希爾頓酒店 (HLT) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Hilton Hotels' Second Quarter Earnings Conference Call.

My name is Ron, and I'll 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 like to inform everybody that this conference is being recorded.

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

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

Over to you, sir.

Thank you, and good morning, everybody.

We appreciate you joining us this morning for a discussion of our second quarter earnings.

I'm here in Beverly Hills, as usual, with members of our Senior Management Team, and following our usual format, we'll have a few introductory remarks from Steve Bollenbach and Matt Hart, and then we will turn the question and -- we will turn it over to questions and answers, spending most of our time addressing your questions.

But, first, let me just remind everyone that the conference call this morning and the press release that we've put out contain forward-looking statements within the meaning of federal securities law, including statements concerning business strategies and their intended result and similar statements concerning anticipated future events and expectations that are not historical facts.

Forward-looking statements in the call this morning and in the press release are subject to numerous risks and uncertainties, which may cause actual results to differ materially from those expressed in or implied by the statements herein.

I will also tell you that the call will be available on a playback, and that will be available until August 4 at 8:00 PM Eastern Time.

The playback number is 888-286-8010, and the passcode number is 45857044.

The call today is also being webcast, and to access the webcast, go to www.HiltonWorldwide.com, press on the Investor Relations tab, and then go to the Quarterly Conference Call link.

Just one more bit of bookkeeping having to do with SEC regulations, and you probably noticed this in the release that we put out today, but to comply with new information received from the SEC's Division of Corporation Finance clarifying the implementation and interpretation of the SEC's Regulation G, the use of EBITDA as a performance measure is being limited to the discussion of total company results.

The Division of Corporation Finance has stated that EBITDA, if presented, should be reconciled to GAAP net income.

Now, Hilton, like most public companies, does not provide net income figures for any of our business segments or components of our business segments since it's impractical to allocate below-the-line costs, like interest and tax expense, to the segment level.

So, therefore, EBITDA for our own hotels, including the comparable subset, as well as timeshare EBITDA, will no longer be provided since there's not a related net income number with which to reconcile.

We have, however, provided adjusted EBITDA numbers for total company results and/or full-year guidance, and the reconciliations are contained in the press release this morning.

So with all that bookkeeping out of the way, let me turn it over to Steve Bollenbach.

Good morning.

Now, a couple of weeks ago, I did a question-and-answer period for our employees using our Hilton website, and one of the questions was, "If you had to describe the hotel industry today in one word, what would it be?"

The answer -- my answer was, "It's difficult," as in difficult to raise room rates.

Matt will go through in more detail on the quarter, but that's really the story in my mind.

Rates continue to be under pressure.

Of course, that impacted RevPAR and margins at our own hotels and led to a somewhat disappointing quarter.

We think this environment's going to continue for a while.

At this stage, it's hard to imagine economic conditions improving quickly enough to cause a dramatic turnaround in our ability to raise prices this year, but we do see some positive signs related to pick-up in reservations and the fact that there is a limited, new full-service supply coming on in the second half.

So we expect sequential quarterly improvements for the second half of the year, but we think a slightly more conservative view for the full year 2000 is warranted.

During these tough times, our focus is to continue doing the things that have made us successful.

We're going to continue to drive occupancy.

We believe that when the economy improves and business travel rebounds, the lack of new full-service supply will enable us to command more attractive pricing.

But until then, it's important to keep our rooms full.

We're continuing to manage our costs as best we can, although we understand that in a service business there are some costs that are very difficult to reduce.

We're ensuring that our brands maintain their market share leadership positions.

It's these positions that are translating into significant new unit growth.

We're continuing to strengthen our balance sheet and reduce debt, and we continue our emphasis on technology; more to the point, introducing and implementing systems that are helping us to enhance customer loyalty and run our hotels even better, and which are helping our owners run their hotels and serve their customers even better.

The rollout of our OnQ integrated technology platform continues on schedule.

