity. Certainly that's been one of the great advantages of the Hilton story the past couple of quarters. Do you have an idea of how much your bookings look like for '03, how much is sort of already on the books? And the past you've talked about attrition being an issue, you know, how many people show up at conferences and conventions. Do you have an idea of how that's been running? And what your expectations are for '03? I don't know if Dieter is there, but he's commented it before.

Steve, I don't, and in 2002, we've actually able to modestly increase our consumed with a slight positive REVPAR. That means, you know, we gave up a little bit on the weight and the same trend I see in 2003, our definite bookings are lowered down maybe 1 to 2 percentage points. But we have a great base of tentatives, over 14% for conversions and we're aiming at, you know, the same kind of objective like 2002. So -- and the trend in terms of the booking pattern, I think, things are getting shorter and shorter. Some delayed decisions in the first quarter or some deferral and there's an increase of smaller and regional meetings. And the attritions, I think we have dealt with it over the last two years, we understand the needs of the association executives and so we have a pretty good hold on that in terms of adjusting the banquet space needed.

And Dieter, how is the pricing holding up on that conference convention? And we might at well talk even about corporate rates?

Yes, it is very competitive, there is no doubt about it. But I think one of the advantages we have in our particular larger hotels, we have some space and we can book the meetings and so it's slightly down on the 80, but the other is up. So, think that's a good combination because that's important for us, too. When you think in terms of other income and food and beverage last year, we actually increased our food and beverage revenue and our food and beverage profit was up about $12 million over previous year. We're talking about carpet negotiated accounts, that's really a success story for the national team. In 2002 they have increased the total revenue by about 12% for all of our brands and that's really great. Now, giving up a little bit on the EDR, but nevertheless, we came in with a slightly positive REVPAR. We believe we will maintain our market share in 2003. It's a competitive market. No doubt about it. Now, the other section, IBT, the independent business travelers, trends in business, that's where the industry has the problem. We have to wait until corporate America is traveling again heavier and we're seeing further softness in that partially due to the flat REVPAR forecast.

Okay, thank you.

Thanks, Steve.

Thank you very much. Your next question is from Mike Wheatrock with Salomon Smith Barney. Go ahead, sir.

Hey, guys. Just a question on Iraq, I guess. Are you starting to see any weakness looking out to the March/April time period? And can you help us think terms of, you know, what the flat REVPAR expectation has baked into it in terms of Iraq? Is it sort of a -- a -- a pretty short disruption, you know, and at what point, you know, would that sort of disruption get to the point where you'd feel like, you know,and of itself you'd have to reduce the expectations, beyond what you've already got baked in?

Yeah, in terms of Iraq, our view is that there's going to be some action there, but we believe that it will be short and contained. And so we've -- we've baked in something that would be consistent that. Not huge numbers, Mike, but we have done that. And I think that we all just have to wait and see what happens there. You know, one thing that makes it a little easier on us than on some other hotel companies is within this company we are not dependent on the -- as much -- on the international travel as some of the countries with big international presence. And I was recently in Europe and I can tell you that the -- the fear and -- and the reduction in travel in Europe is very dramatic. While it's not dramatic here. So, you know, we certainly are putting it into our numbers, but it is kind of more in a sense of the desert storm of 11 years ago kind of look at what the impact could be because I don't know, you know, what else -- how else you could handle that. We could make up scenarios that would be, you know, just wild speculation. So, anyhow, that's what we've done.

Dieter, are you seeing anything -- seeing the business looking like it's starting to soften up in March and April or you don't feel anything yet?

At the first quarter, we're seeing some deferral on meeting saying let's see what's happening, you know, in Iraq and -- and maybe do it second and third quarter, but our -- our definite group of pace of solid. And so that's really a positive story.

Okay. Thanks.

Thank you. And our next question is from Jay Cogan from Banc of America Securities.

Hi, good morning, everybody.

Hi, Jay.

A couple of quick questions for you. Mark, when you outlined your sensitivities in terms of REVPAR changes and what it means to earnings, it sounds to me like if you assume maybe a 200 basis point change or so, maybe a little more with REVPAR units for the year, therefore the cost side of the equation, you're not really looking for absolute dollars in terms of healthcare costs, insurance costs, wage costs, to be higher than it was before. It sounds like it's primarily rate. Can you confirm that?

It's primarily the decrease -- it's primarily taken the REVPAR from our original guidance was, you know, kind in in the low single digit down to flat and, you know, that's got the pressure on rates, which impacts margins, so that's most of it.

