希爾頓酒店 (HLT) 2004 Q1 法說會逐字稿

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

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

My name is Mike, and I will be your conference coordinator today.

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

As a reminder, this conference is being recorded.

I would now like to turn the program over to your host for today’s conference, SVP of Corporate Affairs, Mr. Marc Grossman.

Please proceed, sir.

Thank you, Mike and good morning, everybody.

Afternoon, I guess, for those of you on the east coast.

We appreciate your joining us this morning for the first quarter earnings call.

I am being joined by Steve Bollenbach and members of our senior management team.

Before we get started, just a little bit of housekeeping.

The press release that we put out this morning and the call that we are going to have today are going to have forward-looking statements within the meaning of Federal Securities Law, including statements concerning business strategy and intended results, and similar statements concerning anticipated future events and expectations that are not historical facts.

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

Also to let you know that the call this morning is being webcast, and that is available on www.hiltonworldwide.com.

Go to the investor relations link and then go to quarterly conference calls.

There will also be a replay of this call available until May 5th at 8 pm EST, and to access that call you can dial 888-286-8010 and the passcode number is 90806139.

The call will also be archived on the Hilton investor relations web site.

Our usual format, we will have some remarks performed by senior managers, but we will as usual devote most of the time on the call to your questions.

So to start things off, let me turn things over to our president and CEO, Steve Bollenbach.

Thank you, Marc.

Just before we get into the detailed discussions of the business, I wanted to make a few points.

First, it appears to us that the recovery in the hotel business that we’ve all anticipated is now firmly underway.

Leisure travel continues to be strong, but the even better news is the steady increase in business travel and the recent strong trends in group bookings.

Second, in terms of our company, all aspects of our business are going very well.

Our owned hotels, our fee business and our timeshare business all performed very well in the first quarter.

Coupled with this is a really great margins story, so we are really very enthusiastic about our future prospects.

Finally, we believe that the talent and depth of our management team is unmatched in this industry, and it gives us a real competitive advantage.

As you know, we’ve announced a few changes.

Effective at our annual meeting in May, I will become Co-Chairman along with Barron Hilton and continue as the CEO.

Matt Hart will become president and COO and Bob La Forgia will become CFO.

As you would expect, both these executives are well-prepared for their new assignments.

The bottom line is that these promotions take a strong management team and make it even stronger.

With that, Matt, let me turn it over to you.

Thank you, Steve.

We were pleased with our first quarter results, so I will spend some time talking about each of our businesses in more detail, and I will start with our owned hotels.

The markets that have been strong for us the last several months continued to perform well in the first quarter – New York, Washington D.C. and Hawaii in particular – and the Phoenix market has been a lot more resilient than we anticipated.

We’ve talked often on these calls about mix of business, and we are seeing a gradual shift to a more desirable business mix.

Independent business travel is strong and getting stronger, and group trends in the last 10 weeks have been really strong.

Leisure demand continues to be high as well, but what’s important is that we are increasingly able to replace leisure business with business transients and groups.

The result is an improved mix of business, improved pricing power that comes from increased occupancy levels.

As IBT and group trends improve throughout the year, which we believe will be the case, our ability to command greater pricing power will improve as well.

This is especially true for our company.

We derive a lot of our business from the really large properties of over 1,000 rooms, and about half of our owned hotel rooms are in hotels with 1,000 plus rooms.

In the first quarter, these big boxes trailed the rest of our portfolio in terms of REVPAR as they worked through some relatively low rated groups booked in earlier periods and billed in as leisure.

So as we experience compression from increased demand from higher rater groups, we will be in the sweet spot for the balance of this year and beyond.

This year we are expecting about half of our REVPAR gain will come from increases in average daily rates.

Looking at a few of our bigger markets, New York has been strong, both the Waldorf Astoria and the New York Hilton ran at over 80 percent occupancy with good ADR increases.

Financial services and pharmaceutical industries have been strong, with an improving economy we are seeing more road shows, IPOs, M&A activity, that keeps the investment bankers and other financial types busy.

That means more shrimp cocktails in our catering department and a higher rated room night.

We are starting to see a good amount of that in Boston too.

Washington D.C. is benefiting from the defense business and strong demand from association.

Also with this being an election year, lots of activity on the legislative front is helping build hotel rooms in the nation’s capital.