We'll have just about all of our 2,100 hotels in our system linked up by the end of this year.

At hotels where OnQ has been installed, we're seeing increased productivity in a number of areas and uncovering more ways to contain costs.

Customer satisfaction scores have been increasing at hotels that are on the OnQ system.

So as I've said in the past, it's my view that the development and effective use of technology-based systems will continue to be a critical factor of success for our Company.

So, now, let me turn it over to Matt, and we'll get into some of our -- the details.

Okay.

Thanks, Steve.

While we do have a few bright spots to talk about, the fact is that this was a tough quarter.

So what I'd like to talk about is each of our businesses and the positive and negative factors that impacted each of them, and I'll start with the area where we make most of our money, and that's our own hotels.

Now, Steve started by mentioning the difficulty in raising room rates, and the issue we faced in the second quarter was the mix of business.

With fewer business travelers and less higher-rated Group business, like company meetings, which is traditionally the least price-sensitive parts of our business, we, to a large extent, filled in with leisure.

Now, that's helped keep our occupancy levels pretty strong, but the effect is to lower ADR.

Now, let me put some numbers to this to illustrate the point.

In the second quarter, Business Transient represented around 35 percent of our total room nights, the Group percentage was a little bit higher than that, and Leisure was around a quarter of our total room nights.

But the average rates in each category during the quarter were as follows: Group was in the low $160s, Business Transient was in the low $150s, and Leisure was around $120 for the quarter.

And when you look just at rates, all segments were price sensitive compared to last year's second quarter.

Business Transient rate was down around 3.5 percent;

Group rate was off about 2 percent; and even Leisure, where we did have good demand, that rate was off about 3.5 percent in the quarter, also.

So this demonstrates the importance of the Business Transient and the Group Business and shows the impact of replacing this business with Leisure.

So far this summer, we have seen strong Leisure demand.

Occupancy has been strong at many of our resort locations, like the Hilton Hawaiian Village, Waikoloa, San Diego, Santa Barbara, and in some urban destinations that get lots of leisure travel, such as New York and New Orleans.

But, again, Leisure continues to be more price sensitive than in years past, and one likely reason, of course, is due to the pricing transparency afforded by the Internet.

A strong summer travel is good news, and it's helping keep our hotels full, but in order for us to be able to raise rates, it's really got to come from a more desirable mix of business.

Now, this lower RevPAR, especially the rate part of the equation, also impacts our profitability.

Higher costs, primarily healthcare insurance and worker's comp, combined with lower room rates, food and beverage business, and other revenue items, like telephone and retail, were the main factors here.

Managing our costs remains a priority, although we acknowledge that some of these cost increases -- health insurance, in particular -- are very difficult to control.

But on the cost side, we're working hard to ensure the appropriate levels of staffing necessary to serve our guests, and our managers are constantly on the lookout for ways to reduce costs and change processes without impacting the customer.

On the revenue side, our hotels are casting an even wider net for Group business.

The more groups we get in, the more we can build occupancy and improve our food and beverage business.

Ultimately, of course, what will help our margins is the return of pricing power, but until then, we continue to be focused on cost management.

On the positive side, our reservations volume has picked up recently, and the full-service supply side of the story continues to improve.

That's encouraging and hopefully leads to the historical pattern of recovery in our business -- strengthening occupancies, impression at the hotels, change in the mix of business, higher average rates, improved margins, increased earnings, and happy shareholders.

Group bookings are a challenge, and the booking window remains short term.

The story here is that we're booking more events compared to last year, and there is a lot of interest from groups, but the size of groups is smaller, the stays are shorter, and there is rate sensitivity.

We're doing okay with the association and convention business, but again, what's lagging is company meetings, the historically least price-sensitive component of the Group business.

We believe that we're getting more than our fair share of Group business versus our competitors, but the fact is that there is less of this business to go around for everybody.

In our last call, we said our overall Group business would be down mid-single digits for the year, and we still think that's the case.

