希爾頓酒店 (HLT) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hilton Hotels third quarter earnings conference call.

My name is Brian, and I will be your coordinator for today.

At this time all participants are in a listen-only mode.

We will be facilitating a question and answer session towards the end of the conference.

If at any time during the call you require assistance, please press * followed by 0 and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

I would like to now turn the presentation over to your host for today’s call, Mr. Mark Grossman, Senior Vice President of Corporate Affairs.

Please proceed, sir.

Thank you and good morning, everybody or good afternoon if you’re on the East coast.

Thank you for joining us for our third quarter earnings call.

I’m joined here in Beverly Hills by members of our senior management team.

Steve Bollenbach, our CEO, is travelling, but has joined us by phone and he will be participating in the Q&A session.

Before we get started, just a few housekeeping items and talking about the format as usual.

We have a few prepared remarks for you, but then we will leave the bulk of our hour for your questions and our answers.

Also, just to let you know that the press release that we put out this morning and the conference call remarks we’ll be making this morning, 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 our comments this morning are subject to numerous risks and uncertainty, which could cause actual results to differ materially from those expressed in or implied by the statements and the comments herein.

Also, to let you know, this conference call will be available on a playback basis until October 29th at 8:00 P.M.

Eastern time.

To access the playback you would call 888-286-8010 and the code for that is 44271061.

This call is also available on webcast.

And to access the webcast you would go on www.Hiltonworldwide.com, go on the Investor Relations link and then to Quarterly Conference Calls.

And just one more quick housekeeping item.

You’ll remember that on our last call we talked about the FCC Regulation G, which dictates the use of EBITDA and reconciliations to GAAP net income.

Without going through all the details again, which we did on our last call, let me just say that you’ll find the pertinent reconciliations of adjusted EBITDA to EBITDA and net income as an attachment to this morning’s press release.

So, with all of that as an introduction, let me turn it over to our CFO, Matt Hart.

Okay, thanks Mark.

The story of our third quarter was pretty much the same as we experienced the first two quarters of the year.

Leisure business; very strong; group and business transient fairly sluggish; pressure on room rate and higher costs impacting margins.

The highlights of the quarter were our fee business, which was strong due to RevPAR growth and the addition of new units; our timeshare business, which is experiencing strong sales and higher unit prices; and the refinancing of our bank facility, which pushed out any significant maturities until the end of 2007.

So what I’ll do is talk about each of our businesses and the factors that impacted them during the quarter, then spend a few minutes on our outlook for the rest of the year and then take a general first pass at 2004.

And we’ll start with the owned hotels.

In our owned hotels, revenues were down 2% at our comparable properties, due to the same basic factor that has weighed on the industry all year; a shift in the business mix to more leisure and less groups and business transient.

That shift impacted our room rates, but also food and beverage and other revenue sources, such as telephone and retail, and ultimately our margins.

As to the mix of business, let’s put some numbers to it.

About 34% of our room nights during the quarter came from business transients, roughly 33% from groups and 28% from leisure.

Business transient room nights were down about 7% from the 2002 quarter, with the rate flat.

Group room nights were down about 1%, with about a 1% decrease in rate.

But leisure on the other hand, saw nearly 12% increase in room nights, combined with a 1% increase in rate.

But as we pointed out last quarter, the problem is the rate.

The leisure average rate was $30 below the business transient rate.

During the third quarter we were able to take advantage of the strong summer travel and drive really strong occupancy levels at many of our own hotels.

New York, Hawaii, San Diego, Chicago, Santa Barbara, Minneapolis and Anchorage all posted occupancies of 75% plus during the quarter, with New York and Hawaii well above 80%.

Clearly though, we need a more desirable mix of business in order to command pricing power and improve profitability.

We continue to believe that business transient will pick up as the general economy improves.

In fact, as we noted in our press release this morning, there are some markets where pick up is becoming evident;

New York City and Washington, D.C. are two examples.

In New York, business transient for the fourth quarter, both leisure and business transient, is expected to show a single digit increase at the Waldorf Astoria and to be up in the mid-teens at the New York Hilton.

We are also seeing improved international demand in New York from the UK, Italy, Japan and Latin America.

And with the economic picture getting better, the financial services sector is generating increased demand.

In Washington, government business is up, added by the new $150 per diem, which has helped us all year.

