希爾頓酒店 (HLT) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Hilton Hotels' Fourth Quarter Earnings Conference Call.

My name's Mike, and I'll 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 will require assistance at any time during the 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 very much, and good morning, everybody.

Thanks for joining us for our fourth quarter and full-year 2003 earnings call.

I'm here in Beverly Hills with Steve Bollenbach, Matt Hart, and other members of our senior management team, a couple of whom also are calling in from other locations to help with your questions.

Before we get started, let me just tell you about the format that we typically use.

Matt Hart, our CFO, will have some introductory comments, but as is our custom, we'll leave most of the time for your questions.

Also, just a little bit of housekeeping.

The press release that we put out this morning and the earnings call 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 this press release are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein.

I will also tell you that the conference call this morning is available via webcast.

To access that, you go on www.HiltonWorldwide.com, go on the Investor Relations link, and then go to the Quarterly Conference Calls.

There will also be a replay available of this call.

That will be available until February 2 at 8:00 PM Eastern Time.

The phone number for that call, for the replay, is 888-286-8010, passcode 44271061.

And the replay of this call will also be available indefinitely at HiltonWorldwide.com.

So with all that said, let's get started, and to do that, I'll turn it over to our CFO, Matt Hart.

Okay, thanks, Mark.

Some really good things happened in the fourth quarter that helped us end a tough year on a good note.

More importantly, however, is that the signs we saw in the quarter give us encouragement for better things in 2004, and as many of you know, it's been a while since we've been able to say that.

RevPAR was solid at our own hotels, as we maintained good occupancy levels, and we were also able to show a moderate increase in room rates.

Our fee business had another good quarter due to the addition of new units and RevPAR growth, and our timeshare business was strong.

The story at our owned hotels during the quarter was finally seeing the beginnings of a shift in the mix of business to more business transient and group business.

Business transient revenues were up 2 percent in the fourth quarter, compared to the 2002 quarter, and group revenues increased 1.5 percent over 2002 quarter.

And those were the first year-over-year increases we saw all year.

Plus, leisure travel continued strong during the holidays, and, in fact, leisure revenues were up 4 percent in the quarter.

And having the Kalia Tower back online at the Hilton Hawaiian Village allowed us to show an increase in overall rooms' revenues.

We did see some really good RevPAR gains in many of our most important markets.

Our single-strongest market was New York City, where our two owned hotels ran at 90-percent-plus occupancy levels and at higher room rates.

The improvement in IBT, international travel, strength in important industry segments, like financial services and pharmaceuticals, helped New York post good year-over-year increases.

And that's important because we generate a little over 10 percent of our EBITDA from New York, and number two, as the country's business and financial center, New York serves as a good indicator for the U.S. economy as a whole.

Washington, D.C. had another terrific quarter, as the Washington Group market was strong.

Our major leisure markets continued to benefit from strong leisure demand.

We saw excellent RevPAR increases at our resort properties in Honolulu, in Phoenix, and in San Diego.

The weaker markets in the quarter were Boston, Chicago, and the San Francisco/San Jose markets.

Our Group business showed an increase in revenue in the quarter versus the 2002 period, but smaller groups, on average, that generally spent less in the hotels were more the norm, and that lower spending impacted non-room revenue, like food and beverage, telephone, and retail, which declined during the quarter and ultimately affected our margins, and in addition, lower cancellation fees in the quarter impacted our profitability.

And in what has become a standard part of these reports, cost pressures in healthcare and increased property taxes continue to have a negative impact on profitability.

The upshot is that expenses at our comparable hotels increased 2 percent in the quarter, while revenues were flat.

So when you put it all together, despite the improved business mix, room rate improvement, and strength in some important markets, the declines in non-room revenue and cost factors combined to impact our margins and results at our comparable owned hotels.

Now, before leaving the subject of our owned hotels, I thought it would be a good idea to spend a couple of minutes on the subject of cost.

Now, the biggest component of our cost in the owned hotels side, of course, is wages, which make up about half of our total cost.

On that side, we're in pretty good shape; no really major issues or out-of-the-ordinary cost increases.

We've done a very good job over the years in taking costs out of the business and operating our hotels efficiently, but there are three particular expenses areas which are tough to control: healthcare costs; insurance, which includes worker's compensation; and property taxes.

And together, these three items account for around 13 percent of our total costs.

So let me give you some examples of some of the things we're doing to help mitigate these costs.

In the area of healthcare, late last year, we re-bid all of our health plans.

We aggressively selected vendors by market based on the best discounts, and we could see some good cost savings here and will know that as claims start coming in for 2004.

We also instituted changes in our health plan that helped contain costs, both for Hilton and our employees.

But at the end of the day, one of the ramifications of cost increases in healthcare is that employees wind up paying more, and we try to balance the costs we can afford to pay with the needs of the workforce, and in the end, we expect to see about a 12-percent increase in healthcare costs over 2003.

With insurance, specifically in the area of worker's compensation, we continue to place a heavy emphasis on preventing workplace injuries.

The programs and training we've put in place have resulted in significant decreases in employee injuries and days lost to injuries.

We are expecting worker's comp increases to increase about 13 percent at our comparable owned hotels, but this increase could be less if our current day's-lost experience continues.

There's not a lot we can do about property taxes, especially as cities and states look for ways to get through their own budget problems, but we do consistently and aggressively challenge property tax assessments.

In 2003, we settled appeals in New York, Chicago, and Washington that saved us a total of $5m, and so all in, we estimate about a 10-percent increase in property taxes in 2004 versus 2003.