Hawaii of course is a very important market for us, and the results there have been really good.

Rates are up at both the Hawaiian Village and at the [Wycalora] Village property on the Big Island.

Most of the strength in Hawaii continues to be due to high demand from the U.S.

Mainland, especially from the big feeder markets like Los Angeles and San Francisco, but we are seeing business from Japan improve, and that should spell an especially strong summer for us on the island.

Leisure business remains very strong.

Our two owned resort properties in Phoenix ran over 80 percent occupancy in the first quarter at significantly improved room rates.

San Diego had a solid quarter, but it had tough comparisons due to the Super Bowl there last year in 2003, but we think San Diego will have a good summer.

San Francisco continues to be a difficult market.

Results there are improving, and REVPAR was up double digits, but again it sets off a pretty low base.

As the economy in the San Francisco area improves and therefore demand for our rooms and new supply in that market become absorbed over the next couple of years, hopefully we will see some decent improvement in San Francisco.

Now for a Chicago update.

As we expected, it was a very tough quarter in Chicago due to a lack of city-wide conventions in the market.

The weakness in Chicago impacted our owned hotel REVPAR growth in the quarter by approximately 2 points.

So take Chicago out of the mix and our first quarter REVPAR from comparable owned hotels would have increased closer to 5 percent.

Now advanced booking trends in Chicago suggest that we should see improvement in that market in 2005 and 2006.

If Michael Jordan would come out of retirement and Sammy Sosa would only hit 75 home runs, then we would really be in good shape there.

Looking into the crystal ball can be tricky, but we can identify some positive and encouraging data points for our business overall.

First, call-in reservation volume.

We noted in our release this morning that call volume in the first quarter through our call centers was up 10 percent from last year, and that’s up 17 percent in March alone and gross reservations through our call centers, the GDS and the Internet were up 16 percent and that was up 24 percent in March alone.

So far in April total bookings are up 14 percent over April, 2003.

Another encouraging data point is the direction of group business.

Group nights were up around over 3 percent in the first quarter.

Looking at future group business, by taking our group definite bookings as of March 31st and a historical perspective on our tentative that actually do convert to bookings, our group bookings for 2004 are up around 2 percent over the same period a year ago.

There were also some very positive indicators that our group business will continue to improve throughout the course of the year.

First, the largest increase in our group room nights in the first quarter was in company meetings, and that was up over 12 percent.

This is the single most profitable part of the group business, and it has been the weakest part of the group segment in the last few years.

Second, our group booking sales.

In the first quarter it was up about 20 percent from last year’s first quarter, so a lot of strong momentum is building.

Third, groups have been increasing the allotment of rooms over and above what they had originally contracted for and the attrition level from groups has declined markedly.

So if you take all of this into account, we feel really good about where the group business is headed, and we estimate that at the end of the year our group business should be up in the range of 6 percent in terms of room nights.

All of this points to continued improvement in our overall business for the rest of the year.

The summer is shaping up to be a really good one.

Our hotels in Hawaii are looking strong.

San Diego is looking good.

Advanced bookings in San Diego are great.

The new downtown baseball stadium and other new attractions are generating a lot of buzz in that market.

A recent travel and leisure poll ranked San Diego as the number one destination in the United States for summer, 2004.

New York and Washington should see good leisure travel as well this summer, and with the two political conventions being in New York and Boston that should help fill our rooms in those important markets.

Now let’s turn to our fee business.

We’ve become accustomed to reporting outstanding results in this part of our company and the first quarter was no different, but there is one important distinction this time, however, of a $9m year-over-year increase in our fees, about half was from REVPAR growth at all of our brands.

In previous periods, most of the increases have come from the addition of new units.

So now we are seeing the best of both worlds.

We are continuing to add new units in the U.S. at a faster pace than anyone in our industry, and the REVPAR growth is benefiting our own hotels is also evident at our brand system-wide.

Certainly the comps were favorable in this year’s first quarter, but the REVPAR gains are still significant.

Embassy Suites REVPAR was up 4.5 percent and every other brand was up at least 6 percent.

REVPAR was strong in the quarter, and the REVPAR index for each of the brands remains strong as well.

Once again, every brand but DoubleTree is well above its fair share of REVPAR, and DoubleTree continues to test the 100 index level.

Our unit growth story is right on track with our projections, with Hilton Garden Inn and Hampton Inn leading the way.