We’re seeing a lot more business from defense-related organizations and companies.

And for ’04, the group business at our own hotel in the D.C. area looks particularly strong.

We’re also encouraged to note that in the last three weeks we’ve seen an increase in reservation volume, both at our own reservation channels and through the global distribution systems.

For the balance of ’03, the group business will continue to be a challenge for most of the same reasons we mentioned on our last call.

Events are smaller and stays are shorter.

Group business has generally been slow to recover, especially in the company meetings sector.

But on the other hand, the association and the tour group parts of the group business have been reasonably strong.

And so in sum, we expect our overall group business to be down approximately in the mid-single digits for the full year.

But the good news for us is that as this business returns we’re in an advantageous position due to the location of our owned hotels, the kind of meeting space we have and our position as a leader in the meetings and convention business.

Looking at the cost side of the equation, expenses at our comparable owned properties rose 3% in the quarter.

More than half the increase was due to increases in insurance and healthcare benefits, as well as property taxes.

And taken together, these three items alone increased about $6m over the 2002 quarter.

We’re working very hard to contain costs by achieving appropriate staffing levels, using technology to our advantage and finding operating sales and purchasing efficiencies among our hotels and our brand.

And it continues to be a primary focus for our management team here and for our management team in the field.

So to summarize the owned hotel story, we’re getting a sense that the business environment is steadily and moderately improving, but that there’s still a way to go before we can say a full recovery is here.

On the supply side of things, the story is a very good one.

New supply in the industry is focused in the mid-scale segment with very little in the way of new full service supply.

And that’s especially true in many of the big markets that are most important to us, like New York, Washington, Chicago and Honolulu.

As the business landscape improves and the supply story continues to be favorable, our owned hotels should be in a great position to achieve pricing power and maximized profitability.

This has been the historical pattern in our industry and I believe we’re in the early stages of a very favorable demand and supply cycle.

Okay, now let’s turn to our fee business, which had a terrific quarter as a result of strong leisure travel and drive-in business, our mid-scale and extended stay brand posted reasonably good RevPAR increases.

And with continued strength and market share performance, we’ve kept our pipeline full and we added 43 hotels into our family of brands.

The RevPAR increases and the unit increases thus led to a $4m increase in management and franchise fees for the quarter.

Once again, our brand achieved significant rate and occupancy premiums over their segment competitors.

And one of the analysts who’s no doubt on the call, recently described two of our brands as category killers, Hampton Inn and Hilton Garden Inn.

I’d certainly add Embassy Suites to that list.

And I’d also point out that Doubletree has come a long way.

YTD through August, Doubletree’s RevPAR index was at 99.8% and Doubletree’s improvement in market share has been leading to conversion opportunities and growth in that brand.

During September, five hotels in Tennessee converted to the Doubletree brand and there was a conversion to a Doubletree at Toronto Airport, which is our first Doubletree in Canada.

We believe that this is a very good conversion brand.

And as we’ve said in the past, brand performance leads to happy owners, which leads to more people wanting to invest in one of more of our brands.

Market share gains are one factor, which results from guest satisfaction.

We were very pleased that out of six categories, our brands took half of the first place awards for overall guest satisfaction, given by J.D. Power.

And those were Hilton Garden Inn, Homewood Suites and Embassy Suites.

So all of these factors taken together are leading to excellent unit growth.

We issued a press release last week confirming numbers from Lodging Econometrics, showing that the Hilton brands had significantly more rooms in the active pipeline in the US than any of our competitors.

And our brands now account for about 24% of the active US development pipeline according to Lodging Econometrics.

We enjoy very strong relationships with our existing owners and we have recently welcomed many new franchisees into our family of brands that were previously aligned with competitors.

Let’s now turn to the timeshare business, which was another bright spot in the quarter.

Again, as we reported last quarter, we continue to see excellent growth in unit sales, as well as increases in our average unit sale prices.

Our two new projects in Las Vegas and Orlando are seeing strong sales, with average sales prices at around $20,000 per week.

The first phase of the Orlando project is expected to be sold out when it opens after the 1st of the year.

Timeshare revenue was up significantly during the quarter; 31%, but profitability was impacted by the factors we mentioned last quarter; mix of sales, accounting for the Hilton Club in New York and the receivables we sold last year.