We're doing really well in driving customers to book business on our various brand websites.

In our press release, we noted that in June we saw record reservations, room nights, and sales from our proprietary sites.

And as you all know, that's part of the overall distribution strategy that we announced a couple of months ago, included [in] enhancing our own branded websites, and that effort is definitely paying off.

Now, let's speak about the fee business.

Of course, in a tough RevPAR environment, it's great having the stability of fee income.

Now, none of our brands were immune from lower RevPAR in the second quarter, but it seemed that the brands were more of a drive-to orientation, like Hampton Inn, Hilton Garden Inn, and Homewood, [indiscernible], and our full-service properties.

Lower RevPAR did have an impact on our fee business this quarter, but it was offset by fees from franchised and managed units that we added to the system.

And the main reason we're continuing to add units is that our brands are continuing to provide RevPAR premiums over their respective segment competitors.

The strength of our brands and our very strong relationships with our owners are driving our unit growth and our fee business.

I'd like to make particular mention of growth in the Doubletree brand.

We added three Doubletrees to our system in the quarter, and there are a number of attractive Doubletree conversions underway.

We continue to fine-tune the brand.

We removed two of the properties from the portfolio for quality reasons, and we'll be removing a couple more by the end of this year.

The story here is that the Doubletree brand is getting stronger, and we're very pleased with what's happening at that brand.

Looking now at our timeshare business, we're focused on a number of new projects that we're very confident will be successful.

Our unit sales and our overall average sales prices were both up for the quarter, but revenue and profitability were impacted by the mix of sales, the required accounting for our new projects in Las Vegas and Orlando, the accounting for the Hilton Club in New York, and the receivables that we sold last year.

One of the factors that impacted timeshare profitability in the quarter was a shift in the mix of sales.

Since we started selling at our Hawaiian timeshare project in late 2000, sales have been very strong there, and we've consistently been able to raise integral prices, and the average sale price in Hawaii is now around $35,000 a week.

But we're selling less at this high-priced, low-cost property as our inventory declines, and a greater number of integral sales are now occurring at our new projects in Las Vegas and Orlando, where the two projects average about $20,000 per week.

So we're selling more at these lower-priced properties, which also have a relatively higher cost of product.

And remember, also, that because Las Vegas and Orlando are still under construction, there's a limit to the amount of income we can recognize from them due to percentage-of-completion accounting.

Both properties are selling very well, especially Orlando, where we expect the first phase will be just about sold out by the time it opens early next year.

Briefly, on to corporate finance, we're focused on strengthening our balance sheet and reducing debt.

We're doing well on these fronts.

We've reduced our debt by $33m during the quarter, so our current debt level stands now at just over $4.1b.

Our debt has an average life of nine years at an average cost of 6.2 percent.

We have about $730m of available capacity under our various lines of credit.

During the quarter, we completed a very attractive transaction, where we sold $575m of convertible notes at 3.375 percent, and the notes are convertible into shares of Hilton common stock at $22.50 a share under certain circumstances.

And, finally, we're lots of times asked about property transactions, whether it's buying or selling assets.

On the acquisition front, we continue to look at opportunities but really only if they're at bargain prices.

And on the disposition front, we don't really think this is a great time to be a seller.

I think the most interesting deal in our market was the sale of RFS, which involved mostly three-star properties, had traded for roughly 10 times EBITDA, all cash, and I believe that [host] [ph] Marriott sold some hotels at roughly 10 times EBITDA that they've described as being in the lower 10 percent of their portfolio.

And I believe that the properties that we owned would compare very favorably to those two sets of assets.

So I'll just wrap up by saying that there are good reasons to expect better things in the second half.

We've got the tools and resources in place to take full advantage, our hotels are in good shape, our brands are doing well, and we've got a solid financial profile.

So now I'll turn it back to Marc.

Okay, before we go to the Q&A part of the program, just want to reiterate the guidance that we provided this morning.

