希爾頓酒店 (HLT) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Hilton Hotels first quarter earnings conference call.

My name is Sara and I will be your coordinator for today’s event.

Throughout the conference, you will be on listen-only with an opportunity to ask questions at the end.

I would also like to inform everybody that the conference is being recorded.

If you require assistance at any time during today’s call, please key star, zero on a touchtone phone and a coordinator will be happy to assist you.

I would now like to hand the presentation over to Mr. Marc Grossman, Senior Vice President of Corporate Affairs.

You may now begin, sir.

Thank you, Sara, and good morning everybody, or, if you’re on the east coast, good afternoon, and thank you for joining us this morning to talk about our first quarter earnings.

I’m here in Beverly Hills with, as usual, members of our senior management team.

And, as we normally do, we’ll devote most of the hour to your questions and our answers.

But, first Steve Bollenbach and Matt Hart each will have a few brief comments to make.

First, a little bit of housekeeping, though.

First, the press release and this earnings call contain 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 the press release and in the call this morning 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.

There will also be a playback of this call available until April 30 at 8:00 p.m.

Eastern Time.

To access the playback, you would call the phone number 888-286-8010, pass code number 7129648.

This call is also being webcasted and to access the webcast, you would go on to our website, www.hiltonworldwide.com go to the investor relations link and then to the conference call link.

And, this call also will be archived on our investor relations website as well for future reference.

So, with all of that said, we’ll get started.

And, let me turn it over to Steve Bollenbach.

Thank you.

Well, obviously, this is a pretty difficult quarter, the war in Iraq and the continuing weak economy, made our first quarter of 2003 really quite difficult.

But, what I think I want to talk about this morning is to remind you that as a big company with lots of resources and capabilities, we’re able to manage through these periods and achieve some very good things for our customers and for our shareholders and for the owners of the hotels we manage and franchise.

During the first quarter we completed our second transaction with CNL, which brought us a new management contracts, $30 million in cash, which we used to reduce debt.

And we also sold four Homewood Suites during the quarter, which brought us another $40 million of cash, which we used to reduce debt.

Along with that, just last week, we issued $500 million of new convertible securities on very favorable terms.

And, we unveiled our new distribution strategy.

The pieces of that plan, pricing integrity, enhancements to our own websites and our agreement with Expedia, will make it even easier and more desirable for our customers to book at our hotels across our entire family of brands.

Now, I can tell you that when we presented this strategy to the owners of our hotels that we manage and franchise at a conference we had in New Orleans, their reaction was very, very favorable, very enthusiastic about our strategy.

And, we’re continuing to rollout our integrated technology platform, which we call On-queue systems, which links virtually all of our 2,100 hotels and enhances our ability to serve our customers even better.

In order to bring these kinds of systems and services to owners and customers, especially during these difficult periods, it’s important to be big, to have a solid financial profile and to have a wide range of brands at different price points, and, of course, to have great people to execute our strategies.

And we have all of these things.

And, this bodes very well for our future.

We believe a continuing decline in the introduction of new competitive full-service hotels to the market and the improvement in demand over time, makes us very optimistic as to our long-term future.

So, as a strong company, we cannot only work through the tough times, but we continue to make our business and our company even better.

So, I’m going to stop there and ask Matt Hart to make some additional comments.

Okay.

Thank you, Steve.

As we’ve been out talking to investors, to lenders and to analysts we’re getting good reviews for the performance of our brands and for our balanced approach to the business, and that is, owning great hotel assets, generating strong fee income and having a well-run timeshare business.

From an operating leverage standpoint, we think the near future will be a very good time to be an owner, especially with big hotels in high barrier to entry markets.

And, as Steve said, with limited new full service development, when demand improves, the upside from operating leverage will become even more pronounced and these properties will be sitting pretty.

But, in the meantime, as we manage through these tough periods, it’s great to have stable fee income that, by itself, generates enough cash flow to cover interest on all of our debt.

So, what I’d like to do is take a few minutes to talk about each of our businesses and the key factors that drive value for our shareholders.

Starting with our own hotel, the big factors that determine profitability are [indiscernible] margins.

On the first quarter we actually did very well in maintaining solid occupancy levels at most of our hotels in our most important markets.