And I just wondered if maybe you or Steve or somebody could outline for us, when we think about, you know, a quick Iraq scenario as you guys are planning, I guess, to some degree in your guidance and maybe a more prolonged stay there based on some of the issues the administration is having with our key allies and then also maybe the long shot possibility of, you know, bringing everybody home quickly and not going into Iraq. I was wondering if you could talk us through in the better or worst case scenarios for the business as we think about 2003?

I think, Jay, it is a universal acceptance that if you just focus on the business, not us as individuals, but on the business, a short, defined, completed military action and after that bringing troops home would be best for the business. It's probably the scenario that's most likely in everybody's mind. So, beyond that it's just really hard to speculate because, you know, you can make up a scenario and I can make up one worse and it doesn't get you anywhere. So, you know, what we feel is the likely event and it's -- it's assumed in our numbers, is a short, defined action and then bring troops home.

You know, Jay, and I think, really, you know, that's why we were really talking about this last year and then even this morning, is focusing on the things that we can control. And, you know, look, there are factors outside of our control and, you know, you can sit there and debate them and come up with almost any scenario you want, but I'm not sure that's terribly productive. I think we have to focus on the things Dieter talked about in terms of booking our group business and turning tentatives into definites and continuing to watch our costs and, you know, the things that we have been focusing on in an uncertain environment.

But in addition, should it happened, we have the experience, we have the fan already, we connect, certainly.

Okay. Thanks.

Thanks, Jay.

Thank you. Our next question is from Mr. Keith Mills from UBS Warburg. Please go ahead, sir.

Good day, how are you guys?

Hi, Keith.

Two questions for you. First, when you reference the comparable REVPAR expectations for the first quarter of this year as well as full year '03, can you tell us how you dealt with the Hilton Hawaiian village in terms of inventory at the property? Are you including or excluding the tower?

Let's get the name of it right. We took the Kileah tower ruins out of the comp set and as a rule of thumb, follow the guidelines that Smith travel sets, that says that if a number of rooms are going to be out of service continuously for six months or longer that they come out of the comp set. So, that's how we dealt with that.

Do you have some sense in terms of how much that impacted your expectation? Would that, for example, if you kept it in, would your REVPAR expectation for '03, on a full-year basis, been maybe down 2 or 3%?

No.

Not that much?

When you think about it, first of all, you know, we don't break out individual hotel results here, you're talking about an impact on an entire system, an entire company and it's insignificant.

Okay. Second question is I hope you could give us an update on Hilton's e-commerce strategy as it pertains or relates to the independent Internet sites. See know some of your agreements are expiring as you move into the second quarter, particularly with hotels. I hoped you could share your new strategy going forward in terms of how you're going to deal with these types of sites?

Well, this is Steve. The -- you know, this is a new, fascinating area for us. And the way we have been dealing with the third party Internet sites is that we use them and hopefully use them wisely and to our benefit. Now, so far and I think this is true of all the hotel companies, the major impact of the Internet channel has been that it's increased significantly the volume across our own Internet site. And we get much larger percentage of business that comes across the Internet comes through the Hilton sites. The -- it's still a really small part of our business, the amount that comes to us from the Internet, but we realize that it's going to grow in terms of the amount there and we kind of deal with it on a short-term basis, trying to understand this evolving future. So, it's not so much a case of entering into contracts and providing inventory because we do that in -- in small amounts and -- and without any long-term risk if we misjudge where the Internet's going. But we're -- we're very active. I think we've got very good sites of our own and by and large, this is helpful to us, particularly in these weak times, to give us an opportunity to sell inventory that would otherwise go unsolved.

Steve, will Hilton do anything this year differently than last year as it relates to the bigger hotels, the city-type thing, instead of relying on the independent sites?

Yeah, we will, but it really is just a subset of the fact because our own sites are good and we're going to make them better, but they're good. And in the big hotels, we still sell four or five times as ach cross our own sites as we would over any of the third party sites.

Steve, this is Tom. If I could just jump in for a second, Keith. About 10% of our room nights comes across the Internet. And about 7.5% or 75% of that comes through our own propriety brand sites and that's been increasing tremendously over the last year. So, that means 25% comes from the third party sites or 2.5% of our room nights, but it's important to know that's only about a percent and a half of our revenue because obviously the rates on those sites are quite different than we get on our site. So, it's -- it's Steve said -- it's -- it's not a huge number, we can use it to sell when we need incremental business, out obviously our first priority is to continue to make our sites as effective as they can be and make sure that people, when they're buying a retail purchase, can find as good a deal on our side as they can on somebody else's. And -- and -- the growth in our sites has been from a much bigger base quite dramatic in terms of -- of year-over-year growth, not as robbed as a percentage growth as the first party sites, but they come from a much, much smaller base than we're at.