And as Matt and Steve both said, we do see some encouraging sign for the half of the year, but, again, the issue of the low visibility and the difficulty of predicting things has caused [us] to take maybe a little bit more conservative outlook for full-year '03, and that conservatism is contained in our moderately reduced guidance for the full year.

At this point, we are looking at total Company revenue of approximately $3.85b for the year, with total Company operating income between $510-525m.

Total adjusted EBITDA is expected to be $900-915m.

We expect full-year RevPAR from comparable owned hotels to be down approximately 3 percent, and our new full-year EPS guidance is 35 to 37 cents.

So that is the end of our prepared remarks, so, Operator, we are ready to go to the questions.

[Caller instructions.]

And our first question will come from [Fred Taylor][ph] from Fleet Securities.

Yes, good morning, gentlemen.

I have two questions, and one concerns cost reductions that you're able to make at the hotels.

You say that's a priority.

And I was wondering if you could go into more detail in how much cost you think you can get out given that occupancy levels are not down that much, although I guess maybe it takes more people when you have business groups.

But I'd be interested in that.

Well, it's Dieter here.

We are looking [indiscernible] for activity and efficiency improvements.

And as Steve mentioned, OnQ, our integrated technology solution, is giving us really great opportunities in utilizing the systems, eliminating manual data entry.

And to give [me] just some example from advanced deposit processing in [indiscernible] can be now made for 365 days in advance, and OnQ automatically charges the credit card, so there's no more need manually to go back and balance another system.

In a very large hotel, we have up to two FTEs working on this, and now we don't need any.

So we have these advantages throughout the front office, housekeeping, engineering, and we think there's an annual productivity gain of about $300,000 in our own hotel.

Furthermore, our payroll, productivity and staffing schedule system - we’re working on it.

Management is really focusing on it.

And that’s substantially saved or gained productivity.

When you look at our man hour per occupied rooms, actually it’s flat.

But in the quarter, second quarter, we are down about 400 FTEs per day.

So that’s a substantial savings, that tells you that we have further combined management provision in our hotels.

Okay.

Thank you.

That’s a good update.

And then finally, on the debt reduction, minus major asset sales, can we assume that the debt reduction will tick down in the sort of $30-50m range per quarter for the foreseeable future?

No.

That doesn’t quite work that way.

What we’re trying to do is we’re trying to manage our debt level down to that magic 3.75 times debt to EBITDA.

My rough guess is that we’d be there at about this time next year.

Thank you very much.

Okay.

Thank you.

Thank you.

And our next question will come from [Jay Cougan] from Banc of America.

Good morning everybody.

One question [Jay].

Okay.

I’ll just give you one question.

Well yeah.

And how many parts?

Go ahead.

Let’s just talk about the depreciation adjustment.

Matt, can you talk a little bit more about that?

In the quarter, what exactly was it?

I’m going to let Bob talk.

Bob will address that.

Hi [Jay].

We had a depreciation adjustment in the quarter, as we noted in the release, of about $5m, that’s really spread across a number of properties.

And it’s really the result of these properties chewing up their depreciation schedules in order to complete a conversion to a new fixed asset management software.

It was just a one-time adjustment [Jay].

I’m sorry.

Can you – you basically have lower deprecation because of this new software?

No.

Not because of new software.

The properties – in converting them over to this new software, did a very detailed analysis of all of their depreciation expense that was recorded on their existing assets.

And there were some – certain of these properties found that certain of the assets had been over-depreciated.

I got you.

Okay.

We can talk about that off line.

Thanks.

[Ryan Acher] from Harris, Nesbitt, Gerard has our next question.

Yeah.

Good afternoon.

I just wanted to get a little color may on your thoughts with respect to the corporate rating negotiation process.

I know it’s seasonally very early to make any determinations about that.

But a couple of your competitors have suggested it might be difficult to expect much better than flat negotiated corporate rates in ’04 versus ’03.