So the costs in these areas will all increase in 2004, but the positive news is that the increases are a lot lower than what we've seen in prior years.

So, hopefully, the worst is behind us.

So to summarize our owned hotel business, the trends we saw in the fourth quarter bode well for our own properties in 2004.

We are seeing the business improve, and as the economy gains strength, we look for continuing increases in business travel and improvement in Group business as the year progresses.

Our owned hotels are well located.

They're in good physical shape, and they have the meeting space to take full advantage of these improving trends.

And in addition, the supply part of the equation continues to work in our favor.

So let's move now to the fee business, and this part of our company had another great quarter.

All but one of our brands showed RevPAR increases during the quarter, with our mid-scale brands, Hampton Inn and Hilton Garden Inn, posting particularly strong gains.

This is consistent with the continued strength in leisure travel that we saw in the fourth quarter.

These RevPAR gains and the addition of new units contributed to a $4m, or 5-percent, increase in management and franchise fees for the quarter.

The RevPAR index story continues to be a powerful one for our brands year-to-date through 2003.

Our brands operated at significant occupancy and rate premiums versus their segment competitors.

And even the one brand below 100, Doubletree, operates at a 99-percent-plus index and is gaining strength among owners as a really good conversion brand.

During the fourth quarter, we added 28 properties and over 5,200 rooms to our system.

And for the year, we came in at the high end of our target range, with 116 properties and more than 16,500 rooms.

And with over 400 hotels and 53,000 rooms in our development pipeline, we now account for more rooms in the active U.S. pipeline than any other company.

We've been very successful lately in securing management contracts for convention properties being developed by municipalities.

This is where much of the full-service hotel development is coming from -- cities that are building hotels looking to attract convention business.

Two of these hotels opened in the fourth quarter in Texas.

The 1,200-room Hilton Americas in Houston opened in October, and the 800-room Houston Austin opened at year-end.

The Houston property is a really spectacular hotel.

It's connected to the new addition to the Houston Convention Center.

It's the official Game and ESPN headquarters for the Superbowl, so if you're looking for tickets to the game, you can just call Dieter; he's got plenty.

It will also be the headquarters for the 2004 Major League All-Star Game.

We are also anticipating the opening this April of our new Hilton Managed Convention Hotel in Omaha, Nebraska, as well as the opening of the first freestanding Conrad Hotel in North America, the Conrad Miami.

So when we talk about unit growth, we rely on the strength of our brand names, Hyatt customer satisfaction, Hilton Honors, our distribution system, and our occupancy and rate premiums, and the other factor is the very positive relationship that we enjoy with our owners.

The big conference for our focused service brands -- Hampton, Homewood, and Hilton Garden Inn -- starts tomorrow in New Orleans, and there will be over 3,000 of our best friends, our owners and general managers, in attendance.

During the conference, Tom Keltner and his focused service brand managers will be presenting and discussing the programs, products, and services that we believe will help our owners maximize their investment in our brands, and it also gives us the great opportunity to hear from the owners and get their feedback.

These are annual events, and we're doing one for our full-service brands -- Hilton, Doubletree, and Embassy Suites -- in Chicago this March.

Performance is the bottom line, but this kind of communication and dialog helps ensure that we and our owners are on the same page and helps us maintain the positive relationships that we have with our owners.

Let's now talk about the timeshare business, and this was another great quarter for Hilton Brand Vacations Company.

Revenue in our timeshare business was up big, 50 percent, and we were very profitable, largely due to an 11-percent increase in average unit sales price.

We had terrific results across the board in our timeshare system, including our existing properties in Las Vegas, Orlando, and Honolulu.

We opened our newest Las Vegas project during the fourth quarter.

It has 283 units in its first phase.

It's located at the north end of the Las Vegas Strip, and units there are selling for an average of approximately $23,000 per week, and sales have been great.

And I know that many of you on the call go to Las Vegas on a fairly regular basis, and I'd encourage you to take a tour through this great property, and Marc or [Tisch][ph] could help set this up.

This is our third timeshare project in Las Vegas, and we believe that it will be every bit as successful as our first two at the Flamingo and the Las Vegas Hilton.

It's definitely starting out that way, and we have the capacity there to develop almost 1,000 more units at this site.

Our other new timeshare development opens for occupancy this spring in Orlando near Universal Studios.

The 96 units in the first phase of this project are virtually sold out.

So the story in timeshare is that we're investing in the right product, in the right markets, and this continues to be a very successful, complementary business for us.

I want to spend just a minute on distribution and technology.

We're very pleased with the pricing integrity strategy that we put in place earlier this year and then made even better in December with our "Best Rate Guaranteed" program.

We are achieving what we set out to do, and that is to give customers pricing confidence and encourage them to make their reservations through our Hilton Reservations Worldwide call centers, either contacting the hotels directly or accessing our branded websites.

This program and the enhancements we made to our sites during 2003 are [help] driving reservations through our proprietary websites.

Bookings for all online sources still account for about 13 percent of our total reservations, with nearly 85 percent of that total coming from our own sites.

And this latter number is important since reservations from our branded sites are the most cost-effective.

And to update you on the OnQ system that we've talked about throughout 2003, we've essentially completed installation of OnQ to the 2,100-plus hotels in our system, and OnQ is the technology enabler of our Customer Relationship Management program, which we have dubbed "The Customer Really Matters."

While there are a lot of factors that influence customer satisfaction and loyalty, we believe that CRM and the OnQ technology that helps make it work were responsible for some great successes in 2003.