And, the key really is to leveraging all of our distribution channels through proper and professional yield management. And that we have in place who know exactly when and not to play.

I was under the impression that -- that more of the rooms sold at the larger Hilton hotels in some of the urban markets were coming from the other sites, for instance, the Hilton.com site. If you tried to get more volume to the Hilton.com site, you could increase your sales there.

No, the Hilton.com site is much larger. The other third parties have spread probably 50% by the Priceline.coms and the others.

Okay. Thank you.

Thank you. And our next question comes from Mr. David Anders from Merrill Lynch. Please go ahead, sir.

Great, thank you. Two quick clarifications. First, were there any gains associated with the time share of note sales in the quarter it that we should an wear of that were significant?

Yes, there was a gain in the -- in the quarter, but there was somewhat mitigated by some -- some contracts that we had to -- that were terminated and we had to writedown the book value of the contracts. So, you can see it in the release. There was a net of $1.6 million gain in the quarter.

Okay.

I mean at those two.

Okay. And also for clarification, on your forward guidance for Q1 and for the full year, those EBITDA numbers, are those the numbers -- those are the kind of GAAP EBITDA, right? You're grossing them up for controlled properties as well?

Those are the same EBITDA numbers -- same guidance we've been giving on EBITDA.

Okay. Thanks.

Uh-huh.

Thank you very much. And your next question is from Joyce Minor from Lehman Brothers. Please go ahead.

Hey, guys, can you speak to your EBITDA guidance. It looks like first quarter you're looking for total EBITDA to be down 10% and on a full year, more flattish. What's kind of the driver of the differential there?

I think -- Joyce, it's Bob. Definitely have some higher costs in the first quarter related to insurance and, you know, but we're going to see that all year but for the first quarter, it is more dramatic because of the way our policy periods work.

Uh-huh.

So, our policy periods typically renew for comp and GL, in March, first part of March, and on property in June. Of course you see a more dramatic impact of insurance costs in the first quarter than you would in the latter half of the year. And the second reason is our time share business. We had an extraordinary first quarter in 2002 critically in Hawaii. So, you saw a drop-off there, you know, as we begin to sell more of units that we are not able to fully recognize the revenue in the EBITDA from and also we have the impact of the time service receivable sales that are more dramatic in the first quarter, I think later on in the year, because we sell units throughout the year and you built up your income. Your financing income from selling those units.

Okay. That makes sense. Can you just clarify maybe what you're looking for in the way of time share EBITDA growth, maybe full year '03 or specific for first quarter? That would be helpful, too.

Yeah, our time share business, again, because of those factors, you know, because of the fact that, you know, we sold receivables, because of the fact that you're kind of shifting your mix of business more towards the -- the new units, the new developments that we have in Orlando and Las Vegas and not getting all of that recognized income, our times of business were probably be down year-over-year about 10% EBITDA basis.

Okay.

Even more dramatic in the -- in the first quarter, again, because of the fact that Hawaii was so strong.

Okay. Okay. And then can you just explain a little bit more about you guys had mentioned that time share costs on that Hawaii project have sort of been ratcheting up as you've revisited them. Is that on a product sales side or on the sales and marketing cost? Can you describe that a little better?

The cost of products ratcheted up a little bit. We said it last quarter in the third quarter, we said it again this quarter. That's strictly because of the improvement that we're needing to make in the lagoon tower related to the mulch situation. So, we're going spend about $7 million there and we had to take half of that through cost of product this year because we are roughly 50% sold-out on that project and then the other 50%, I'm sorry, the other -- yeah, the other part of that -- half of that $7 million will be expensed as we sell the units over time.

Okay, very helpful. Thank you.

Sure.

And your next question is from Mr. Harry Curtis from JP Morgan. Please go ahead, sir.

Hi, just following up on Mike and Joyce's comments or questions, historically you typically see the fourth quarter and first quarter operating profits about the same and it sounds like it's a combination of two issues, deferral of meetings in the first quarter as well as time share. Is there anything else going on that's somewhat softer sequentially, are you seeing any softness in your leisure business, for example?