And not hearing you say anything that would suggest you necessarily feel otherwise, I didn’t know if you had any thoughts to that effect at this point.

Yeah.

Our corporate and local negotiated segment actually is doing quite well.

We have increased our market share.

And we are showing a positive rate for the year.

One advantage we have, because we have the distribution, the brands.

And there are some companies, they like one-stop shopping, because it’s a trend that they will further mandate for preferred hotels.

So we believe, going into the season of negotiation, that we will fortify our position.

And actually ’04 looks pretty good.

But it’s too early to tell how that all will come out.

I think an increase in room nights for sure.

But the rate will be kind of flattish.

Okay.

Thank you.

Thanks [Ryan].

And our next question will come from Michael Rietbrock from Smith Barney.

That was close.

Just a couple quick ones.

Just so we understand on the depreciations, is this the new run rate or that was a catch up?

That was a one-time catch up.

The run rate will more or less mirror the first quarter.

Okay.

Matt, I just missed a couple of numbers when you gave the business breakdown.

You said that business transient was 32%.

You gave us 25, and the rest was group?

Business transient, Mike, was roughly 35%.

Group was just a touch higher than that.

Okay.

And leisure was around 25%.

And the balance would be –

Government.

Contracts, government, Boy Scouts.

What’s your sense of how high the business transient would have been at the peak in 2000 as a percentage?

It’s 40.

Okay.

I think the difference here is really what we call a [whack] [ph] rate or best available rates.

That kind of segment is down.

And that has a higher rate.

So in 2000, people were just staying, whatever the rate was.

And there was compression.

There was pricing power.

And that we don’t have right now.

But in actual fact, as I told you, our corporate negotiated rates are really up.

And our government is quite strong.

Yeah.

And Steve, when you think back to the recovery that took place, starting in ’92, was that similar?

Or was it different in the sense that occupancies, I guess, are sort of surprisingly high today?

Given everything that the industry has gone through, and it really seems to be more a mix issue, how do you think about how this recovery is likely to play itself out relative to the last one, based on that?

Mike, I really think that it will be stronger this time around, because in the early ‘90s, there was just so much over-supply, that one of the things that drove the recovery was the process, as those hotels moved from the hands of financial investors to operators, at lower prices, and were kind of recapitalized.

And it made it – you had to kind of go through that process in order to get to a point where you could price things at something that was realistic, relative to their value, as opposed to what they’ve been traded at, at limited partners.

And we don’t really have that issue today.

I mean there’s not over-leverage.

It’s just we don’t have enough people prepared to pay the highest rates in the hotels.

So we sell to the marginally profitable, but still profitable leisure segments.

So it’s just a lot different.

But I would think that, like always happens in business cycles, we’ll just wake up one morning and it will be over.

And I would say in our business that we’ll have – it will be a long cycle, up cycle.

And it, I think, will be better than we saw a decade ago, because it’s different dynamics.

Right.

Exactly.

And did you guys rate what July is at, the quarter today?

No.

We did not.

We’re really not inclined to sort of give you month by month or anything else Mike.

So –

That’s fine.

Okay.

Thanks.

And our next question will come from Keith Mills from UBS.

Good morning.

Hi Keith.

A few questions for you.

First, Dieter, could you share with us what Hilton’s yield management strategy will be for 2004?

I know Steve you had a quote in the press release talking about trying to go after more occupancies.

Should we make the assumption that for 2004 you’re managing that way as well?

Well I think personally, I think going into ’04, until we get better visibility, we will maintain our efforts and focus on driving the highest occupancy.

And we’re doing that in a very price sensitive market.

We are continuing leveraging our entire brand and distribution channels through sophisticated new management, and of course aggressive sales efforts.

And so, as Matt said, we are casting our net further out there, looking at any business, from [inaudible] to government and so forth.

But we have seen a slight increase in May, our booking basis up by two or three percentage points.