During the year, the total number of stays at our hotels by our Hilton Honors members increased over 20 percent, and online bookings by Honors members at our branded websites increased 42 percent.

And our hotels have seen significant increases in customer satisfaction scores.

In terms of how we can use technology to better serve our customers and run our properties even more efficiently, we're actively exploring and testing a number of new technology applications to enhance customer recognition, maximize the customer's experience, and enhance service recovery.

For example, we've introduced self-serve kiosks at the New York Hilton to expedite check-in.

So far, customer usage and reaction has been great, and we'll be putting them at the Chicago Hilton in a couple of weeks.

We have believed for some time now that if you can create and employ effective technology systems, you can build a sustainable, competitive advantage.

With the programs we've put in place and other programs and systems we're testing, we believe we are building such an advantage.

Before we turn to our 2004 outlook, I want to talk briefly about a couple of other fourth quarter activities.

During the quarter, we completed another excellent transaction with CNL.

Our two companies formed a partnership, which acquired Hilton Hotels in Washington, D.C. and La Jolla, California.

This accomplished a few strategic points for us: we enhanced our fee business in that we will continue to manage both properties; it brought us about $190m in cash, which we used to pay down debt; and it allowed us to use available tax-loss carry-forwards.

There were also important changes announced at two very prominent Hilton-branded hotels, the Beverly Hilton in Beverly Hills and the Las Vegas Hilton.

Both hotels have new owners, and we will manage both properties.

These are high-profile hotels that had the need of capital spending for some time, and we are very pleased that the new owners are dedicated to making significant and extensive improvements.

These properties are major billboards for the Hilton brand, and we look forward to the capital improvements leading to stronger performance at both properties.

Turning quickly to the balance sheet, we reduced our debt in the quarter by $269m, so we ended 2003 with total debt of $3.8b.

Our debt has an average life of 9.6 years and an average cost of approximately 6.5 percent, and I'd like to also remind everyone that our story is quite good in terms of maturity.

The refinancing of our bank debt that we completed in the third quarter last year means we have no significant maturities until November 2007.

Okay, so now let's talk about 2004, and as I said in the beginning, we believe the hotel business has finally turned the corner and that 2004 should provide more opportunities than challenge.

So let's start with the opportunities.

First, business transient travel is definitely on the upswing, and as the economy and consumer confidence continue to improve, which we would expect especially in an election year, we can certainly anticipate greater strength in this important business segment than at any time we've seen since 2000.

This pick-up in business travel and the weak dollar, helping attract international visitors, will benefit many of our most important owned hotels, including those in New York, Washington, and New Orleans.

And Boston is finally expected to improve due to the Democratic Convention, which will be held there this summer.

We are anticipating another strong year for leisure travel and good results at our properties in Hawaii, San Diego, and Phoenix.

We continue to place a priority on maintaining our own hotels, allocating 6 percent of revenues for routine improvements.

Eighty percent of our owned rooms have been renovated within the last five years.

On the supply side of the equation, we are looking at a continued favorable environment for our owned hotels.

It is estimated that total industry supply will increase 1.4 percent in 2004.

But important for us, though, only a fraction of that is full-service supply in major market city centers.

So the upshot here is that higher demand from independent business travelers, combined with little new competitive full-service supply should help us achieve greater pricing power than we've seen in the last few years.

Our fee business continues full-speed ahead.

We expect to see about 5-percent unit growth in our system in 2004, and as usual, we are not using our balance sheet to fund this growth.

Our brands should continue running at significant RevPAR premiums to their competitors.

Owners are signing up with our brands in big numbers, and our U.S. pipeline is the strongest in the industry.

We expect continued strong sales at our timeshare properties in Las Vegas, Orlando, and Honolulu, and this should result in another good year for our vacation ownership business.

Our focus on technology will continue.

We believe that by introducing new systems to enhance the customer experience, we can build on the competitive advantage we have created in the technology arena.

So all in all, a potentially good year in front of us, but there are some challenges, and the biggest one is Chicago, and the softness in that market has the potential to bring down overall results for the year.

For example, our total group definites in the first quarter are down about 1 percent, but if you exclude Chicago, they're actually up 3 percent.

So I know everyone's interested in the group business outlook, so let's continue on with that.

For the year, group tentative bookings are currently up 7 percent, but definites are down 5 percent.

Here again, though, the numbers are heavily skewed due to the weakness in Chicago.

Take away Chicago, and group definites for the year are down only about 2 percent.

We do expect the Group business to improve as the year progresses, and trends are going in the right direction.

For example, over the last 60 days, we've seen a lot more activity in the company meeting segment, which is the most profitable part of the Group segment, and that has been the weakest part of it over the last couple of years.

And people continue to book with short lead-times.

So when it's all said and done, we expect our Group business to be up approximately 2 to 3 percent for 2004.

We're seeing good bookings early in the year.

For the last two weeks, our total reservations volume is up about 10 percent from the same period in 2003, and we expect the second quarter to be very good compared to last year.

The war in Iraq pretty much wiped out a lot of business in last year's second quarter, so the 2004 period should benefit from an easy comparison.

Excluding Chicago, the other major challenge we anticipate in 2004 is the one that I talked about before -- cost increases in healthcare, worker's compensation, and property taxes continuing to put pressure on margins.

But as I mentioned, we are focusing on mitigating these increases.

So our story for 2004 is having the assets, the resources, and the people to take full advantage of the improving trends we started seeing in late 2003.