Yeah, I think the first 10 days, the trends of this were rather soft in the leisure business, but then, you know, the report I got actually from the field yesterday, it's picking up in New York again, Chicago. So, there's nothing unusual, no. Except it's softer.

Are you seeing any of that softness extending into February/March.

No, not at this point. No.

Okay, thank you.

Thank you, next is Joe Grive from Fulcrum Global Partners.

Good morning, guys.

Good morning, Joe.

What's REVPAR in the first 26 days of January? [ Laughter ] All the good questions have been taken! [ Laughter ]

That's shameful! Joe!

We gave you the first quarter guidance, give us a break! You know we don't talk about REVPAR any given day, week, month, we let the guidance stand on its own.

Okay. Understood. One of the things I'm surprised with, your development pipeline stays around the 50,000 room threshold. What's driving that? Are you seeing the business weaken a little bit? Obviously your brand is performing well to maintain that? Can you talk about that? And when do you see that decelerate, are you doing anything equity wise or anything like that?

Joe, this is Tom. We've, you know, I guess about two years ago we had a pipeline that was sort of like 390 or 395, so, it has fallen a little bit. If you look at our pipeline and compare it to lodging, you will still see that we've got a huge share of the pipeline, much, much greater than our share of overall industry supply. We work pretty hard to add hotels to that pipeline and we've, in fact, we've approved more deals in 2002 than hotels we opened. But at the same time, we look at that pipeline every month and -- and hotels that haven't made it through the planning process, that haven't been able to get financing, we've removed from the pipeline. So, I think it's a good number. It's real deals that are still there, not just deals that have been hanging around in there for years. So, if they don't measure up to the milestones that we've set and they've agreed to, they can get removed. 50,000 rooms I think is a pretty aggressive number to look at the industry and, you know, we've sort of -- we've indicated we'll open 100 to 115 hotels in this year, '03. And I think if you look at the pipeline, you'd think that's a realistic number, probably.

And, Joe, we have not decided to rachet up our loan program or equity investment program or guarantees or anything like that.

And, in fact, we've decided not to be in that -- be in this business by supporting equity of licensees. That's not our strategy.

Great, thank you.

Thank you. And our next question is from Bill Crowe from Raymond James associates. Please go ahead.

Hey, good morning, guys.

Bill, you feeling pretty good?

It was a great night last night!

Did I see you on the pictures in Oakland? Breaking windows and stuff? [ Laughter ]

He went to work this morning, good boy!

That's right! It was fun. A couple of questions here, you guys had v had pretty impressive market share gains across your brand portfolio. As you look across that, who's losing?

You know, we don't get that information from Smith Travel, they're very, very careful about not giving out that kind of information. We speculate all the time, but we really don't know.

You don't want to speculate here?

No.

I think you can guess what some of our competitors are losing! [ Laughter ]

Write that down!

All right.

Just really from a general standpoint, you know, what we've always talked about is being able to offer the kinds of technology and the marketing programs and frequent stayed programs. Especially in this kind of environment. People that can do that and have the resources to bring those kinds of programs will be the winners and those that can't aren't going to do as well. But in terms of calling out who might be losing, we just don't get that.

All right. Can you give us an update on the time share sales in New York and whether you've got any additional planned urban time share projects ready to go?

Probably too early to tell in New York. You know, sales really just started there. In fact we're just now putting the finishing touches on the sales center. The units are completed, you know, are going through, they love them, they look great. Getting good interest. But too soon to report on sales. And in terms of other plans, you know, we're going to have to see how things go in New York before we make any determinations on where else we might put this concept. Certainly or opportunities, but we will see how it goes in New York.

And I guess one final question, on the mold issue in Hawaii, any developments with the insurance? And potentially recouping some of that?

Nothing on that at this stage, Bill.

Okay, thanks, guys.

Thank you. And our next question comes from Mr. Will Marks of JMP securities. Please go ahead.

Good morning. First question, I just have a couple, actually. Tax rate on '03, can you give any guidance?

Yeah, we're being in the 38% range for the full year.

Okay. And I guess I was curious -- in the past you've given some free cash flow guidance. Can you -- can you give us any at this time?

Yeah, roughly speaking we'd be in the $350 million free cash flow number and that would be taking cash interest, cash taxes, maintenance Cap Ex, our technology spend and some other, smaller changes in working capital. And then, when you layer in through that some of the Cap Ex discretionary items that we've laid out for you in the press release, the time share Cap Ex, some special projects, finishing up on the mold remediation, we probably get to a net cash flow number of around $200 million for the year and our plan would continue to be to use that money if that's what the number winds up being to reduce our debt balance.