And June, as a matter of fact, for current and future years, are up 20%.

So there are some encouraging signs.

So up – I guess that’s 2004, up 20%?

No.

I’m saying for the month of June, in the current year, our booking base is up.

Just we are looking at one month.

And July we’re looking at it.

But for ’04, we are careful in terms of allocating – we won’t just give our space away in terms of a lot of convention or association business, because this particular business, even this year, has been very strong, has been good for us.

So we have, through our yield management, we can control the high demand dates.

And hopefully we do our pricing accordingly.

Okay.

Steve, I have a question for you regarding OnQ.

I think it’s a great concept.

But could you share with us what your, and I guess what Hilton’s vision is for OnQ years down the road?

Where do you think you can bring it to, to help differentiate your brands relative to your competitors, and what you need to do at this point to do that?

Well let me just kind of give you an overview.

But Tim Harvey is on the line.

And I’d like him to speak to it in a little more detail.

But in my view, this is the technique by which we can compete against the other big hotel companies, because we’re ahead, I believe, in our development of these technology driven systems.

And it’s really hard, and really expensive, to ever catch up.

So it is that kind of classic sustainable competitive advantage.

Now I think that all of the three or four big hotel companies have these competitive advantages over the rest of the industry.

So this, for us, is kind of the second step, is that we’re in line with our head-on competitors, and above the rest of the industry.

Now the question is how do we step out ahead of them?

And it’s by using very expensive, very hard to create systems, and spreading the costs and the advantages over 2,100 units.

And that’s what lets us do that.

That’s how we get our sustainable competitive advantage.

And so, Tim, you might talk more directly about how, now that we have it – virtually have it in place, how we use it, how we do take advantage and provide lower cost, and better customer service than our other big competitors will be able to do.

Yeah.

Thanks Steve.

On the – we’re going to really be focused in two areas.

One is – and Dieter highlighted some of the early results and cost reductions that we’ve got to drive revenue or cost reduction improvements in, in all hotels.

But particularly on the managed hotels, we’ve got a list of initiatives in place today, trying to get at better management of our payroll, increasing productivity by eliminating manual efforts.

And we’ve got a whole series of cost reduction items.

On the second side is really in trying to drive what I would call customer recognition, treating customers better, really understanding who our customers are.

We’re going to be using more preference management, knowing what people’s needs are, so that we can better take care of those guests when they show up in our hotels.

And then the third area that I would highlight going forward is in the area of pricing.

How do we take the expertise across having one common place where information on over 2,100 hotels exists?

And how do we really look at what’s happening in all the distribution channels, and being able to optimize the prices that – and control the prices that show up in the various channels.

At the end of the day, I think Steve’s comment about scope and scale is really true.

With 2,100 hotels all on one common system, we can react to the market’s changing conditions literally in a much faster speed than our competitors.

Just as an example, you will recall in 2000 we rolled out Honors in just over four months.

And literally something that our competitors took much longer to roll out honors programs, their frequency programs.

And we were able to do that in four months.

Literally, the software changes to accurately know the points to provide to customers, literally was just rolled out with a single push of a button in getting the technology out there.

So I think, and overall, I’d just end it with speed to market.

I think we’ll be able to adjust to changing business conditions quickly.

Does that help you?

It does.

Thank you.

Appreciate that.

Just one final question for I guess Steve and maybe Marc.

You didn’t provide expectations for the second quarter in your second quarter release – understandable.

Why not provide third quarter expectations in this release?

I think really for the same reasons Keith, just really looking at things quarter to quarter is just so difficult.

So we just made the decision to provide full year at this point.

Okay.

Thanks.

And our next question will come from David Anders from Merrill Lynch.

Great.

Two questions.

First, on a housekeeping, on the share count going forward, should we be using 380 million now Marc for the back half of the year?

And then if Dieter could comment on the New York market, we keep hearing mixed things about it, that we still need the European business sort of to show up in August to really make New York work.