Turning to corporate finance, during the quarter we lowered our debt by $22m, so our current debt level stands at roughly 4b.

Our debt has an average life of 9.5 years and average cost of 6.2%, and our mix of fixed and floating debt is 7723, just where we want it.

The big news in the quarter, however, is that we refinanced our bank debt with a new $1b revolving credit facility.

Pricing remained at LIBOR +125 and we did get an improvement in some of the terms.

And with this facility in place, we have no significant maturities until November of 2007.

Before I turn it back to Mark, let me briefly address our outlook for the rest of 2003 and give a few general thoughts on 2004.

Starting with the balance of 2003, we are seeing some signs of improvement in certain markets.

New York and Washington are seeing improved business travel and there are pretty strong leisure trends in Hawaii and San Diego.

On the flip side, however, we expect challenging situations for the rest of the year in San Francisco and Chicago and in Boston.

Group business is expected to remain relatively sluggish for the balance of the year and pricing power is still limited in the group and business transient segment.

The upshot is that the remainder of 2003 will see some challenges, but we’re really not suggesting any significant changes to the full year earnings guidance we gave on our last call.

Turning to 2004, we would expect improvement in business travel as the economy continues to rebound, which should enable us to get back into positive RevPAR territory.

It’s important to note, however, that our industry historically lags the general economic recovery by a couple of quarters.

And with shorter booking windows and limited visibility, it’s difficult to pinpoint just when the business returns to full strength.

We are, however, anticipating an improved environment that should enable us to begin shifting the mix of business to more group and business transient, thereby helping achieve greater pricing power than we’ve seen in the last two years.

We believe our owned hotels are in the best position to take advantage of improved business conditions, the demand-supply story is working is working in our favor and we’re always focused on maintaining our own hotels.

We’ve consistently allocated 6% of revenues to our owned hotels for routine improvements; roughly $150m per year and around 80% of our rooms have been renovated within the last five years.

We also view our use of technology as a competitive advantage.

Across our entire system—that includes all of our managed and franchised hotels, over $125m will be spent this year on various technology initiatives to enhance customer service, maximize customer and guest loyalty and achieve cost efficiencies for ourselves and for our owners.

Our OnQ initiative, which we’ve talked about in the past, is one such initiative designed to help us stay ahead of the competition.

These factors, along with our strong stream of fee income, solid timeshare business and strong financial position make the Hilton investment story a very good one.

So with that, I’ll turn it back to Mark, and then we’ll take your questions later.

Okay.

Thanks, Matt.

And before we go to the Q&A session, let me quickly reiterate the guidance that we provided in the press release this morning.

Our estimates for full year 2003 are a total revenue of approximately 3.84b; total operating income in the range of 515m; total adjusted EBITDA of approximately 900m; a 3-4% RevPAR decline at our comparable owned hotels; and diluted EPS in the $0.37 range.

Our estimate for capital spending in 2003 is approximately 350m, broken out at about 165m on routine improvements and technology, 110m for timeshare, 40m on hotel special projects and 35m related to the mold situation in Hawaii.

I will mention to you though that Kalia Tower at the Hilton Hawaiian Village successfully reopened to guests in early September.

In terms of unit growth for 2003, we’ll add about 112 hotels and 15,000 rooms to our system in ’03.

Now let’s change just a second to ’04.

Matt gave you kind of a general overview.

At this stage we’re still reviewing property operating budgets, so we’re really not in a position to provide very specific 2004 guidance at this time.

However, based on a very preliminary look at things, we would expect generally that RevPAR from comparable owned hotels would increase in the range of 3-4% in ’04, with slightly improved margins.

Now contributing to that expected RevPAR increase would be moderately positive overall group business for ’04, driven primarily by improved company meeting business.

You heard Matt say that the company meeting segment, as a component of the group business, it’s been the most challenged this year.

We’re currently seeing comparably strong trends in this segment for 2004.

The pharmaceutical and financial services sectors are leading the way here.

Now this is highly profitable business that should help us get that shift to a more desirable mix of business.

And on a macro level, more company meetings simply means that corporate America is out travelling in increasing numbers, a very good sign for our industry.

Another encouraging sign is the trend that we’re seeing of improving reservation volume from our call centers, from the GDS and via the Internet.

The needle is certainly moving in the right direction as we head for 2004.

Looking at capital spending for ’04, that’s expected to be in the range of 275m.