Boston, New York, New Orleans, Hawaii, Phoenix, San Diego and Santa Barbara were all 70 percent plus for the quarter.

And the weaker markets continued to be those with the biggest exposure to the technology business, like San Francisco and San Jose, which have the double whammy of reduced demand and increased supply.

Rate has been a challenge throughout and is a result of the shift in the mix of business.

The business transient part of the business is still weak and we saw cancellations and postponements from higher rated groups, such as company meetings.

And then we filled in with more leisure and lower rated group business.

I should also mention that as a company that has just about all of its hotels in the U.S., we have seen relatively little effect on our business from SARS.

We have seen some impact on the Japanese business and Hawaii and some softness in the international group market.

Our margins for the quarter were impacted by lower ADR’s and the lower food and beverage revenues that we’ve missed from the bigger groups.

Increased cost in healthcare insurance continue to put pressure on margins.

And the lion’s share of the negative flow-through can be traced to the ADR decline and these higher costs.

And the return of business transient to full strength, which is a function of general economic improvement, continues to be the catalyst for our industry and when that occurs, we’ll be able to command pricing power and improve our operating leverage.

Let’s switch gears now to the brand business.

Our fee income for the quarter was about the same as last year.

All of our brands are performing well with the report card being the RevPAR index numbers we get from Smith Travel.

For the first two months of the year they show that, except for Doubletree, all of our brands are continuing to command significant rate and occupancy premiums over their respective competitive sets.

And Doubletree is right around the 100 percent level.

Because of results like these, our brands are in high demand among owners and the proof of the pudding, of course, is unit growth.

The Hampton Inn and Hilton Garden Inn continue to be our highest growth brand and we’ll be opening a number of Homewood Suite properties as well.

Doubletree’s market share improvement is resulting in new billed Doubletrees and conversion opportunities and we have 15 new Doubletree hotels in various stages of development.

All told, we’re on track to add between 100 and 115 hotels to our system this year with no capital from us and our development pipeline continues to be quite strong.

Year over year comparisons in the fee business will be tough, however, in that we lost some contracts when we sold Harrison Conference Centers and when we bought the Hilton Waikoloa Village last year, that moved income out of the fee column and into the owned column.

Turning to timeshare, our timeshare business, our overall unit sales were about flat with last year, but we were able to continue to raise our average sales price across the board.

We’re continuing to see strong sales in Hawaii and initial sales at our new projects in Orlando and Las Vegas are strong.

Our test project in New York at the New York Hilton’s a little bit behind where we’d like it to be, but we believe ultimately it will be a successful project.

What impacted reported results in our timeshare business for the quarter was the percentage of completion accounting rules, meaning that we couldn’t recognize all of the income from sales at the new projects, which are both still under construction, well, they’re all under construction.

And, remember, we sold $119 million of receivables in June and November of 2002.

We have a couple of new timeshare projects that we’re working on, but we intend to limit the amount of capital we spend on timeshare to about $100 million or so annually.

It’s a fine complimentary business with high margins, but it is capital intensive.

And we want to keep timeshare to 10 percent or less of our total results.

Finally, I’ll just a quick look at our corporate finance priorities and just like our overall business model; we have a balanced approach here too.

We always want to make sure we’re spending appropriately to maintain our own hotels and to stay ahead of the technology curve.

And, even in a difficult environment, it’s critical to keep the property in top shape and to make those expenditures that are going to benefit our customers and provide long-term value.

We’ve been focused on debt reduction.

We’ve done really well here and we’ll continue managing our level of debt to a solid investment grade rating.

We do look for opportunities to enhance our properties, to add to our timeshare business or to acquire hotels.

But, in the acquisition game, we’re strictly looking for bargains, which have been few and far between.

And, I’ll end now by saying that it seems like we’ve been poised for recovery for a long time.

And the fact is that our industry has had to endure a lot of challenges in the last two years.

But, the balance in our business model and in our financial model have allowed us to enhance our leadership position and when the recovery in travel comes, we’ll reap the biggest benefits.

So, now, I’ll turn it back to Marc.

Thanks, Matt.

And, before we go to the Q&A session, I want to point out a couple of things related to new SEC regulations.