With well-located owned hotels and little new supply, a strong stream of fee income, a solid timeshare business, and a strong financial position, we believe we're in a great position to benefit from the better things we see for 2004.

And so with that, let's go back to Marc.

Okay, thanks, Matt.

Before we go to the Q&A session, let me quickly recap the full year 2004 guidance we provided in this morning's press release.

And has been our practice since early last year, we will not be providing specific quarterly guidance.

We are offering estimates for the full year, and those full-year estimates will be updated on each of our subsequent conference calls during the year.

So for 2004, we estimate total revenue in the range of $4.07b, total adjusted EBITDA in the $945m range, and total operating income in the $575m range.

We anticipate RevPAR at our comparable owned hotels increasing 3 to 4 percent in 2004, with a slight increase in margins.

Diluted EPS is expected to be in the mid-40-cent range.

Talking about our capital spending, our expected capital spending for 2004 is consistent with the guidance we provided on our last call.

That is a total of approximately $275m.

Breaks out this way: $155m for routine improvements and technology; $55m for timeshare projects; and $65m for hotel special projects.

We're expecting another good year in terms of unit growth.

We expect to add 115 to 130 hotels and 15-17,000 rooms to our system in 2004.

So in closing, we said on our last call that we were optimistic for 2004, the signs were certainly pointing in the right direction, and that we were especially well positioned to outperform our competitors.

That definitely continues to be our belief.

So thank you for listening through the prepared remarks and the update, and we will now turn it over to questions.

(Caller instructions.) And our first question comes from Harry Curtis with J.P. Morgan.

Please proceed.

Hi guys.

I appreciate you not giving quarterly guidance.

Can you, with respect to the first quarter, give us a sense of what the challenges are that you cited in your press releases, and what signs your beginning to see in the second half of the year that gives you confidence to maintain the year RevPAR guidance at the 3-4% range?

Presumably there is some shifting in business that you expect to occur in the back half?

I am going to have Dieter handle that, because really the big challenge in the first quarter Harry, to get to the first part of your question, is Chicago and the business there.

So Dieter, do you want to talk a little bit about that?

Yeah Harry, two things really.

The trends in business, particularly last quarter, we assumed really some positive trends.

And that reflects as well in the first quarter and going forward.

The booking pace last quarter was really surprisingly strong for us, and very good.

We were up 16%.

Just in December alone, we were booking more than 20% over ’03.

And many of our hotels have done extremely well.

In Houston, for example, a new hotel there booked over 50,000 room nights in one month.

So we believe that – and also, I think, based upon the other reports we have seen from the meeting Professional International, AMEX and other associations, and the facts we have, that we see positive trends in business, positive group business.

The leisure business always has been strong.

And the international business has picked up in the last quarter.

And we believe that this will continue into the year.

So the primary driver for the first quarter challenge is Chicago.

Was there anything else?

Yes.

That’s the main challenge, in Chicago.

And that’s a city-wide problem.

Got you.

Thanks a lot.

Thanks Harry.

And the next question comes from Joe Greff with Fulcrum Global Partners.

Please proceed.

Good morning guys.

Just following up on the same question related to Chicago.

For starters, can you just remind us how much revenue, EBITDA contribution in ’03 Chicago was?

Chicago is right around 8% of our total – EBITDA total revenues roughly.

So about 8% Joe.

And then looking at ’04, how much of a RevPAR revenue and EBITDA decline for that market do you anticipate?

We don’t go market by market.

But if you look at the 3-4% RevPAR guidance that we gave for all of our comparable owned hotels, that obviously includes a weak Chicago.

Take Chicago out of that mix, you could probably add a point or so.

Got you.

Okay.

That’s helpful.

And then Matt, you discussed a topic pretty thoroughly.

In terms of absolute increases on a fixed cost basis for the owned hotels, I mean what kind of number are we talking about on an absolute basis?

Is it something like $30-35m on a year over year basis?

Bob do you want to do this?

You [inaudible] for the owned properties?

The absolute increase in fixed cost for the –

Well it’s tough to compare it, because we have owned hotels in the mix.

So if you’re looking, trying to compare year over year, we sold roughly about $25m worth of EBITDA this year, compared to – next year compared to this year.

But I think overall, excluding the cost increases that Matt mentioned, we figure that costs would be up in the 2% - two plus percent range.

And then the cost increases that Matt was talking about would add maybe another half a point to that.

Okay.

So same store expenses are going up 2-1/2% year over year?

Yeah.

Between – I would say between 2-1/2% and 3%.

Okay great.

Thank you.

And the next question comes from Joyce Minor with Lehman Brothers.

Please proceed.

Hey guys.

I hate to ask you to do this.

But would you mind repeating the group definites versus tentatives that you provided?

I feel like I wrote down maybe two or three sets of numbers.

Was one for first quarter, and the other for the full year?

Yeah.

We talked about, Joyce, for the first quarter, total group definites are down about 1%.

If you exclude Chicago, they’re up 3%.

Okay.

That was for first quarter.

For first quarter.

For the year, group tentative bookings are currently up 7%.

Definites are down 5%.

Again, for the full year, take away Chicago, group definites for the year are currently down about 2%.

Okay.

Thank you.

And then in terms of first quarter, do you want to comment in terms of EPS at all?

I guess with kind of the challenges that you face there, should we expect that EPS is flat at best, as opposed to up significantly?

No.

We’re not going to give specific quarterly EPS guidance Joyce.

All right.

Thanks a lot.

Harry said he appreciated that.

I think he used appreciated in a different context.