Okay. And on -- on some of the items, cash interest and cash taxes, I guess, any -- is there much of a difference between -- I guess cash interest in particular, between this year and last year? Besides the fact that you have a lower debt level?

No, there won't be much difference there. Because as you probably know, we've fixed most of our debt and then the rest of it is just an assumption on what LIBORD will be for the year. But the cash tax number will be a lot different. The two used tax credits to significantly lower our cash taxes paid.

Right. Okay. And then just lastly on the maintenance Cap Ex, no reason to assume any substantial change as a percentage of revenues?

No. No.

Okay. All right. Thank you very much.

Thanks.

Thank you. Our next question is from Mr. Rod Petrick from Legg Mason. Go ahead, sir.

Hi, guys. With regard to the CNL joint venture are there any operating performance guarantees?

No.

What kind of priority return do they get?

About 10.5%.

And then what do the splits look like after that?

Split according to the equity ownership. The way it works is we -- we bought two hotels with them. The Doubletree in Lincoln center Dallas and the Sheridan in Tucson, the one there. We've converted the Sheridan in Tuson. It's really a great property. And we're in the process of converting the Doubletree into a Hilton. And the first priority is to pay interest on the loan and, you know, I think one -- this has been a difficult forecasting exercise for us, but I can tell you that one bright spot on the horizon is that the loan market seems to be quite aggressive if you've got the right kind of product, the right sponsorship, but we did a -- on that deal, we did a five-year loan, under 6%, no amortization, no guarantees, nonrecourse loans and on Phase 2 and 3, which we kind of eluded to in the press release, we've also circumstance faeld financing on that part of the deal and that's seven years at sub-6% rate and all with one insurance company and that's a big change because the insurance companies traditionally only wanted to do hotel properties in the 30 to $40 million range and anytime it got bigger than that, they brought in other partners. It made for a very difficult negotiation. But, no, these guys are so focused on getting yields, they're comfortable with this hotel product, it's relatively low loan to value and so they like this product and so, you know, I think that's really a very interesting development for us in the industry. But, in any event, first we pay the interest on the loan. There is no amortization. And then CNL gets a priority return on their money which is about 10.5% and then we get 10.5% on our money and then we split according to the equity ownership.

Would you guys...

And it's noncumulative, just year by year.

You have about 20% interest?

You know, I've been artfully dodging that question. I don't want to answer that one way or the other.

Okay. Thanks.

Thanks, Rod.

Thank you. Our next question is from John Arabia from green street advisors. Please go ahead.

Just a quick follow-up on Kaleah. What's the updated estimate for the total cost of the mold problem? And also the $35 million you outlined in capital expenses, what part of that would be expensed versus capitalized?

It's all capitalized.

It's all capitalized. Okay. And what's the total cost?

Well, the $35 million is our best and latest estimate.

So, that's still good and you've already expensed what, 20?

Yeah, remember we took a $10 million charge in the second quarter last year and another $10 million charge in the third quarter related to the mold situation.

It was for investigative and remediation costs, not related to the improvements in the physical plant.

Okay.

Which we would capitalize.

Okay. Great. Thanks.

Thank you. And our next question is from Gates Capital Management. Please go ahead.

Yes, what is your Cap Ex end up being for this year?

$290 million with around $245 million in -- in hotel-related Cap Ex and another about $45 million in time share Cap Ex, which, again, flows through as we say on the call, flows through our inventory account.

Thank you. And also your total proceeds from divestiture and -- and sale of receivables -- your --

$125 million--.

For prime share.

For prime share receivables.

Then we sold the Harrison dyt for $50 million roughly.

Yeah.

Thank you very much.

Okay.

Thank you. Our next question is from Todd Scott from Morgan Stanley. Go ahead, sir.

Morning. A quick question, the guidance on the owned hotels steams imply 3.35 to 4% cost inflation from '03 to '02. Does that sound right?

Yeah.

Okay. Thanks.

Thanks.

Thank you. Our next question is from Todd from Cliffwood partners. Please go ahead.

Hello?

Hello, you have a question today, sir?

Our next question is from Allister McCinnis from ABN Amro.

Just a quick question on your corporate rate negotiations in the fourth quarter. Do you have an indication of how they progressed? Do they hold up or an increase on a right basis?