Back to DoubleTree for a minute, that brand has 10 hotels in various stages of development.

In the first quarter an affiliate of USAA Real Estate Company acquired a portfolio of six DoubleTree hotels from a third party, and we are very excited about the plans that new owner has for enhancing these hotels.

Enhancing and improving the Hilton brand is a top priority for our company.

I am delighted to tell you that owners of our franchise of Hilton Hotels across the system are investing in improvements at their properties in a major way.

Approximately 80 Hilton franchised hotels, which is about half the Hilton franchise system, are currently undergoing major refurbishment.

These are good-sized hotels, 300 rooms on average.

The capital being expended by these owners is around $275m and we expect that the work will be completed on all of these properties in late 2005, and that should really help our brands profile.

Our total U.S. pipeline remains vibrant with approximately 400 hotels and 55,000 rooms, and again, according to Smith Travel we have more rooms under construction in the U.S. than any other company.

We had several milestone openings in the first quarter, and in April our newest Hilton Convention Center Hotel, next to the Omaha Convention Center, opened.

This property joins the Houston and Austin properties which we opened in late 2003 and it adds to our unmatched collection of city center convention hotels.

Both Houston and Austin are outstanding physical properties that are off to great starts, and we are also looking for great things from the Omaha property as well.

We continue to see strong growth from Hilton Garden Inn.

It is a comparatively young brand that has become the fastest growing brand in the industry.

A really great story is about Hampton Inn with over 1,250 units and a brand name that has been around for only 20 years continues to resonate with both customers and owners.

Hampton Inn Hotels continue to stand for quality and value, that our and our owners commitment to keeping the brand fresh and exciting, is keeping Hilton as the leader in its category.

The Make It Hampton initiative we introduced to our owners in late January, very promising.

Our owners will be investing $80m over the next two years in a wide variety of new products and services.

It is probably the most comprehensive brand improvement program in the industry’s history, and what is more important is that it is being done while the brand is at the top of it’s game.

The changes are taking place now and I would encourage you to check them out.

Mark [Rotisse] can arrange tours of Hamptons that have already put many of the improvements in place, and you can even spend the night there on us.

These improvements include everything from a new breakfast area to improved bedding and enhanced check in and welcome area.

New alarm clocks, especially designed by the Hampton team that are so simple, even Marc Grossman can set it.

Tom Keltner and his team have done a fabulous job creating this program and gaining the enthusiastic support from our owners.

Early reports from owners and guests are extremely encouraging, we’ve gotten some fantastic letters from guests and owners.

The Conrad story is gathering momentum as well.

The Conrad opened in the first quarter in Bali.

Conrad Miami is scheduled to open this summer. [Inaudible] management agreement for a new Conrad on the Las Vegas strip, and we do have a number of additional deals in the works.

With the opening of Miami there will be 17 Conrads operating in such major destinations as London, Hong Kong, Dublin and Singapore.

One last editorial note on our fee business.

This is a fast growing, reliable part of our company that has a strong quarter, strong quarters in and out, and represents about one-third of our business.

I do not believe that we get the credit from the investment community that we should for the strength of our fee based business.

Now onto time share, which was again, in a word, terrific.

Revenues were up 45 percent.

Overall unit sales up 29 percent and average unit sale price up 2 percent.

We are having great success with our two new developments in Orlando and Las Vegas.

The first phase at our new Orlando project on International Drive is just about sold out.

This is our second successful project in Orlando which is, as you probably all know, the world’s leading time share market.

We are very excited about customer reaction, acceptance of our new time share property on the Las Vegas strip.

You will remember that we had two very successful projects in Las Vegas at the Flamingo and at the Las Vegas Hilton, both of which are sold out.

The latest development is at the north end of the strip near Turnberry and Steve Wind’s new properties.

The first phase, a tower with 283 units opened for occupancy late last year.

It is already about one-third sold.

The product is really spectacular – plasma TVs, granite countertops and a really nice pool area and a very attractive setting.

We built these time share projects in phases.

As one phase nears sell out we build another.

That’s what’s happening in Las Vegas.

Sales have been strong in phase 1 so we will begin construction of phase 2 by the end of this year.

The second tower will have 431 units and will be ready for occupancy in the summer of 2006 when phase 1 should be just about sold out.