Oh, I thought he was saying he appreciated us not doing that.

No.

That wasn’t what I was saying.

I was hoping.

Just trying to be helpful.

Okay.

In terms of your ’04 EBITDA guidance, kind of up 4.3%, does that take into account any asset sales, EBITDA in ’03 that we should sort of be effectively taking out?

Or would you call that kind of a same store EBITDA growth number?

Joyce, that’s off our reported adjusted EBITDA number, that growth.

Right.

So I mentioned earlier, there is roughly about $25m of EBITDA that went away as a result of the asset sales in 2003.

Okay.

So if we look at that 2003 of 906, you would argue take it down by $25m.

And then that number grows to the 945?

Right.

Okay.

Thank you.

And the next question comes from Jay Cogan with Banc of America Securities.

Please proceed.

Good morning everybody.

Hello Jay.

I’ve got a few questions for you.

Again, I know you’re trying to skirt around the first quarter.

But can you at least tell us if RevPAR will be up relative to being down in the first quarter?

It sounds like it should be up, given your improved commentary.

And then second, I was wondering, when you said Matt that the second quarter should be a lot better, given you were down 7% almost last year in terms of comp RevPAR, if I remember correctly, an obviously very easy comparison, can you talk a little bit about that relative to the year outlook?

And then finally, on the margin side, Marriott had made some comments at their Investor Day a couple months ago, saying it’s not just 2004 that we’re going to see margins being squeezed.

But that could last into ’05 and ’06, given continuing cost pressures.

And I was wondering if you could maybe comment on your view of their comments, and how do you see margins trending over the next few years, let alone this year.

All right.

Let me start with the third one.

And then we’ll let Marc –

Be the bad guy.

Dance or skate or whatever.

I have never seen him dance.

I haven’t seen him skate either.

But I am sure he’s good at both.

Nor will you.

Right.

But on the cost thing, it kind of reminds me of when Ronald Reagan was president.

He got along by saying the rate of increase is slowing in the budget, in the deficit.

And I think that’s the same story we have.

The healthcare, that’s just the way it is.

There is a balance between pushing those costs back to the employees, and keeping your work force relatively happy.

And that’s what we’re trying to do.

The increases, I think I said were going to be in the 12% or 13% rate.

That’s a lot lower than they have been.

But it’s just – it’s still tough.

There is a lot of legislation going on to cap jury awards and so on.

So I think things are going in the right direction.

But it will take some time.

We have had some very good success on insurance.

We didn’t talk about property and casualty insurance.

And those rates are actually down a little bit for the last couple of years.

So we’ve been doing well there.

The workers’ compensation is a big issue.

And a lot of that you really can’t negotiate.

It’s just a question of getting better workplace experience.

And we’re spending a lot of time and effort in that area.

And the property taxes – I mean that’s a tough one.

So I would say I think we’ll see continued improvement on the healthcare.

And I think workers’ comp, we are focusing on that, particularly in our owned hotels.

And so as you get better experience, those rates come down over time.

So I think we’ll see some improvement there.

On the property taxes, I just don’t know.

I mean I think that’s really a hard one.

Matt, I think also on the operating side, we have been able to get some further productivity gains.

Our FTEs are flat.

Our room nights are up 100,000 room nights.

And the cost of occupied room is only up 1.3-1.5%.

So I think we are keeping that very tight.

So I think that, just from an investor standpoint, you should know that that’s what we’re working really hard on, is trying to keep those costs down, because we know that why people are interested in this business is because of the operating leverage that it affords.

And so if you’re able to keep those costs reasonably under control – and we have that on the wage side, which is the biggest part of it.

And the heat, light and power, and some of the marketing costs, those are reasonable.

It’s just these three that we focus on, and we are focusing on.

And so as the demand picks up, that operating leverage should return.

And as far as the first part of your question Jay, I went out to get my roller skates real quick.

But I think we’re just going to let our comment on the quarterly stuff, with the first or second quarter, what we said in the release and in the prepared remarks, we’ll just let that stand.

Okay.

And not to beat a dead horse here, I think I actually said skirt, not skate.

But that’s fine.

Okay.

Sorry.

I didn’t go get a skirt.

That is for sure.

So I am not going to go any further there.

If you could maybe just in very simple terms, Matt, say when we’re looking at the needed RevPAR increase for you to maintain margins over the next few years, roughly where do you think that will be?

I say it’s 2-1/2%.

Thank you.

And the next question comes from Keith Mills with UBS.

Please proceed.

Good afternoon, or good morning.

Hi Keith.

We have a couple of questions.

And I am with [Will Truelove].

The first is, Matt, could you share with us what Hilton’s yield management strategy will be throughout 2004, or at least what it is for at least the first six months at this point?

For example, are you - ?

Yield management?

Yeah.

Are you – ?

Raise the rates.

Yeah, exactly.

Are you, right now, more willing to leave inventory open, because you are optimistic that business transient will fill in, and you’ll be able to drive rates at that point?

Or are you still in a kind of a booking pattern where you’re more cautious and still willing to take on more groups to at least provide a secure foundation for the business going forward?

That’s really a question for Dieter.

But I can just throw in my two cents, is that I have been struggling to find a place to go for Spring break.

All of our hotels are filled.

So –

Then the rate goes up.

That’s a good question.

But really it has to be tailored to the individual hotel, because the demand factor is different in New York.

Obviously we are anticipating a really good second, third demand – quarter in terms of demand.

Our yield management system is quite sophisticated.

And we project, or really forecast on a daily basis, literally.