We convert that out for you as follows; approximately 155m for routine improvements and technology, 55m for timeshare projects and 65m for hotel special projects.

We’re looking at a good year on the unit growth front.

We expect to add between 110 and 130 hotels and 15,000-17,000 rooms to our system in 2004.

So on balance, we would say that we’re optimistic for 2004.

The signs are pointing in the right direction for our industry.

And we believe that our company is especially well-positioned to outperform our competitors.

So that concludes the prepared remarks and we’ll now turn it over to your questions.

Ladies and gentlemen, at this time if you wish to ask a question, please press * followed by 1 on your touch-tone phone.

If your question has been answered or if you wish to withdraw your question, please press * followed by 2.

Questions will be taken in the order that they are received.

Again, press *1 to begin.

And your first question comes from Will Truelove, of UBS.

Please proceed.

Hello gentlemen.

I have two questions really.

My first question deals with the market of Chicago.

In terms of looking at the convention business in Chicago, it looks like it’s going to be down, from what we’re hearing, about 30% next year.

How is Hilton trying to compensate for that impact, especially given that there’s a new union contract in the Chicago market?

So, how are you going to deal with the drop in conventions as well as probably a pressure on margins in that front?

Well, in Chicago, the reason for that is the citywide conventions are down substantially for ’04 and the has to negotiate it.

And we have made some changes and as you probably know, we are looking at our productivity schedules very carefully.

And in order to get some more business, we really have to look in leisure business.

I think company meetings—and Mark mentioned it as well.

Company meetings we have seen in the third quarter, a positive trend for the first time, because the previous quarter we had been down by 10-15%.

So to me, that is an encouragement trend and our in Chicago at the O’Hare Hilton, where we have seen a 10% increase in company meetings.

These are small increases and that’s the kind of pent-up demand we all have been waiting for to surface.

And so I believe part of leisure business, company meetings and any other business we can get, we can somehow offset Chicago.

But it’s going to be a soft year for Chicago.

Yes, but just getting back to the combination of softness in Chicago as you described it, along with the new union contract, how does that sort of impact overall margins for the owned portfolio, Dieter?

Well, Chicago is a component for the three hotels we have in Chicago, it has a slight impact.

But you have to, really for ’04, we look at Chicago and San Francisco—and San Francisco is better, it’s sort of flat.

It’s not as bad.

So Chicago is really the only problem we have right now.

And we’re putting all of our resources in there to find other businesses.

Sure, thanks.

One last question.

The Hilton Garden Inns, I saw now that you’re managing two Hilton Garden Inns.

Is this something that we should expect to continue, from something that was historically a pure franchise vehicle?

Well, I think—Tom can add to this, but Hilton Garden Inn will continue to be almost exclusively a franchise product and franchise brand for us.

Well, I think that is true.

We do believe that we manage hotels better than anybody else.

We manage a number of Hamptons.

We manage a number of Homelands.

We manage a number of Embassies and we’ll clearly manage some Hilton Garden Inns.

But you should always expect that the majority will be franchise.

And in our limited service, where we are managing close to 100 hotels, these are smaller hotels.

So whenever there is an opportunity, we certainly will be able to manage it.

Oh, okay.

Great.

Thank you very much, gentlemen.

Your next question comes from Joe Greff, of Fulcrum Global Partners.

Please proceed.

Good morning, guys.

You had mentioned, also in the press release, you mentioned earlier on the call that you’re starting to see some improvement in business travel in New York.

Can you kind of talk about, in other cycles, do you typically see that the business travel recovered in New York first, and then start to spread to other urban markets?

Yes, I think that’s about how trends go.

I mean, New York seems to be a trend and we see that positive sign in business travel being up, and in other cities as well.

And particularly you see there.

They have meetings.

Well, you would think that especially, New York as a gateway city and then certainly in the financial services sector, when the economic picture gets better you have more meetings, more IPOs more road shows, more stuff going on.

And New York is a home base for a lot of that.

And we’re also seeing some international pick up too, which is important.

Yes, New York would certainly be a leading indicator there.

Great.

And can you talk about what your collective conversations as corporate travel planners and managers in terms of where your sense is the budgets are going for next year?

Yes, we’re in the midst of finalizing or negotiating the various open negotiated contracts and it’s going very well.

As I mentioned in the previous quarters, we are gaining market share.