In accordance with the SEC’s Reg G, whenever we provide a non-GAAP financial measurement, such as EBITDA, we are providing the corresponding GAAP measure, operating income in equal prominence in our press release.

Now Reg G also directs companies to provide a reconciliation from non-GAAP financial measures to GAAP measures.

And you’ll find those reconciliations on tables attached to this morning’s press release.

The reconciliations are also posted on our IR website as part of the press release.

So, let’s turn to the guidance that we’ve provided this morning and I’ll tell you, with the continuing uncertainty and low visibility in the business, frankly, the prediction game is becoming increasingly difficult to play, especially trying to offer specific guidance by quarter.

But, we understand the need that you all have for at least some broad parameters.

So, therefore, in this morning’s press release we’ve provided our best current estimates for full year 2003.

We anticipate total company revenue in the $3.9 billion range, and total EBITDA and operating income in the ranges of 930 million and 530 million respectively.

The full year guidance that we provided in our March 27 announcement remain the same.

A RevPAR decline of 1 to 2 percent at our comparable loaned hotels and diluted earnings per share in the high 30-cent range.

So, in closing, the environment continues to be challenging, but our estimates do anticipate some improvement in the second half of the year.

So, that’s our introduction, and, Sara, I think we are ready to take 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, one a touchtone telephone.

If your question has been answered, or you wish to withdraw your question, please key star, two.

So, it’s star, one, [audio gap] question.

And your first question comes from Jay [Cogan] [phonetic word] of Banc of America Securities.

Please go ahead.

Good morning, everybody.

Hi, Jay.

Hi, Jay.

I was wondering if Matt or Marc could maybe speak to the question about EBITDA.

Let’s compare what you said at the last quarterly call when you thought maybe you’d be about 980 to a bit on the service side, or can you talk maybe about the rate environment in terms of your expectations for the next three quarters?

It seems like a pretty big differential given what you actually did in the first quarter.

No, you know, I think it’s a combination of all of it, Jay, is the costs were certainly in the business that, you know, on the healthcare side, on the property tax side, we anticipate some increases later in the year.

And it’s just been hard for us to get the rates.

And, I think the other thing too, Jay, is when you look, again, mix of business, you know, our group business, the company meetings, which is a very highly rated business, has been weak.

And, you know, frankly, for the rest of year it will probably continue to be pretty soft.

So, you know, it’s cut the rate of the room rate, combine that with increased costs, you know, that’s putting some pressure on.

I think, Jay, also some of our business, the larger groups and then smaller ones that were cancelled in the first quarter and one-third of it was deferred into the third and fourth quarter.

And, so, that has an impact as well.

Okay.

Thank you.

Thank you very much.

And your question is from Michael Rietbrock of Smith Barney.

Please go ahead.

Hey, guys, maybe to comment the last question in a little bit different way.

Matt, can you take a shot at, you know, identifying maybe in dollar terms some of the cost components of, you know, some of the components of the cost inflation, and then try to give us a sense of to what degree some of those costs items sort of be in the cycle themselves or burn themselves out, hopefully, by next year?

Yes, I’m going to let Bob take the specifics of that.

The only bright spot that we’re seeing, and this is really trying to hard to find a bright spot, is that the property insurance market seems to be improving a little bit.

But, why don’t you go through the specifics, Bob?

Yes, for the first quarter overall our insurance costs were up about $5 million, compared to last year’s quarter.

And probably you’d see the same run rate on insurance next quarter and the subsequent quarters.

Though, I think you may see a little bit of a kick up in total costs maybe in the third and fourth quarters.

But, as Matt mentioned, we’re hoping that would be offset, you know, by maybe a more favorable property insurance market.

Our energy costs are up also in the first quarter by about $2 million.

Though, we were thinking possibly that we’re going to see some softening of our insurance costs later on in the year...

Energy.

I’m sorry, energy costs later on in the year.

And, our overall -- as you know, a big component of our cost is salaries and wages.

And it’s about 36 percent of our house costs.

And that ran at about a 3 percent increase quarter over quarter and I expect that to remain the same increase for the subsequent quarters.

And then you had healthcare costs.