At this juncture, it’s – when we were going into the first year, into the first quarter, it was a little soft.

And so the yield management is a little more flexible.

But in terms of corporate negotiated rates, I think we are yielding pretty well.

And we are gaining market share.

And the same would apply to the leisure business, and the group business.

Okay.

So basically it depends on the market.

And that’s where you manage those yields.

Chicago, we’ll take anything.

Mmm-hmm.

The second question is on Chicago.

And that is wages are expected to go up for the new union contract that was signed about a year and a half ago, anywhere from 10-15% annually over the next few years.

And could you share with us, Dieter, how Hilton in Chicago specifically – and specifically within the Chicago Hilton [inaudible], you’re keeping costs down or reducing costs to offset the wages pressures?

Well we’ve done quite a few things.

I mentioned in the previous calls, we consolidated the outsource.

And we really have tremendous productivity gains.

And we’re looking at payroll increases to occupied room of about between 2% and 3%.

Okay.

I have one more question.

I think Will has got a question too.

The next is could you share with us what the first quarter or first half bookings look like, for example for Hawaii?

Could you maybe give us an update on what kind of demand you’re seeing out of Asia and Japan specifically for Hawaii?

Yeah.

Hawaii has done well last year.

And we see a relative positive trend from Asia, with the strength of the yen.

But we, in terms of going forward, we still see a lot of domestic business going to Hawaii.

And I guess that’s the reason why, because it’s too expensive to go to Europe.

And people like to stay within –

Domestic, you mean U.S. mainland.

U.S. mainland.

Yeah.

So I think Hawaii will be fine.

And there will be some pick up – yeah, positive trend from Japan and Asia.

But it’s not going to be that big.

Okay.

And Will, I think you had a question.

Yeah.

My question is about Chicago as well.

But for more like 2005, obviously near term you mentioned it was a city-wide issue.

Convention bookings, I believe, are down 30-35% for ’04.

What’s the convention calendar look like so far for ’05 for Chicago?

Could you see a major rebound in ’05 because of the easy comps in Chicago?

No, ’05 looks much better.

How much better?

The answer to the question is yes.

We do see a rebound in ’05 in Chicago.

Is the convention bookings so far up 10-15%?

Or how can we think about convention bookings for Chicago for ’05?

I don’t have the exact numbers.

But the city-wide conventions are better in ’05.

And that of course creates demand.

And that will stimulate more business.

Okay.

Thank you.

This is kind of a one year phenomena.

The other market that’s still weak is San Francisco/San Jose.

But it’s been weak for a while.

So, relative, it’s a little better.

But it’s still not strong.

So one way of thinking about it, then, could be if city-wide bookings are down 30-35% for ’04, those should all come back in ’05 is what you’re basically saying, right?

I don’t know if it all comes back.

But –

I can give you the exact number off line.

You can call me back.

Okay.

Great.

Thanks.

I imagine the Convention Visitor’s Authority probably has some good numbers on that too in terms of the city-wides.

Thank you.

Appreciate it.

Thanks [Will].

And the next question comes from Brian Egger with Harris, Nesbitt.

Please proceed.

Yes, hi.

Good morning.

Just two questions about your hotel “Best Rate.

Guaranteed.” The first is what has actually been, in your experience, the incidence of having to act on those rate guarantees?

And I assume that the cost is actually borne by the properties that might make acting on those guarantees necessary by offering below retail rates on merchant Web sites.

And just related to that, are there any cost savings implications of driving more bookings from your call centers to your branded Web sites?

Is there any meaningful cost savings from that over time if that shifts?

This is Steve.

Good questions.

Tom Keltner, who is on the phone from New Orleans, has done a lot of research into both of those areas.

So Tom, do you want to do that?

Sure.

Brian, the “Best Rates.

Guaranteed.” was a result of something we actually put in place in July, which was a requirement that we have price integrity across booking channels.

It’s not just online.

It’s also through our reservation system, HRW, as well as if you call hotels directly, that you won’t be able to find – if you find a better rate on any third party site than you find through any of our channels, then we will give you that rate, plus a $50 AMEX gift check.

The rate of incidence of that since December 3 has literally been maybe a couple of thousand calls.

And maybe 40% of those actually had lower rates that we honored the AMEX gift check with.

The reality is we’ve always had pretty good price integrity.

And what we’re seeking to do here is just to make customers understand that they can trust our sites to give them a fair price.

And if we do screw up and have a lower price somewhere else, we’ll make it right.

As you might expect, whenever that happens, one of the first things we do is make sure that the hotel that’s done that cleans up their inventory and their pricing, so that they are consistent with “Our Best Rates.

Guaranteed.”

The second part of your question is shifting activity from the call center to the Internet.

Clearly 1-800 calls have been declining.

And the result of that has been our Internet sites have been growing.

It depends on the brand, but anywhere from 30-60% a year.

And, in fact, bookings on our sites are growing faster than Internet bookings from third party sites are.

We expect that would continue to happen, as people get more and more confident in understanding that our rates are very well positioned, and they’re not going to find a lower rate.

And if they do, we’ll make it right.

The reality is that, over the last several years, customers have actually said we prefer to book with the supplier, once we can trust that we’re getting a fair deal.

And so we’ve seen a shift, not only in the hotel business, but in other businesses, of customers doing that.

So we’re quite happy with how “Our Best Rates.

Guaranteed.” has unfolded, and quite happy with the results.

Tom, of the 2,000, is that of how many roughly?

Oh gosh.

Matt, I don’t have that number here.