Actually, you know, as I've said, we've got -- in 2002 we did a good job of increasing our total revenue over 2001. And that's partially due because we have the distribution, we have the powerful brands and a great sales team. Looking -- going into 2003, I think we will maintain our market share. It's competitive, there's pressure on rates, no doubt about it. But I think, you know, it's probably going to be flat by the end of the year, compared to last year in terms of REVPAR.

Thanks very much.

Thank you. Next is James Irwin from AIC, please go ahead.

Hey, guys. A couple of quick ones. Post-911 you did a great job on taking costs out. Great productivity in the first quarters of 2002. Based on Steve's comments it sounds like the healthcare and dmurns is just too big a nugget to overcome. Can you give a little bit of color on kind of what that cost increase is? '02 versus '01 and then what the progression is in '03. And I wonder if that vurns cost specifically is kind of a '03 event and then flattens out.

Yeah, basically in terms of overall for insurance both in terms of benefit costs and across all major lines of coverages as well as property taxes, you know, we're looking at about a $30 million net increase year-over-year.

And what would the -- your expectations -- I know the healthcare, I assume, is just an ongoing problem you have to deal with. What about the insurance costs; that a one-time steppup?

Yeah, that's in the number.

And in '04, does the insurance Delta, if you will, kind of mitigate?

We hope so!

But the healthcare is a fact of life that's going to be going up against you every year, is that correct?

Well, you never know, I mean that's just a judgment, I think -- I think healthcare costs in the United States are going to increase for a long, long time. The question is going to be how much of that will be born by the employer, how much of that will be born by the -- by the employee? And, you know, we're in this kind of slow motion process of dividing those things and, you know, these extraordinary rises in healthcare, it's hard to say are, you know, who benefits from that, because in our own system, the costs are going up but the amount that we charge to our employees goes up and they get less. So, we're all kind of in this boat together and there really are two different questions. One is how to -- to what extent does healthcare costs in the United States continue to rise and the second question is how do you split it between employer and employee?

Steve, what about your tech investment? Is that going to translate into fewer people doing more over the next 12 to 24 months? Or is that something you don't expect to see much in terms of margin?

No it translates into few year people doing more things and doing them better and we have -- we can identify areas where we've recently put in systems and been able to re-organize the workforce limit eliminate jobs and take advantage of the productivity. So, you know, it's a big, big item for us because we think that we're way ahead in the area of using the new available technologies and we'll use it both on the cost control side and on the customer side and we think that's going to be the dig differentiator between the large hotel companies around the world over the next couple of decades.

Any margin impact you're willing to put out there in terms of the positive impact?

No, and I say that because there's still a lot of things to be learned as to how you identify the savings, how you manage to be sure you captured the savings that are available.

And we'll probably always have some debate about how revenues are driven by the use of this technology and what they would have been without it. But the key -- I mean we'll -- we'll develop metrics that you'll be able to follow over the next few years, which will deal around making comparisons between us and our head-on competitors and where we see market share increases in -- in travel. We'll put a lot of that down to the fact that we've got better technology and when we see higher margins that we currently run increasing we'll put that down, too, because we can do better things with less people.

Thank you very much.

I think we have time for a couple more.

Thank you. Your next question is from Erika Johnson from CIBC.

Hi, it's actually Erika for Paul King I had a few follow-up questions on the REVPAR assumptions. In terms of your projecting flat REVPAR for the first quarter and flat for the full year, breaking that down between occupancy versus pricing, are you anticipating any improvement pricing over the year or -- how are you thinking about that as it trends over the time?

You're probably really not looking too much in the way of improvement over the course of the year. As you look across the full-year, it's -- you know, probably still going to be including more occupancy-driven than rate-driven.

Okay. And then I just wanted to -- your assumption for the expense growth because it obviously seems to be ahead of accelerating faster than the REVPAR does, is that, again, in the -- is your assumption it's going to be around 3.5 to 4%?

Yeah, I think we tackled that on an earlier question, yeah, that's about right.

Okay, thanks very much.

Thank you.

Thank you. And your final question today is from Joe Grive from Fulcrum Global Partners.

Back again, are you?

I just wanted to clarify something Dieter said, I think in response to Steve Kent's question, talking about a great base of tentative bookings, you had mentioned that's up 14% year-over-year?

That's correct, about. Yeah.

Great. I just wanted to clarify that. Thanks, guys.

Okay, well, that will wrap it up for this I time. I'm sure we'll be talking to many of you over the coming days and weeks and we'll look forward to talking to you again soon. Thanks for joining us this morning. Bye!

Ladies and gentlemen that, now concludes your conference call for today. Thank you very much for your participation.