That’s included in our insurance overall.

[Audio gap]

I’m sorry, you said that the wage costs were 36 percent of what?

Up costs.

Okay.

Okay.

So, if you add, I guess if you add up all of that stuff, maybe you get -- I mean you’re still coming with, you know...

... big functions, big banquets, you know, last year in the first quarter we had the world economic forum, the Waldorf, we didn’t have this year.

We had Super Bowl in New Orleans last year, didn’t have this year.

So, we’ve missed out on a lot of that stuff.

But, yes, you got it right.

Okay.

Thanks, guys.

Thank you.

And your next question is from Joyce [Minor] [phonetic word] from Lehman Brothers.

Please go ahead.

Hi, guys.

Just to follow on that, can you be a little bit more specific too in terms of maybe food and beverage revenues, what the decline was in millions of dollars quarter-over-quarter or maybe food and beverage EBITDA for your owned hotels?

Well, we have lost up March actually, some of the some big functions we had last year and also we saw a trend in New York with the high level for terrorism and all of the other stuff floating on that social functions were cancelled or postponed.

So, the banquet revenue really that’s where the impact was and that’s where we make most of our profits.

So, we lost about $2 million in that for the owned hotels in totals in revenue and that relates to probably, you know, $2 million in missed profit.

That’s the amount from the business that was cancelled.

But, I guess what was from the mixed shift that you experienced would you say that food and beverage EBITDA was down more than that?

Not more than that, no.

No.

Okay.

So, the food and beverage impact from the mixed shift and cancellations was only kind of a $2 million EBITDA hit in the quarter?

That doesn’t sound that gigantic to me I guess.

You’re talking about for the owned hotels only?

Right.

And discounting the events, the larger events we had, if you compare the Super Bowl and the economic forum and the Olympics in these hotels, so we have some huge functions.

So, when you compare that and discount that and as far some of the cancellations and the social functions, we have lost in the first quarter.

Okay.

I guess I’m just trying to maybe get a little bit better understanding of that operating leverage metric of, you know, owned RevPAR down 2.2 and the EBITDA, you know, down 20 percent.

And it sounds like you’re hoping that that’s going to improve later in the year.

Anymore collar that you can provide around that.

I think that which Dieter is referring to is just the mix of business shift in group.

Right.

Won’t that continue to happen to some degree, though, aside from that, you know, piece of it?

Yes, there’s a couple components that is the mix of business in group and that’s what Dieter was referring to in terms of kind of our revenues from the group business.

Overall, our food and beverage revenues were down about $4 million, quarter-over-quarter.

Okay.

Okay.

Then can you just talk a little bit maybe about the outlook for kind of summer leisure travel?

Are you guys thinking you get a benefit with people wanting to stay closer to home or are you thinking that the weaker economy makes that tougher?

I mean, I know...

The leisure market has been sort of strong and to -- I was just looking at true service and Travelocity and TIA and it seems to be an indication that the summer first travel will be quite good.

And that’s really -- that travel is also to offset some of the business we lost from Japan from the Asia and Hawaii, or particular California leisure market has been very strong for us.

International market, of course, that’s sort of -- I’ll admit, that’s declined substantially.

But, we have seen them, on the flip side, we have seen those who would travel international would stay put and go to Florida or Hawaii or somewhere else.

I think, Joyce, if you look across all of our brands and all of the hotels, not just our owned and managed, the hotels that are really in drive to destinations are looking for a reasonably good summer.

All the indications are that people are going to take their vacations and they’re going to take them here more than abroad, perhaps.

And, so, I think the summer leisure business, if nothing else surprising happens, should be reasonably strong.

Thanks, Tom.

Maybe on last question for Steve or Matt.

I guess at some point during the quarter people started to talk about six continents it sounds like, you know, pricing on acquisitions is important to you, but if you ever assumed that that was reasonable are there kind of strategic, is there strategic set at all there?

Could you talk about maybe those brands how that might stack up with you or interest level?

Do you mean specifically with Six Continents, Joyce?

Yes.

Yes.

You know, I think everybody in the hotel business we looked at Six Continents.