But literally we’ve had it in place now for nearly 45 days.

So we do hundreds of thousands of reservations probably.

So it’s a relatively small number?

Very small number.

And a very small amount of implications.

That didn’t surprise us.

That’s about been – it’s not been that different from other companies that have gone into this with a good sense of how they can price.

So we had good price consistency across channels to begin with. “Our Best Rate.

Guaranteed.” is actually just marketing that to the customer, to make sure they understand.

Okay.

Thanks very much.

You’re welcome.

And the next question comes from Bill Crow with Raymond James.

Please proceed.

Good morning guys.

A couple of big picture questions.

First of all, we’ve seen an acceleration in development at higher end properties – the Ritz, spreading that brand;

St. Regis, and their bigger expectations.

Your luxury brand is Conrad.

Could you just kind of discuss growth expectations from that brand going forward?

Well I am not sure I agree with what you said – Ritz and St. Regis.

I think a lot of those are coming out of the ground now, that were mixed use projects, you know, a lot of residential deals that were started in 2000, that are now opening.

But I am not sure I agree with you that there is that much activity on those fronts that are real deals.

What do you anticipate from Conrad going forward Matt?

Well, we’ve got our first deal that opened in April in Miami.

We’ve got another signed deal for a new build in Indianapolis.

And we’re hopeful that when those open, and people see the quality and what our brands can do in terms of bringing business in the doors, that we accelerate a lot of the opportunities that we have where we’re talking to people.

We’ve got a lot of talk going on.

But, until people see some actual results in the physical product, it’s hard to get them across the finish line.

And also, keep in mind that our alliance partner, Hilton Group, the Hilton International, is very active in trying to promote the Conrad brand outside the United State, and has got a lot of deals going.

And so that will add to the brand too.

I mean if you think about it, it’s really only a couple of years that we’ve had to work with Hilton International to make this a high-end international brand.

So it’s tough.

Deals are hard to get.

But we think we’ve got a good position here.

That’s helpful.

Steve, while you’re on the phone, we’ve seen Starwood in particular throw a lot of money into revitalizing the Weston and Sheraton brands through heavily publicizing changes to the beds, for example.

How do you hope to sustain the competitive positioning of Hilton, given that it’s not heavily owned by your company?

And the franchisees haven’t been in a real good spending mood over the past several years?

I mean as you look forward, do you have any initiatives?

Or have you thought about the strategy of the Hilton brand and it’s positioning longer-term?

Yes, absolutely.

And I will compliment Starwood.

I think they did a great job, particularly with their Heavenly Bed.

And we’ve got other initiatives that will leave us in the same kind of public relations position they’re in.

Now the reality of what you’re delivering, I think we are right along with them.

And not only in the physical nature of the hotels, but also our focus on the use of our superior technology systems to not only maintain costs, but provide a better customer experience in total.

So it’s difficult in a franchise system to have total uniformity.

But I think all of the big franchisors understand that, and particularly in the more mature systems.

I mean we’ve got it in our Hampton Inn system.

It’s not a problem.

But in the Hilton system, it’s a high area of focus to us.

I don’t believe there is any chance that we’re going to lose kind of market position against any of our competitors.

But for all of us, it’s quite a struggle to be sure you get the same kind of experience at the Waldorf that you do at a franchised Hilton, and somewhere else.

But it’s a focus of ours.

Okay.

Thank you.

And the next question comes from Michael Rietbrock with Smith Barney.

Please proceed.

Hey guys.

Just a couple of quick ones.

Matt, can you reconcile the time share revenue number?

I guess the intervals are flat.

The pricing was up 11.

But the reported revenue is up 50.

Is that percentage completion?

Or is that a note sale?

What is that?

[Inaudible].

Part of it Mike is certainly percentage of completion.

I mean the Las Vegas Boulevard property, we got our CO in the fourth quarter.

And we actually opened the property.

So that certainly helped.

Tuscany is nearing completion.

So we’re getting some favorable percentage of completion accounting on that.

Overall, I mean the big reason is our mix of sales in the quarter generated a higher average sales price in total.

And that, we bring down to the EBITDA line.

We also had higher resort revenues and higher financing income as well.

So it’s kind of a mixture of a bunch of stuff that led to that 50% increase.

Got you.

That’s why we always focus on the average unit sales price, because time share is hard to figure out exactly what’s coming and going.

And that’s why we always want to tell you what the average sales price is.

And that’s been a little tricky for us, because as the Honolulu inventory starts to wane, we’re picking up additional sales at other properties that just don’t have quite as high average rates.

So that’s really been an excellent overall result there.

Got you.

The last question is each quarter I just try to – back of the envelope – just in the Smith Travel numbers, to try to get a feel for what you’re going to report for the component RevPAR.

And going into the quarter, I would have guessed, just based on the markets here, probably two to three.

I guess the question was how bad was Chicago in the fourth quarter?

The Smith Travel number was only like slightly negative, maybe negative 0.5.

Was Chicago a lot worse?

Was that the reason?

Or – presuming I don’t think you’re losing shares.

A lot of it is that we don’t have the representation in Las Vegas that Smith Travel shows, nor in Orlando.

Those markets, relatively speaking, were very strong.

And we don’t pick up there.

Okay.

And yes it was difficult in the fourth quarter in Chicago.

Okay.

And then just last question, maybe it’s for Dieter.

This pattern that you’re seeing for the group bookings for the year, with the tentatives up seven, and the definites down five, that sort of intuitively seems like the sort of pattern that you would have seen this time last year, with the war looming.