We’re looking at positive RevPAR increases for next year in this particular market, with occupancy up and the rate slightly up.

Great.

Thanks, guys.

Your next question comes from Bill Crow, of Raymond James.

Please proceed.

Good morning, guys.

Just a couple of questions.

Could you quantify your group bookings today, compared to where they were at this time a year ago?

Yes, we see consistent quarterly improvement in the booking pace.

And in actual fact, the number of bookings we do is up quite a bit, but the size is somewhat smaller.

So, if you look at the first quarter, tentatives are up 12% for the quarter and our definites are still down about 6%.

But that’s changing rapidly as we move forward.

Also earlier this year I would imagine you had quite a bit of cancellations with the war and SARS and everything else happening, so if your group bookings are running even or slightly better than they were at this point a year ago, it seems like a pretty good sign for ’04.

Yes, it’s a good sign.

We had more cancellations the previous year, actually, in total numbers.

Okay.

And then Matt mentioned that you’ve seen an increase in reservation volume in the last three weeks, any way to quantify that?

Across all of our brands it’s been up a couple of points and it’s been true across all of the channels, both Internet, GDS and our own voice channel.

And given the short booking window, I assume we’re talking about really fourth quarter type numbers, right?

Well, you’ve really got to look brand by brand, because some of the reservations are a week out for Hampton Inns and for other brands they’re longer than that out.

But yes, it’s mostly fourth quarter.

It’s not beyond fourth quarter for sure.

Right.

Thanks guys.

And your next question comes from Joyce Minor, of Lehman Brothers.

Please proceed.

Hey guys.

When you look out to ’04, that was helpful guidance that you provided.

I think you said that you were looking for some up-tick in margins potentially on that 3-4% RevPAR growth.

Should we be thinking kind of same store EBITDA growth of 3-5% or could the margins allow you to do even better than that?

I don’t know if you’re comfortable with a range like that.

Joyce, I think our general guidance over time will still kind of be at 1.5 times flow-through would be something in our comfort zone.

Okay, that’s helpful.

Thanks.

And then in terms of the timeshare numbers that we saw in the quarter, with units up 9% and pricing up 5%, is the reason that the reported revenue number was up 31% related to percentage of completion accounting differentials.

Joyce, this is Bobby.

A part of it was we’re starting to get pretty close to a completion in Las Vegas during the end of the quarter, about 85% complete on Las Vegas Boulevard.

And about 58% on our first phase of Tuscany.

So part of that certainly was the fact that we’re getting closer to completion.

Okay.

And then just lastly, we’re seeing some people out there being more active in the way of acquisitions.

I know that in the past you guys have focused more on taking your debt down and longer term goals to kind of reduce owned hotel EBITDA relative to management franchise EBITDA.

But might we see you interested in single assets or small portfolios at these price points?

Are you seeing anything interesting out there?

No, not really, Joyce.

We’re really interested in bargains.

And the last bargain we saw was like Waikoloa, which we moved fast on and we loved that deal.

I think the bargain time to be buying was two years ago.

And we’re very active.

We see all the deals, but we just haven’t seen anything that’s really we’d characterize as a bargain.

Okay, thanks, guys.

And your next question comes from Steve Kent, of Goldman Sachs.

Please proceed.

Hi.

Did things deteriorate a little or substantially or materially in the past few weeks, because I guess Steve Bollenbach just sounded much more bullish on CNBC just a few weeks ago, when he talked about that good times were starting now and things were starting to improve.

And yet in your press release you’re really talking about that it would be—and even your commentary today, it sounds like it’s going to be further out.

Is there something that’s happened in the past few weeks that makes you feel less comfortable that it’s going to happen now rather than some future period?

Well, let me just say one little technical thing and then Steve, you can chime in.

One of the things that happened was that September was kind of a funny month.

If we looked at the September results, September 1st through the 10th, we were actually up 5.3% in RevPAR at our own hotels and then September 11th to 30th we were down 0.8.

Now that’s not anything that’s going to change our outlook, but it’s just kind of funny what happened in September.

And we don't know if it was because of when the Jewish holiday was or people were watching the baseball games or whatever, but that was kind of a funny month.

But I don’t think our outlook has really changed.

I don’t know, Steve, do you want to chime in.

No, nothing in my mind has changed.