I don’t see us as a big player in any of that for the -- you know, the really simple reason that we think that we were strategically complete and we really are -- have all the pieces that we need in terms of size and scope and price points and ability to have an international product with our alliance with Hilton Group.

So, we think we’ve got all those things.

And what it means is that when we -- if we get involved in an acquisition process we won’t be the bidder that will pay a premium for a strategic reason.

And if it makes sense probably not a competitive bidder, so, therefore, we just don’t spend a lot of time on them.

I mean we look at it just in case the world is making a big mistake and underbidding for something.

In the case of Six Continents, there is so much going on around that, there was just no chance that a transaction was going to happen at a bargain price there.

And, of course, nothing did happen.

So, you know, I don’t see us as merely being a competitive bidder in the process that would involve the assets of Six Continents.

We already have all the things that they’ve got.

So, we couldn’t afford to pay a premium price for it.

And I think if it sold, if the company or parts of the company were sold, they’ll be sold at premium prices to people that need to pay a premium for some strategic reason.

Okay.

Thank you very much guys.

Thank you.

And, your next question is from Will [Marks] [phonetic word] at JMP Securities.

Please go ahead.

Thank you.

Good morning.

I just wanted you to expand a little bit on timeshare.

Actually, could you just quickly repeat to where the strength was and the weakness?

Well, it’s been pretty strong throughout.

The two big projects that we have going now are Orlando, which is a new project by Universal Studios and we have another new project at the north end of the strip in Las Vegas.

Those are both follow-on projects to other successful projects that are essentially sold out.

Now, one of the keys in the business is if you’re able to establish a strong sales and marketing force and a presence in that market and you know the local market and you know what customers are looking for, so we have gotten very good starts in both of those properties.

Hawaii is still really strong.

I don’t know the exact number, but we’ve been open for 24 months and we’ve had like 19 price increases.

We had our strongest month ever last month.

So those have been very strong.

I mentioned New York was a little bit behind where we thought it would be or we hoped it would be, but we think ultimately that’s going to be a successful project.

And, remember was just a test case for us anyway.

The harder part, though, is it’s hard for the analysts is to compare is how are we doing because you got this percentage of accounting completion accounting that doesn’t allow you to recognize the sales until a certain amount of their construction is completed.

And, the fact that we sold a lot of receivables last year that makes the comparison difficult.

But, I think the thing to look at is and what we said in our release, is that our unit sales are on pace with last year and we’re still able to increase prices.

So, we’re very, very optimistic about all of those projects.

But, we don’t want the tail to wag the dog in timeshare and so that’s why we’ve decided to limit the total cap ex to $100 million a year.

Because we don’t want it to be more than 10 percent of our total results.

Thank you.

And your next question is from Keith Mills at UBS.

Hi, how are you?

A few questions for you.

Here, first on the owned hotels there has been a pretty significant amount of new convention space built across the nation, whether it’s in major markets or secondary markets.

And I was wondering if you could share with us what Hilton’s strategy is for trying to minimize convention loss in some of your major markets where you have the big assets like Chicago, like New Orleans for example?

What you’re doing there.

Before you answer that, don’t forget that we’re picking up a lot of that.

Because we’re building -- we’re opening up two hotels actually between Houston and Austin and that’s [indiscernible].

Yes.

So, we’re probably the guys that are in the driver seat for that business.

But, from a cash flow standpoint, you’re losing it from markets where you own assets to markets where you manage assets.

Dieter, why don’t you talk about...

Yes.

I think particularly when you talk about New York, Chicago, even Hawaii, you know, we have a great products.

We have the largest convention facilities in the New York Hilton, you know.

And these are just assets you cannot reproduce that easily.

But, what with the trend going back to your trend, we see more and more convention centers expanding in the territory market as well.

So, surely, there is some competition out there.

But, where we are located, we actually we have seen that our group and convention association market were really holding the line there.

We have picked up a couple of percentage points for the year and definite bookings.

That shows how strong we are, because we have the distribution and we have [indiscernible].

We have the relationship.

And I think that makes the difference.

Right.

Are the hotels, though, at the property level or regional management doing anything to try to, you know, work with convention authorities to make sure that you’re trying to keep conventions coming back to Chicago, New Orleans et cetera?

I mean how are you doing that?