That way we have continuous inventory available to sell.

When phase 1 and 2 are finished we will be halfway completed with the master plan at that location.

All told we are looking at four towers with over 1,500 units that should take us up to about 2012.

When it is 100 percent completed it will be the largest single time share project in the world.

Just a few words on technology, which continues to be a major focus for us and our owners, and where we believe we have a genuine competitive advantage.

We successfully tested self-service check-in kiosks during the first quarter at the New York Hilton and at the Chicago Hilton.

Fantastic customer usage and acceptance.

During the remainder of this year we will be introducing the kiosks at most of our owned hotels and at several of our larger managed properties.

Customers like them, we’ve delivered machines that work, that are easy to use, and we have clearly staked out the leadership position in expediting check in this way.

Our On Cue program is fully installed throughout the system and as good as this program has been, we are working hard at introducing enhancements to the system which will provide us with an even greater knowledge of our customers and give us a better ability to serve them.

The other part of the technology story that you probably want to know about is online distribution, so before I wrap up let me give you a quick update on that strategy.

One of our goals is to expand distribution options on our terms.

We’ve made good progress here by lowering commissions from our preferred merchant model partners without having to commit inventory.

Establishing and enforcing pricing integrity is another key point.

Our best rate guarantee program is working, it is the brand standard across our family of brands, and most importantly it is giving customers the confidence that they will get the best rates through one of our own proprietary distribution channels.

Another focus on our distribution strategy has been to create easy to use brand web sites.

We’ve done a lot of work on enhancing our reservations, search and cross sell functions, improving the look and feel of our sites, improving our ability to connect with our Hilton Honors members and introducing innovative web sites to boost business such as MyLeisureTrip.com.

And we’ve got more programs in the works.

The bottom line is that our strategy for online distribution is working.

Reservations made through our brand web sites are growing at a much faster pace than those made through third party sites.

This past February we had a record month, 530,000 online reservations were made on our web sites that month, 34 percent higher than February, 2003 and revenue from our own web sites was up 41 percent over February 2003.

Year to date March, room nights booked on our web sites were up 30 percent from the same period last year, with room revenue up almost 40 percent.

In general, we still get about 13 percent of our total bookings from online sources, with about 85 percent of that number coming from our own web sites.

So on that note, I will turn it over to Bob.

Good morning.

I certainly echo Steve’s and Matt’s comments that this was a very good quarter in all aspects.

I wanted to additionally highlight a few areas.

First, while the first quarter is traditionally the weakest quarter of the year from a revenue and margin perspective, margins at our comparable owned hotels improved about 50 basis points to about 23 percent in the quarter.

Margins would have improved 100 basis points but for a difficult quarter in Chicago.

So two key points here.

First, the margin story is improving, and second, we continue to outperform the competition on margins.

Flow through on our REVPAR gains, which were primarily driven by occupancies was a strong 2.7X.

Part of this is reflective of an increase in food and beverage profits due to our strong group business in the first quarter, but it also reflects a continuation of our efforts on the cost management front.

In the first quarter, total cost per occupied room at comparable owned hotels increased only a half a percentage point despite higher insurance costs and property taxes, which means we are doing a great job at managing the more controllable costs of the business.

In fact, total labor hours per occupied room, our measure of labor productivity, declined 1 percent from last year’s quarter.

The important point here is that this is simply a continuation of the good work we’ve done in this area over the last three plus years.

Since 2001, our total labor hours per occupied room have declined 11.5 percent.

So we are utilizing our people more efficiently, and our operators have done an excellent job in running the business.

Back to the first quarter.

Insurance costs, including health care, increased about 6 percent in the quarter.

In the area of health care, we are beginning to see the benefits of the programs that we put in place for 2004.

In worker’s comp we continue to experience significant decreases in employee injuries and lost days due to injuries due to the programs that we have put in place over the last 12 to 24 months.

Based on these recent trends, we are expecting overall insurance costs, including health care, to show an approximate low to mid-single digit increase in full year-over-year costs rather than the expected low, double digit increases that we had noted on the last earnings call.

Given our outlook on the revenue side and our continued focus on costs, we expect to see favorable market comparisons for the remaining quarters of the year, and for full year 2004 margins to show a moderate increase over 2003.

Turning to the balance sheet for a moment, we ended the quarter with total debt of $3.7b, that is down $100m from year end 2003.