It’s what I was expecting on television and I would expect again and say to you today, is that trying to guess what this is going to be like in the next couple of quarters is obviously just pure art and not much science.

And I just had a feeling in talking to the people in our business and the people in other businesses that it’s about time to start seeing a turn-around.

But I’ve not seen anything in the last few weeks to change my mind one way or another.

Steve, I think it is consistent with what we’ve said and that is we are seeing some improvement, especially in a couple of markets.

But again, just to kind of put that little caveat in there, that this is an industry that typically lags in economic recovery by a couple of quarters.

So, seeing some encouraging signs, but still some challenges for the rest of this year.

That’s consistent with what we said before.

I think, Steve, I just wanted to mention again the international market is picking up.

In New York we see a 10% increase just in the last two weeks, Japan, Asia, Hawaii, it looks more positive.

That’s trending up and if company meeting really does trend an increase of 5% or 10% for the year, if that continues, I venture to say that we will see more business travelers on the road as well and that would change our business mix.

And I guess just as a follow-up, is this typical Dieter or Steve or Matt, as you look through a couple of these cycles, is this typical of what you will see coming out of the recovery, where it’s fits and starts going out and then maybe takes 6-12 months to really get cooking?

I would say through my own experience—and I haven’t lived through so many cycles, thank you, Steve.

You know what, it’s a big country though.

I think New York is good, Washington is good, but San Francisco is still really bad.

And it’s a technology issue there combined with the fact that a lot of people have built new hotels and there’s an announcement of another new deal being built there last week.

So, that’s the thing that’s a little different, it’s some stronger and some weaker.

But in general, when you look at our RevPAR, it really flows well with the GDP line—we’re a couple of months behind, maybe one or two quarters.

Okay, thank you.

Your next question comes from Jay Kogan, of Banc of America.

Please proceed.

Hi.

Good morning everybody.

Most of my questions have been asked and answered, although I can’t wait to do that property tour in Anchorage.

I have a quick question to follow-up on Steve’s last question, just so we’re all looking for the same thing here and expectations are not missed.

If you’re looking for –4% RevPAR, which is basically what everybody seems to be anticipating now.

What’s the expectation in terms of how it rolls through the year, quarter by quarter, given the lag issue?

But also at the same time, you’ve got a very easy comparison to the second quarter.

And I was actually a little bit surprised when you were pretty upbeat on group bookings at the same time you’re saying the definites are down 6%.

I know the short booking windows have gotten shorter.

I guess what I’m wondering is what should our expectations be about the quarterly progression of RevPAR comps as we move through next year, based on what you know today?

Based on what we know today, we are looking generally at RevPAR being up 3-4% for the year, but we’re just not in a position to give any kind of quarter by quarter breakout at this stage.

Okay, well maybe to ask the question another way.

How much of your group business is actually on the books, in terms of number of room nights, for 2004 at this point?

I mean obviously, windows are very short, so can you give us some sense as to what percentage?

We are over 50% of our target for ’04.

And that’s sort of an average of the previous years between 60% and 50%, between that range.

So I think there’s no difference in it.

But as I mentioned to you, our tentatives are 12% for the first quarter.

And the 6% down in definite room nights is really when you take Chicago out, then the number changes quite a bit.

Okay, thanks.

And your next question comes from Jeff Donnelly, of Wachovia Securities.

Please proceed.

Good morning, guys.

I’m trying to understand just how sensitive timesharing revenues and profits are to changes in the rates you charge your customers as well as the spreads you can securitize receivables at?

Can you guys estimate to some degree how financing costs and spreads have influenced your growth and profit maybe in the past two years and Matt, maybe where you expect those spreads to head in the next say 12-24 months?

My concern is that maybe a rise in rates mutes your sales volume growth or your profits in future years.

Not really.

What we do is we have actually found that consumers are paying a little more attention to what those financing rates are and so we give the timeshare sales guys a little bit more flexibility, so instead of charging a fixed 15%, we might lower that for a year or two.

We have seen probably the average spread is down maybe a point or so.

But then of course they balance that against the sale price that they’re able to get and so you have to manage both.

And we haven’t done securitization of the timeshare paper.

We’ve sold the paper.

When we think the balance gets to be of the size that it makes sense to do so.

Overall, I don’t think it really is a big factor in the business, what that rate is.

Okay, thanks.