Well, you know, local has their own convention bureau and most of our guys are on the -- members of the board and we work very closely with them, with the city, with the mayors, with the governor, whatever, in order to entice more business to their perspective area.

So, we are very deeply involved in that, in all that business.

Dieter, I was hoping you could also -- we always, in this environment now, for unfortunately two years, we’ve been talking contingency plans and what we’ll, you know, what companies will do in the event that demand starts to decline.

What is Hilton’s strategy or policy or plan, if you want to call it, I guess more plan, for preparing for, in the event that we, you know, start to see an upturn in demand relatively soon if that occurs.

I mean...

Raise the rates.

Exactly.

There’s a thought.

Well, I mean, how do you plan on that?

How do you look at, you know, what type of customers you’ll more aggressively pursue and how do you plan for that?

This is Steve, just real quick, in that, you know, I think that’s an excellent question because we do plan on how you win here.

And, you know, we are a company that’s maintained all of our abilities through some tough times.

I was trying to say that earlier, that in terms of staffing levels, in terms of systems, you know, we’ve continued to stay competitive and more than competitive, and increasing market shares is the way we can identify that.

So, you know, Dieter, you can talk about some of the things that we can do in terms of -- and I think Matt had it right, it really is kind of a change in the mix of business, which will come, and an ability to, using that change, to increase the revenues.

And, you know, that’s our future.

No, I think that’s, indeed, a very important point people don’t really focus on.

Steve’s reflections doing that, managing for recovery, you know, really has been received and maintained -- we’ve maintained a very positive security for among all our team members in the field.

You know, we didn’t lay off any of our department heads and sales offices like other companies did, fired left and right.

So, we’re very focused and very motivated.

But, when business picks up I think what we’re going to look at the distribution channels very carefully.

We put our [indiscernible] in there and we take the highest yield possible.

We know that.

We know how to do it to maximize the space in our hotels.

I think also, Keith, you know, something that really anticipates the recovery is this new distribution strategy that we’ve development, and, you know, as demand improves, you know, we’ve got a great distribution plan in place and take advantage of that.

I’ll just boogie [phonetic word] to what Marc said, Keith, if you think about the distribution announcement we’ve made, think of it in two ways.

You’ll always see us, number one, doing things that are customer friendly that makes it easier for customers to deal with us.

And, number two, a strategy that leaves more money at the hotels.

And we do both of those things, I think we’ll be well positioned to, you know, when the turnaround comes.

And, if it doesn’t come, we’re still well positioned.

On that subject, just one final question, I guess for you, Steve.

You decided to have the relationship now with Expedia.

Why not TravelWeb?

Why not really focus on that?

Have you got a joint venture opportunity there that you’re involved with and TravelWeb just doesn’t seem to have kind of, from the distribution channel, I think that most involved thought it would be, and kind of, can you talk about what your plans are from Hilton’s perspective in dealing with TravelWeb going forward and what you see there and why it hasn’t really had the success as of yet?

You know, I’m going to let Tom talk to that because Tom does this on an everyday basis.

First of all, I mean TravelWeb is still a new company and we still support TravelWeb.

We support both Expedia and TravelWeb.

And our whole focus was to make sure there was more competition in this marketplace.

And I think we’ve seen through what we announced with out distribution strategy, that there has been.

And, so, TravelWeb will, I think, continue to play an important role.

We will continue to support it as we recommend to our hotels if they need third party internet production the Expedia TravelWeb are our preferred spots.

And I think you’ll see TravelWeb get stronger, I hope so, because that means there be more competition in that marketplace.

Okay.

Thanks, I appreciate it.

Thank you.

And, your next question is from Larry Haverty from State Street Research.

Please go ahead.

Yes.

I just want to piggyback on that last question, the other way...

Well, you know, there are, in the merchant model side, in the merchant model part of the business, there’s really Expedia, Hotels.com, TravelWeb are the main players.

And we’ve clearly got a good relationship with TravelWeb.

And we wanted to find another preferred provider that was easy and friendly to do business with.

And it turned out, through our negotiations that that was Expedia.

So, we’re recommending to our managed and franchised hotels that they use one of those two channels should they need business through third party sites.