That is net of $325m allocated to Caesar’s Entertainment, which we expect to be repaid on schedule in July of this year, and it is also net of $100m resulting from the implementation of FIN 46 which we explain in the press release.

At this point, debt reduction remains a priority of our excess cash flow until trailing 12 month debt to EBITDA is below 3.75X and we anticipate being there by the end of the year.

So the question is, of course, what to do with excess cash once we reach our desired debt to EBITDA ratio.

Over the next three years, we expect to generate over $1b in cash.

In addition to that, we expect to have completely repaid all the outstanding under our billion dollar revolver at the end of this year, and we have no significant fixed debt maturities until 2007.

So in thinking through the various alternatives for use of cash, and this is consistent with what we have done in the past, there are three main things we will look at.

Making selective and prudent investments in our core business, repurchasing our shares, and/or increasing our annual dividend.

It is purely opportunistic and will depend on what makes the most sense at any given time.

We can deploy any one of these strategies or a combination thereof.

After three difficult years for our industry, having to decide on the use or uses of excess cash is certainly a high class problem to have.

Marc, back to you.

Okay, thanks, Bob.

We know that all of you have been waiting patiently to ask questions, so I am just going to take another couple of seconds to reiterate the revised full year 2004 guidance that we provided to you this morning.

Total revenue is expected to be approximately $4.155b with total adjusted EBITDA in the range of $990m and total operating income in the range of approximately $635m.

REVPAR at our comparable owned hotels is expected to be up in the 5 to 7 percent range, and that includes Chicago.

We expect that the softness in Chicago will impact our REVPAR growth by about a point-and-a-half for the full year.

Lastly, diluted EPS for 2004 are expected to be in the low to mid-50 cent range.

With that, operator, we will now take questions.

(Operator instructions) Our first question comes from Jeremy Cogan;

Banc of America Securities.

Good morning, everybody.

Hi, Jeremy.

Hi Matt, I’m not sure if you want to give Marc such a hard time, I understand it was pretty interesting when you were doing room service when you were doing your day at the hotel recently.

In regard to the technical question in the income statement today, the other revenue and expenses which tend to be an offset to one another on the management franchise fee side didn’t exactly match this quarter, and I was wondering why that was.

Does that have something to do with FIN 46 and if so, how does it affect the overall P&L.

Then I have a follow-up question.

This is Bob.

We had a note that is in our press note on the financial table in the press release.

We have one managed property that we were required to consolidate as a result of FIN 46, we have a performance guarantee on this property.

Whereas before we would include the system management fee from this property in the franchise management fee revenues, now we have to consolidate all of the revenues and expenses of this entity.

So the revenues from this property are included in the other revenues from the managed, the franchise properties, the operating expenses of the property included in our other expenses for managed and franchised properties.

We also picked up some interest expense associated with this property because it has $100m of debt on its books, but the net impact of it all is basically equal to the management fee that we got in the property, so it doesn’t have any impact on our net income or earnings per share.

Jay, I would be disappointed if you didn’t have a follow up.

Just so we are clear, do we expect, just from a modeling standpoint, that this basically has no impact and basically would be the same kind of P&L impact on a quarter after quarter, on a go forward basis.

The seasonal effect.

Understanding that.

Understanding that, the answer is yes.

Okay, and then in terms of the follow up question, speaking about the high class problem and how you are going to allocate free cash flow on a go forward basis, historically I thought you guys were not exactly all that excited about raising your dividends, maybe there has been some rethinking there given what has happened with certain gaming stocks.

I was also wondering if you could outline some of the potential growth capital projects that you are looking at in your hotels and elsewhere.

Let’s not forget that we are coming out of a down cycle here and our focus over the last few years has been on strengthening the balance sheet.

We’ve made a lot of great progress in this regard.

We’ve paid down over $1.8b in debt since we acquired Promise at the end of 1999, and for right now, debt reduction will continue to remain a priority.

As I mentioned, we are going to be big generators of cash over the next few years, and certainly our bias on the use of cash is going to be focused on investments within our core business with attractive returns, and of course we are going to evaluate that vis-à-vis where our stock is trading at the time.

If we are not able to deploy the excess cash we will return it to shareholders, whether that is through stock repurchases or dividend increases, time will tell.