And your next question comes from David Anders, of Merrill Lynch.

Please proceed.

Great, thank you.

Matt, can you help us out on forecasting timeshare for Q4 and for next year?

Should we see the current run rate as you complete Vegas and Orlando, is that reasonable for next quarter?

And then for next year, what kind of growth rate are you shooting for?

I think the fourth quarter is going to be strong relative to last year’s fourth quarter, so I think we’ll see continued strength, certainly what we saw in the third quarter this year.

And then for ’04, that should be up at least at the same level that it’s going to be up for this year.

Okay.

A follow-up for Bob then.

Should the fourth quarter growth, sequentially down slightly, on an absolute basis, let’s say, on the revenue line item, down slightly.

Because the fourth quarter last year was pretty punk and so it doesn’t surprise me it should be better than that.

It will be.

It will be better than the growth that we saw in the third quarter.

Thank you.

And your next question comes from Will Marks, of JMP Securities.

Please proceed.

Hi.

All my questions have been answered except for one thing.

Since you give guidance which includes the reimbursements, is there any kind of anomaly we should expect in the fourth quarter on that other revenue line?

No, not that I’m aware of.

So the same type of growth, let’s say, as the third quarter?

Yes.

Great.

Thanks a lot.

And your next question comes from Harry Curtis, of J.P. Morgan.

Please proceed.

Hi, guys.

Just along the same lines, in the fourth quarter, have you built a receivable sale into the fourth quarter estimates?

No.

Any estimate of which quarter you will have accumulated enough to sell a block next year?

I don’t think so, Harry.

What happens in the timeshare business, you go into it and you create all these receivables and we have very good collection experience and we’re really on top of things, but we just wanted to prove to ourselves that yes, these things are good for the money.

So we did a deal, last year, I guess, for CE and worked out we need another one, we just thought that they were very aggressive about it.

I think we’re at a point in time where we keeping growing that EBITDA.

So I think we’ve kind of proved to ourselves that yes, this paper is good money and even though we’ve gotten several proposals and they love it and they want to do more with us, my guess is that there’s nothing compelling for us to want to do that at this point.

So at this point, I’d say probably not.

All right, thank you.

And your next question is from Brian Egger, of Harris Nesbitt.

Please proceed.

Hi, good afternoon.

I noticed that your RevPAR comps in the quarter for your more mid-scale and franchise brands were generally better than for your upscale and full service and more ownership oriented brands, which is actually opposite to the pattern of some of your competitors.

And I’m just wondering how much of that bipolar kind of trend there, the disparity, may be attributed either to the difference in terms of business, versus leisure travel mix across those brands or if it’s just the difference in terms of the typical behavior of different chain scale segments across where we are in the cycle right now?

I think it’s sort of both of those.

I think there’s generally a higher, more stable leisure component at the mid-scale brands and the business traveler hasn’t left them as much, because they’re mostly drive-to markets that they have in the top 25 markets where we’re concentrated in owned assets.

I think also the brands have done great.

Oh, they’ve done great.

The market share gains have improved and the customer satisfaction is there and so people keep going back to them.

And this is mix in terms of having convention in our space and that relates—if we’re down there in that market, of course that has an impact on RevPAR.

Okay, thanks.

And your next question is from Asad Kazeem [ph], of Real Estate Securities Advisors.

Please proceed, sir.

Hi, guys.

You commented on not wanting to do any acquisitions, because there’s no values out there.

But based on the changing complexion of the balance sheet, you guys will have a lot of free cash flow going forward with an improving economic environment.

So what’s the best investment alternative?

Is it buying back your own stock?

Is it reinvesting in your portfolio or going out and buying assets?

That’s a great question.

What we’ve been very consistent about for several years is to say that we want to make sure that we always have access to inexpensive capital.

We think the best way to do that is to have a solid but low investment grade rating from both agencies.

We think that one of the important things there is what the debt to EBITDA ratio is.

We want to get that to about 3.75 times.

If things go the way we think, we’ll probably be at about that time next year, where we are now.

So, then I think it’s a balance.

We always want to make sure we maintain the properties.

We’ve been very consistent about doing that.

We also look and we challenge the general managers to come up with ideas for property improvements, return on investment in those particular properties.

And we’ve done really well with that.

And then I think it does become that.

It becomes a look at perhaps share buyback, change in the dividend policy.