Now, the other thing, of course, is that Expedia, as we said in our press release, we think we’ve got an industry-leading agreement with them.

We’ve not revealed what the margins are; other people have taken a shot at it.

You can see that they are lower than they have been in the past, which goes back to the point I made earlier, that leaves more money at the hotels, which is in the interest of all of our hotel owners, including us, because we own a lot as well.

It’s in Expedia’s interest because if you’ve got 2,000 hotels that feel that they need to have business and they’re one of the preferred providers along with TravelWeb, I would hope that that would be of interest to them.

The other piece that’s favorable for us is that we don’t have to commit a specific contribution...

Yes, we don’t have an inventory commitment.

And we’re building and had already in process for the last couple of months, the work to directly connect the Expedia customer to our reservation booking engine.

So, we have individual hotels that can dynamically manage the raise in the inventory through that channel.

Now, just let me drill down a little bit on this.

In these sites, I understand that it kind of surprised me, but and extraordinarily high amount of the volume gets down on the first couple pages of the listings.

It’s kind of like the 90/10 rule in business that I’m sure you guys know about, does this thing give you preferred placement on the first couple pages that pop out on the city, or the guys that are affiliated with you, whether your owned or, you know, managed?

The Expedia excluded deal gives us some preference.

But, again, you’ve got to put it in perspective.

You know, we’ve said all along that 75 percent last year, 75 percent of all of our Internet business came through our own sites.

And we’re focusing on driving more business through our own sites, not through the third party sites and we’ll do that.

In fact, the first quarter this year, we’ve actually increased the amount of business that comes through our sites.

So, Expedia will give you preference based upon a whole lot of things, do you have rooms available?

How many have you sold in the past?

But, we’re very happy with the Expedia game and I think they are as well.

Great.

Thanks a lot.

Thank you.

And your next question is from Joe [Greath] [phonetic word] of Fulcrum Global Partners.

Please go ahead.

Good afternoon guys.

Larry took my question.

I’m all set.

Thanks.

Thank you very much.

And our next question is from Bill [Crow] [phonetic word] of Raymond James.

Please go ahead.

Just a coupe questions, have you gotten a response back yet from Hotels.com or any other competitors trying to negotiate new deals?

I think, Bill, if we did we wouldn’t tell you because we don’t want to negotiate over the telephone.

Okay.

Have you seen any change in the booking patterns now that we’ve kind of gotten beyond the war, and understanding, of course, that we just had Easter, which is going impact bookings.

But, during the week or two weeks that we’ve had post successful conclusion in the Middle East, have you seen any change or any pickup?

What we have seen is that at Hilton Direct, which is our national sales office in Dallas and they’re really focusing on smaller kind of short term business group that we have back.

The call volume is back to pre-war levels.

So, that’s encouraging.

Usually they’re the first indicators that business is picking up a little bit.

So, that’s one trend.

Yes.

[Indiscernible] about a second half of the year improvement, which we don’t disagree with, but I’m wondering what you’re seeing out there that gives you confidence in that and whether you’re seeing -- whether you’ve gotten more books -- more groups that are booked or what are seeing to give you that confidence?

It’s so soon, this is Steve.

It’s so soon.

So, all we have are kind of little stories that we get from the people that are closer to the customers.

And the stories are encouraging.

You know, there the stories about this group did cancel, but yes, they promised to come back in the fall, or this group cancelled but they said they’re going to rebook in another three or four weeks.

Dieter’s comment about the call volume.

So, we get encouraging stories, but there’s certainly not enough time and, as you mentioned, too many factors involved in trends for anybody, I think, to make a definitive statement as to whether you can see anything today that you can really rely on to change views of the future, you know, based on three or four weeks of a lot of stuff going on, whether it’s holidays or whether it’s a war and the anticipations of what the war might have been and what it did become.

It’s just really too soon to do anything other than tell you the stories and the stories are encouraging.

And, I think, Bill, it just goes back to that whole idea of low visibility, you know, and that remains the case.

All right.

Okay.

Thanks, guys.

Thank you.

And our next question is from Harry [Curtis] [phonetic word] at JP Morgan.

Please go ahead.

Thank you.