Just a little historical perspective on that, you know, if we’d had this question a couple of years ago when the tax law was what it was then, we would have said most likely through share repurchase because that was so much more tax efficient for the owners.

All we’re saying now is at a point where we decide that we don’t have as good a use for the capital as our shareholders do, we’d return it to them.

So we’d consider in that calculus a dividend along with share repurchase.

So it is not really a change, it is just sort of a recognition that share repurchase in our minds and dividend payments, at least from a tax perspective, are on equal footing to them.

Got it.

Appreciate the perspective.

The next question comes from Brian Egger;

Harris Nesbitt Gerard.

Good morning.

Hi, Brian.

Two questions for you.

The first, you had mentioned that your expectations for full year REVPAR growth come roughly from half room rates and half occupancy improvement.

I am just wondering if that view is similar to what you had earlier this year, if there is any change in that, or any change in the full year owned hotel margin improvement expectations as a result of the mix of rate versus occupancy?

In terms of our prior guidance versus our current guidance on REVPAR growth, we are still expecting half to come from occupancies and half from rates.

In terms of margin improvements, I think we are expecting now with our revised guidance is better margins, moderately improved margins as opposed to slightly improved margins.

Brian, that is really a result of – you know, we did expect in the first quarter or three months ago when we gave our guidance that it would be about half and half, rate and occupancy.

That hasn’t changed, but what has changed and what Bob was talking about in terms of health care and some of these other costs that are down.

And my follow up question is just in terms of your comments in respect to online distribution.

Can you speak at all to whether you are seeing any meaningful savings from switching from call center reservations to booking through Hilton.com, whether there are any favorable cost implications from that?

Brian, Tom Keltner speaking.

Call center volume, you know it is up as a percentage of our overall revenues, has been declining over the years and we would expect it to continue to decline as people shift from calling the call centers to making reservations online, and it is clearly cheaper to make reservations online for us as a company.

One of our objectives is to continue to increase growth through our own Internet sites.

Matt mentioned the quite great performance this year, and every month has been better.

March in fact hit 50 percent growth, average 40 percent for the quarter as Matt mentioned, and our objectives are to continue to drive business online if that’s where the customers want to book.

Not everybody does, so we will continue to take care of them whatever way we want to book.

-- call centers, number of centers over the years.

We are down one or so, two or so, but we are also bringing into the call centers a lot of the reservations functions at our big hotels that results in call savings for the hotels, more ability to service the customers and a higher cross sell that we get out of individual hotel reservations.

And then the ability to take that space and do something productive with it like meeting space and increase revenues, so it is a win/win all the way around.

Thank you.

The next question comes from Mike Rietbrock;

Smith Barney.

Hi guys, a couple questions.

Just looking out to Chicago in ’05, do you have anything that is more specific?

Number of city-wides, what you’ve got on your books today in Chicago versus what you had at this time last year?

The second question, I should know the answer to this, but could you remind us what the game plan is for securitizing time share receivables for the rest of the year?

First on Chicago, we see a positive trend already in ’04, but for ’05, the booking base for the city is up about 6 percent and in ’06 it is up 45 percent, so in ’06 we see, particularly in the first quarter, we are seeing three city-wide conventions, so that will really bring back the pricing power for us, so the trend is positive.

Mike, the convention visitors bureau in Chicago is talking about the booking pace there being up kind of in the 10 to 20 percent range, and those numbers are coming from the convention bureau.

For ’06 it is 45 actually, because they have three major conventions coming back, city-wide conventions, and they are coming back.

On the securitization of time share receivables, Mike, we have no plans to securitize the portfolio for the remainder of the year.

We have about $184m outstanding on our balance sheet today.

The portfolio is performing extremely well, so we are going to hold that paper for a while.

Okay, thanks.

The next question comes from Joe Greff;

Fulcrum Global Partners LLC.

Good morning, everyone.

Matt or Steve, can you just talk about which markets you are seeing your ability to shift the mix of business more favorably?

Well I think we mentioned that in New York, certainly.

You know, one of the issues we had is the larger, big box hotels that you have to do a lot of advance bookings and we are still kind of working through some of the group business on there with lower rates than we would like to see.

Our space is generally on the larger properties is where you are going to see the most improvement in terms of that mix of business as those groups come back in.

The hard market, still is San Francisco and Chicago, but the rest of them are pretty darn strong across the board.