Do you sense that as well?

I think in New York, although still somewhat softer, and we do see a slight pick-up on international business, we are running pretty high occupancies.

And all of our hotels in New York have achieved really high RevPAR index increases in the second quarter by 10%.

The Waldorf-Astoria is running over 130% of RevPAR index.

So we are very pleased about our performance.

And Dave, yeah, 380 for the back half of the year would be right.

Hello?

Yes.

Thank you very much.

Okay.

And Will Marks from JMP Securities has our next question.

Yeah.

This may have been covered.

But I’m a little confused on the total adjusted EBITDA number.

And your guidance for that – 909 and 915 – how does that compare to the previous guidance for total EBITDA of 930?

Is it apples to apples?

Yeah.

It really is Will.

Okay.

And so if we were looking at past numbers for this total, I assume you are going to use this total adjusted EBITDA number going forward.

This is kind of something that you want to keep going?

Yeah it is.

And if you look at one of the attachments to the press release, we define adjusted EBITDA.

But that has been what we’ve used as EBITDA.

But the SEC is now saying that if you’re going to use “EBITDA” it really is a strict definition – earnings before interest, taxes, depreciation, and amortization.

But there are other things contained in it.

So the adjusted EBITDA number is a comparable number to what we’ve had in the past, and is what we’ll use going forward.

Okay.

Great.

Thanks a lot.

That’s all.

And our next question will come from Joe Greff from Fulcrum Global Partners.

Good morning everyone.

Most of my questions have been asked and answered.

I know it’s kind of difficult looking out into ’04.

I am not going to ask you what you expect RevPAR to be.

But maybe you can just talk about how much RevPAR growth do you need next year to keep EBITDA margins roughly flat.

I think we had that question last time.

Yeah.

We had that question last time.

I think we talked about something on the order of two to three percent Joe.

Okay.

Now is that – you’re assuming in the RevPAR growth, are you assuming that’s all rate, because of an improvement?

I think that’s – you said you weren’t going to ask.

Yeah.

Come on Joe.

I think Dieter talked about the yield management strategy.

And we’re going to keep trying to build occupancy.

And hopefully probably some color returns where we can get more rate.

Great.

Thank you.

And next in queue is Steve Kent from Goldman Sachs.

Good morning.

Just to continue on that question, do you think that it’s really the occupancy?

Or is it really just the mix that you need to get pricing going?

And then secondly, I guess I’m a little troubled by the fact that Internet pricing is increasing – or Internet activity is increasing.

At the same time, you all seem to have some trouble, and the industry has some trouble with getting some pricing power.

And I don’t know if those are correlated, or they just happen to be happening at the same time.

So I just wanted to hear your comments on that.

Well we’ll talk to Internet first.

Let me – yeah.

Our Internet sales are increasing dramatically at our own sites.

And the rates on our own sites are very, very strong.

So don’t correlate Internet sales on our sites with the challenge we’ve got with average daily rates in general.

We’re selling very strong rates on our side.

And we’re maintaining, and in fact increasing the percentage of revenue that we book on our sites versus third party sites.

So I think that’s – you’re heading in the wrong direction if you’re looking at that as a weakness.

I think on the business mix, I mean it’s just a classic pattern in our business, is that once the occupancies build and make for compression, that gives the general managers the confidence to back off on taking some of the leisure business or marginal group business, in anticipation of being able to fill the hotel with either shorter dated small group business, or business transients.

And it’s just that’s the way it seems to work, is once you get those occupancies into the mid-seventies, that means you’re basically full during those four days of the week.

And you can start backing off and being more selective in the business that you book.

It really is a quality of occupancy issue, if you will Steve.

It’s getting more of the corporate meetings and the business transient.

Okay.

Thanks for your help.

And Bill Crow from Raymond James has our next question.

Good morning everybody.

A couple of quick questions here on time share.

You said that your results were hurt a little bit because of the percentage of completion.