What do you attribute that to?

Well we, last quarter, beginning of last quarter, we actually went into a 10% decline in definite room bookings.

And we cut that in half.

And that shows you how strong the booking pace is.

And that continues.

The last two weeks in January have been very good.

So I believe we’re going to bring that – that will come down drastically over the next two or three months.

The same trend line will prevail.

The short term –

Short-term is really a big part of it too Mike.

Delay decisions.

And as well, I think it’s a very positive trend – we see more company meetings are coming back.

And they were down 10% last year.

And we see really a very good pick up in that segment.

And last quarter sequentially, the definites were down ten?

We went into the quarter with a 10% - yes, down 10% on the.

The trend line is improving Mike.

Okay.

Thanks guys.

And the next question comes from Will Marks with JMP.

Please proceed.

Great.

Thank you.

I had a question on the asset sales that contributed to $25m of EBITDA, or that contributed $25m of EBITDA.

In the press release you mentioned the cash proceeds of $190m.

How should we look at the valuation of that transaction?

First of all, the $25m just wasn’t related to the third quarter.

We did the write-down deal in the first quarter.

We sold some Homewood.

So it was – the $25m in EBITDA didn’t all relate to the fourth quarter transaction with CNL.

Okay.

So $25m would just be the full year number?

Exactly.

Okay.

Now that’s helpful.

What - ?

Can you give me an idea of what the CNL transaction took place at?

No.

We don’t like to do that, because then we’re bragging.

And they feel bad.

And if they’re bragging, we feel bad.

So we don’t do that.

We don’t go into the details.

But we are very delighted with that transaction.

Okay.

Can you give me a sense of what that may, assuming that money is just going to pay down debts – or the proceeds are – what that may do?

Does that drop earnings by a couple of pennies?

No, because you’re paying off – lowering your interest expense too.

I realize that.

I just was wondering if the transaction would be near term dilutive or accretive.

No.

And plus you lose the depreciation from the asset that you own.

And if you sell them right, then you sell them for more than your cost too.

Okay.

So that didn’t change your own internal outlook for ’04, those transactions?

No.

And even though we didn’t technically link the two, remember we also are working very closely with them on developing the San Diego project, which is an outstanding project.

It will be the first development deal that we’ve looked at since Logan Airport five or six years ago.

But we’re working with them in developing that project.

Great.

Okay.

One final quick question.

You mentioned on the call – I think you allocated 6% of revenues in your own portfolio to routine improvements.

Yes.

What of that is expense versus capitalized?

It’s all capital.

That’s all capital.

So that’s a little confusing to me.

So if let’s say you had $2b of revenues from your own portfolio, that would be something like 120?

Right.

I think our number that we’ve told is like 145 or so.

It comes to 155.

But that includes some technology spending as well.

Okay.

That’s helpful.

And then just lastly, on the numbers you gave for ’03 in the press release, I guess that did not include the Hawaii renovation.

Is that - ?

The numbers we gave for ’03 in - ?

The cap ex.

We talked about – that included – yeah, I believe it included the $35m for –

So the total hotel cap ex of $202m.

Let me just go back.

Yeah, that’s on page nine.

Yeah, so that did include the – it was $35m for Hawaii within that number.

Great.

Okay.

Thank you.

I think we have time for one more question.

And the last question comes from Jeff Donnelly with Wachovia Securities.

Please proceed.

Thanks guys.

Well, it’s come to the wire.

Two questions actually.

First is, just to take advantage of the large gathering of GMs and franchisees that you are seeing tomorrow, I mean what are some of the major themes you will be communicating to them?

And are there plans to roll out a newer, modified strategy for a particular brand?

Yeah.

I want Tom to address this, particularly in terms of Hampton Inn.

Jeff, each of the brands has their own initiatives that they’ll pursue.

And there is a number of break-out sessions for each of the ones, to educate the general managers and the owners on the direction ahead, all the way from how to do you deal with inventory management in the new Internet world, to problem resolution.

The only new brand initiative is really in the Hampton brand.

This is the 20th anniversary of the Hampton Inn brand.

And we’ve now got about 1,250 of them.

And so there is a new program we’re rolling out called make it Hampton, which really, while Hampton is on the top of its game, takes the opportunity to revitalize it in a number of key areas.

And we’ve already tested at probably over 100 hotels.

That’s nearly 10% of the system.

And everybody else will be finding out about it in detail here in New Orleans.

Okay great.

And just one last question.

Coming out of the analyst conference, we saw that pricing on assets looked pretty strong I guess.

Where do you guys see volumes on dispositions, if there will be any, in 2004?

And just drilling down, is there the ability or desire on your part maybe to skirt some of your exposure in Chicago, and lessen your exposure there through a sale?

You know, you want to buy low and sell high.

So I don’t think that would work.

We look at our portfolio all the time.

One that we need to make a decision exactly where we’re going to go is in Chicago, unfortunately, is the Farmer House, because that one is one that we need to address from a cap ex perspective, and market positioning.

So we’re looking very carefully at that one, with some maybe a little different twist on it.

But no specific plans for asset sales.

And we only like to announce them when they close anyway.

Thanks guys.

Okay.

I think that’s going to do it for us.

We’re ready to – we’ll take some questions off line.

I am sure we’ll be talking to you to do some follow-up.

So thanks for joining us.

And we’ll be seeing you on the road.

Thanks everybody.

This concludes your Hilton Hotels Fourth Quarter Earnings Conference Call.

Thank you for your participation today.

You may now disconnect.