New York and Washington would probably be another one where we see an ability to get a more desired mix of business.

And I think the unique position we are in, from my point of view, I think the pick up since 2000 in leisure, in transit and in corporate group business.

So the hotels that [inaudible] we see where the compression is and we will get the high yield.

Great, thank you.

The next question comes from Harry Curtis with JP Morgan.

Hi.

First, can you give us a sense of what your margin is on the catering and banquet business?

The margins are really good.

New York you could easily look at 40 percent margins, 35 to 40 percent.

We have seen in the first quarter a pick up in catering business, partly because the corporate company meetings are up, and also the local catering function is up.

My second question had to do with ’05, not to put words in your mouth, but if REVPAR were up 5 to 6 percent, would that translate into something like a 200 to 400 basis point expansion in margin?

I think we are going to take a pass on ’05.

We’ll do that offline maybe.

Okay, thanks.

No, we are taking a pass on ’05.

The next question comes from Bill Crow;

Raymond James.

Congratulations, nice quarter.

Thank you.

A couple of questions.

Can you just generally describe the relationship with Hilton and maybe the industry overall with its unions right now and whether there is not a risk in that we will see the labor cost accelerating from here, because of the unions?

I think it is an issue that we look at very carefully, the hotel workers have joined with another big union, they are trying to consolidate their power.

They have publicly said that they are trying to get all of the contracts for all of the big companies in a lot of these city center hotels to all come due at the same time, so we are very cognizant of that.

The flip side is that we have good relations with the union, they do a lot of business with us, in fact, so I think we have a good position with them relative to the industry, but it is something that we monitor very carefully.

Second, just beating on this free cash flow horse a little bit more, I am just trying to reconcile what sounds like your desire first off to invest in core operations with the cash against your announced desire to reduce the amount of EBITDA coming from your own portfolio, which given the REVPAR and margin growth that we anticipate would imply that you have to sell, fairly aggressively, some of your owned assets which would of course create proceeds for debt repayment.

I am just trying to figure out where some of those core operation investments might be, given that your time share already represents a fairly healthy part of your business.

I don’t think they are inconsistent because of the magnitudes of it.

What we’ve said over the years is we’d like to see more of our business come from our fee side, but that is through all cycles, and I think we are going to be in that very nice part of the hotel business, I think, for the next few years where you are getting the high part of the cycle’s returns out of the owned hotels business.

So fortune will favor those.

We’ve still got the same long-term desire to be more of a fee-driven company.

Over a three year period the amount of excess capital we’ll invest probably won’t impact those relationships very much, so it is consistent.

Thank you.

The next question comes from Keith Mills with UBS.

Hello, gentlemen, how are you?

Good, Keith.

John, I’ll start with you.

The first question relates to your comments about the group business from the larger houses that you own.

Can you tell us when you think you get to the point where you burn off that lower rate group business and you can expect to then put forward some higher rated group business.

I think the first quarter, but that was tough on Chicago, but we have been rather cautious in booking business in terms of giving the store away and I think our [inaudible] is quite healthy.

I see a second and third quarter as we have space, really, the booking space over 20 percent is up, so we have the compression, I think we can yield a higher ADR.

Are groups due to these types of hotels booked three, four, five, six, seven months in advance?

How far in advance?

You have seen a very short booking in the last year, it was incredible.

In the first quarter we booked almost 70 percent in the year, but that trend, I think as space gets booked I think you are going to see a lengthening a little bit more.

So the burning off of this lower business is basically behind you, and as you move to a second, third, fourth quarter in the future then you –

I don’t want to over-emphasis that it was lower rated business that we just took on.

I think more of it is that we had to revert more towards some leisure rates that we would have preferred not to.

That’s where I think you will see more improvement.

It’s not like we are selling the group rates too cheap, its we didn’t have enough of them.

A second question for you is regarding the REVPAR Index for DoubleTree.

It’s been stagnant here now for the past couple of years, in the 100 range, maybe slightly below.

I know that you mentioned in your remarks you’ve got the new DoubleTrees that will be added to the system and there are some big reservations going on there.

What else are you doing to try to boost the REVPAR index for DoubleTree longer term, and what is your strategy for DoubleTree as it relates to your other brands?

Great observation.