But that tends to have a catch-up period.

And as you look at New York, and you look at Orlando, should we see a little bubble coming through the pipeline at some point in the future?

I think you’d find that in the second half.

I think the comparables will get better.

Or I don’t think they will get better in the second half than in the first half.

But the – that is in regards to Las Vegas and Orlando.

The New York accounting will just be with us until that property sells out, more or less.

So there is not going to be any pick-up, if you will, on that, except that once we get into the comparable numbers in next year’s first quarter, then you will see the quarter over quarter impact as great.

Could you give us an update on how New York is performing, and whether you’ve decided to book at other urban timeshare developments?

I expect at this stage Bill, you know New York has been a little slower than we would have liked, but good interest.

Just sales have been a little slower.

But we think that will be a successful project.

But we’re going to wait and see kind of how that performs before we take a look at other urban kinds of projects.

We have plenty on our plate now with Las Vegas, Orlando and New York.

One final thing.

Any update on the insurance negotiation on the mold issue in Hawaii?

No.

No.

Nothing there.

And as we said in the release, we expect to reopen the Kalia Tower to guests during September.

Thank you.

And we have another question from Keith Mills of UBS.

Hi.

Actually two questions gentlemen.

First is Marc, would it be possible that you could issue an 8-K with the third quarter 2000 and fourth quarter 2000 occupancy ADR and RevPAR stats for the chains as you report them now?

That would be helpful from a modeling perspective.

Keith, you’re looking at the comparable owned properties?

Because back then we were doing comparable owned and managed?

Yeah.

For 2002.

I’m sorry.

For the third quarter 2002, fourth quarter 2002.

’02 third and fourth quarters?

Yeah, as you now report the stats?

Because you changed that effective for the first quarter of this year.

Yeah.

That would be helpful if you could do that.

Yeah.

We’ll take a look at doing that for you.

Second question for you is – I guess it’s for Matt.

Matt, how do you break out, or how do you know those guests that are considered group versus corporate transient, versus leisure?

Because what we’ve been hearing is that those that may be signed up to go to a group in some cities, like Chicago for example, have been canceling their group reservations, and then booking under the Internet.

So they may like they’re at coming in as a leisure reservation.

Could you walk through it with us, how you kind of track all that information?

Yeah.

That’s a good point Keith.

And we debated putting that information in my remarks.

We’re really just trying to illustrate the pricing differential in each of the categories.

And there’s no doubt that there is some inexactness in exactly putting those customers into those different rate categories and customer categories.

But we do track carefully.

I think Dieter you handled about 20 different customer categories?

Very detailed.

And Keith, I think this is really a good question for the meeting planners international convention people, because they all talk about it, because as they lose the attrition, there’s a penalty.

So in some cases what we have done is if a fellow comes from the next door hotel from Priceline.com, he or she has to pay a $60 attendance fee to get into the [board] [ph].

There are different ways.

And we are concerned about it.

And the industry is concerned about it.

And there is some dilution.

There’s no doubt about it.

Appreciate that.

Thank you Dieter.

And our next question will come from [Matt Zucker] from Quattro Global Capital.

Yes hi.

I was just wondering if you could address [inaudible], and the likelihood of an increase to [inaudible] going forward.

No.

We’re focused on using the free cash flow we have to continue to reduce our debt.

And what we’ve been telling our investors for some time is that that’s been our focus.

And it’s really been as a foil against share repurchase.

I think, in fairness, with the change in tax laws, I think dividends comes a lot closer to share repurchase as a way to get money back to the shareholders.

And when we get to that point where we’re in the financial position that we’d like to be, I think that we’d have to look at that very carefully.

Okay.

Great.

Thank you.

And that was our final question.

And we’ll conclude our q-and-a session.

I’d like to turn the call back over to our conference host for any closing remarks.

Okay.

Well all I have to say is thank you for joining us.

And we’ll be talking to you down the road.

Thanks again.

Bye.