But I think we’re about a year away from having to make that choice.

Okay, thank you.

Once again, ladies and gentlemen, just as a reminder, if you wish to ask a question, please key * then 1 from your touch-tone phone.

Your next question comes from Luca Ippolito, of Chesapeake Partners.

Please proceed.

Actually, it was just asked a minute ago, so thank you.

And our next question comes from Fred Taylor, of Fleet Securities.

Please proceed.

Yes, I think most of my questions were answered.

I just don’t know if you answered this one already.

I apologize, I clicked off.

Could you discuss—it looks like 300m in technology related capital expenditures over the two years.

Maybe drill down a little bit what that involves?

Well, it was probably about 250m for this year and we’re probably about that same level for next year.

Our share of that for this year will be about 20%.

For next year it will be about 18%.

And we parse through that by how many of the hotels are ones that we own, different enhancements that we do to our system.

And Tim, are you on the line?

Why don’t you describe in general terms what those expenditures are for?

Okay, Matt.

As Matt said, a lot of this is in technology costs of our owners of all the brands as we made OnQ consistent across all the hotels.

It is investment that they’re making into that 250m.

But, the general expense categories are centralized computer systems, they’re running in Memphis in the data center, the network connectivity cost, software expenditures, etcetera.

So they go across all the traditional kind of technology classifications.

Okay, so this is kind of a revamp of both the business systems monitoring the performance, as well as reservation?

Yes, it’s totally across all of the major business functions that go on within our business from back office operations as you described, to reservations delivery, customer identifications, honors processing, etcetera.

So really since 2000, we’ve gone back and revamped everything that we’ve done as we put some companies together.

We’ve taken the best and created one product and then actually gone and put that everywhere.

So it’s new stuff.

And just on the 250, 250, what I had was CapEx in ’03 of 350, of which 165 was technology.

Did I miss that?

I’m sorry.

Maintenance CapEx plus technology.

Of that 165, probably 12m or so was technology.

The number that Matt gave you for technology, Fred, was not just capital, but it was also the operating expenses of all of our technology systems, which is an ongoing annual expense, as Tim mentioned, plus the Internet.

So you’ve really got to separate the two.

We’re not spending 250m in capital investment into technology.

Okay.

Thank you for that clarification.

That’s all.

And your next question is from Miles Henderson, of Victory Capital Management.

Please proceed.

Good afternoon.

I have three numbers related questions.

The first is, in the third quarter of this year, under expenses, you had other operating expenses that came in at 89m and it’s quite a bit bigger than it has been trending historically.

If you look at it’s a percentage say of the first nine months of ’03, the third quarter alone was about 37% of that nine-month number and it was 32% last year.

So it looks like it’s at least $10m high?

That's the first question I would like to ask you.

Miles, that’s all related to the timeshare business.

We had mentioned that the timeshare revenues were up 31% and our timeshare expenses were up 37%, it’s all basically mix of business and if you carve out the timeshare business out of the other operating expenses, those other expenses are basically flat to down.

So it’s all the timeshare business that’s buried in that number.

Okay, thanks.

And then taxes for the third quarter were up.

In the first half it looked like they were running around 35%.

In the third quarter it looked like they were around 37.5% and I guess management’s outlook for the fourth quarter is that tax rate will come in a little over 39%.

Can you tell me what’s driving that and what your outlook is for ’04?

The taxes in the first half of the year, Miles, were influenced by the utilization of tax off carry forwards in the first quarter, related to the sale of the [Ryetown] Hilton.

So that had an effect on our YTD effective tax rate.

Our effective tax rate is currently running in the 37-38% range.

So I wouldn’t expect a 39% in the fourth quarter.

Okay, thanks.

And then just finally, what drove your diluted shares down, vis a vis standard shares outstanding?

Just the accounting for convert, our old 5% convert, versus the accounting for our new 575m convert.

It’s different treatment on the way you account for the dilution related to those converts.

Okay, thank you.

There are no more questions in the audio queue at this time.

I’d like to now turn the program over to Mr. Grossman.

Okay.

Well, we appreciate you joining us this morning and we will be talking to you down the road.

Thank you.

Keep travelling!

Ladies and gentlemen, this concludes today’s Hilton Hotels third quarter earnings conference.

You may now disconnect your lines and have a great day.