Just as a follow up to that question, simplicity, do we need kind of a 2 percent RevPAR growth number just to cover the cost of -- I’m sorry, the higher costs that we’ve just spoken about earlier?

Something like that would probably do it, if that were the only lever.

If the only lever we had was revenue increases.

You know, some percentage, you know, 2, 3 percent would probably do it.

But, we’ve got other levers.

So, you know, it is kind of simplistic I think, Harry, maybe too simplistic to say as cost go up, the only thing we have, the only thing we have is revenue.

But, from an owned, an existing owned hotel portfolio, other than unit growth, that’s the number we should focus on?

Yes.

Yes.

That’s still the key measure.

Yes.

Terrific.

Thank you.

Thank you.

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

Matt, a question for you on the timeshare, on note sales last year, were there any in this quarter?

No.

Thank you.

Thank you.

And your next question is from Zachary [Terry] [phonetic work of [Newberger Berman] [phonetic word].

Please go ahead.

Good morning, guys.

Matt, I was wondering if maybe you could quantify what the company’s SARS exposure might be, maybe on an EBITDA basis, since some of the riskier regions.

You know, it’s relatively small.

It’s Hawaii, where we have seen quite a few cancellations from the airline companies.

So, of course, there’s less tourists that are coming in.

And it has been somewhat rebalanced, though, by American travelers who still see Hawaii as an exotic destination, but don’t really want to go to Asia or Europe or something.

So, there’s a little of a counter balance to that.

And, then the only other thing we’ve seen is some of the international group business that primarily comes in to the west coast, whether that’s Seattle, San Francisco, Portland and it’s all in all, for the first quarter, it was an immaterial amount.

Okay.

Great.

Thanks.

Thank you.

And your next question is from Paul [Keung] [phonetic word] of CIBC.

Please go ahead.

Most of my questions have been...

Gentlemen, how it going?

You mentioned levers.

Is it safe to say that you expect food and beverage and the non-room revenues also to not to perform on tougher comparisons in the later quarter, or can you give me any collar on that?

Can you give us that one again.

Yes, can you give me some collar in terms of your food and beverage and meeting and other revenues and non-room revenues, where do you think those trends may be given the comparisons were tough with Super Bowl and the World Forum in the first quarter.

Are we going to see a similar type of trends in that non-room revenue number in the second and third quarters?

Well, I’ve seen in New York that, for example, the social functions have picked up again.

And that’s important for our hotels, the major hotels and catering functions are up slightly.

And, so, I think once we get out of the second, third and fourth quarter, that these numbers will stabilize [indiscernible].

That’s related, Paul, to the convention and the association business.

You know, Paul, we’re doing well on the convention and association side of the group business, that’s lower rated business than company meetings, for instance.

But, you know, as we continue to do well in that part of the equation, you know, the convention big associations, you know, do good F&B business.

If I were you, though, I’d book that Christmas party at the Waldorf now.

I’ll think about it again.

And the other question was, falls on Larry.

There’s this the most favorable merchant was used in your press release; the word preferred where exclusive had been used.

Can you compare the definition of what those mean versus your relation with TravelWeb, who, I understand, from past discussions also have a so-called most favorable nations agreement as well.

We are recommending to our hotels if they need to use third party sites, they use either Expedia or TravelWeb.

So, they are identical language, is that safe to say?

Excuse me?

Is it safe to say the language is identical?

You mean are the contracts identical?

Yes, in terms of...

No.

But, we’re treated the -- we treat them the same in terms of recommending them to our hotels and they’ll make their decision based upon their individual needs or individual markets and what they economics look like for them.

And, how’s that relate to your own owned hotels, the ones that you control?

We’re using both TravelWeb and Expedia.

Okay, on an exclusive basis?

For third party merchant.

Yes.

Okay.

Great.

Thank you.

Thank you very much.

Ladies and gentlemen, if you have any further questions, please key star, one on a touchtone phone.

We have no further questions at this time.

Okay.

Well, ended a little early, but that’s all right.

We’ll all get back to work.

So, I appreciate everybody participating with us this morning and we’ll be talking to you soon.

Thanks.

Ladies and gentlemen, that concludes your conference for today.

You may now disconnect.