We probably were a little easy on some of our owners in terms of product quality over the last couple of years as we made the transition into the Hilton family of brands, so we are probably going to take a harder line on some of those owners in terms of product quality, I think that’s an important issue with some of them.

You see in the press release that went out of the system, that was probably a start in that direction.

Those 10 properties that are in the works, all good properties that will serve to kind of reverse that decline because those are a lot nicer properties that are replacing those going out of the system.

What you have when you have a new owner like USAA, spending money fixing up those properties, that certainly helps.

Great.

I think the other thing is as Matt mentioned about the number of [PIPS] underway at the Hilton brand, we have a similar story at DoubleTree.

We’ve got a new bedding standard that will be in by the end of ’05.

There is a lot of activity going on at DoubleTree and yes, its sort of been static for a year or two, right around 100, but remember it started at 92 four years ago.

So we’ve made a lot of movement and we still think there is movement up above 100 over the next couple of years.

Matt, you also mentioned in your remarks the kiosks and how those are positive for Hilton overall.

What other types of technology initiatives are you working on like that that can improve productivity as well as maybe reduce some of your operating costs?

Tim, why don’t you talk about that?

Most of it is top secret, but we’ll tell you some of them.

Tim Harvey is our CIO, so he is going to speak to that for a second.

Well first of all on kiosks, we are going to ratchet up the number that we originally planned and I think in total you can look for us to be around about 45 kiosks in total, at least that is what the plans are for current 2004 year.

That’s 45 hotels, I think two or three at each unit.

About three on average.

There are a couple of things that I think just in categories of things, how do you build a closer relationship with the customers, whether they are a business type customer, business travel, corporate account type customer or they are individual transient customers.

I think what you are going to see from us is a movement towards a better understanding of exactly what those customers prefer and the attributes they are willing to pay for, and matching those back to individual rooms.

I think you can look for individuals to actually be able to, over the net later in the year, over our Hilton.com sites to be able to actually check into a room remotely like you do with the airlines and seats on a plane.

So a lot of investment around the customer and really that customer connectivity and trying to know exactly what customers want and need.

I think the other question at this point is what type of savings you’ll have by putting in two or three kiosks at a property.

Do you need one less person at the front desk, or how do you think about that?

The focus is really customer service, Keith.

Just like we’ve all learned going to the airports that we look for those kiosks to check in, that’s what we are really trying to do is give customers what they want.

We tested these at the Chicago Hilton, at the end of the check in process there is a little survey, did you find it easy to use and that sort of thing.

On a scale of one to seven the average response was like a 6.5.

So if you can make your customers happier by checking them in faster, that’s a win.

Just one final question for you and I will let you go.

As it relates to union contracts, I believe the San Francisco Union Contract is expiring this year some time, mid to late this year.

What status is that in terms of negotiations there.

Do you think that is going to be viewed in a favorable way?

It’s in negotiations.

Okay.

We can’t – Keith, you know that.

Thanks, take care.

The next question comes from Jeff Donnelly with Wachovia Securities.

Please proceed.

Good morning, guys.

Bob I guess, the first question is margin growth is pretty good for you guys in the quarter given your REVPAR growth compared to your peers, can you walk us through your expectations for same-store margin, or EBITDA margin growth as you move through the year and your ability to hold on and accelerate that?

Jeff, we don’t give that quarter to quarter, margin numbers or growth expectations.

What we did say though is that we do expect to have for the full year moderate margin improvement both from our expected REVPAR gains as well as how we are doing at the cost line.

I kind of like to shy away from locking into the specific improvement number, but they are going to be better.

Fair enough.

And then the question then, in recent years Las Vegas has been gaining market share in the convention business.

I am curious to your opinion, is this a lasting secular trend in your view, or mainly a cyclical event we could expect from the strength out of the non-Vegas market as convention activity perhaps cycles back to markets where it has been relatively more independent and cheap to reserve in the past two years?

I think Las Vegas is always going to be strong.

People tend to have the reverse of what we used to think of the Atlanta effect.

In Atlanta, if it was a three-day conference you’d have people stay there for two nights because there was nothing to do, Las Vegas was probably the opposite.

People do stay a little longer, and I think the facilities are good.

But I honestly think that there is enough to go around.

We are seeing very positive booking trends at our properties that have different things to offer, probably you get a little more productivity out of the non-Las Vegas conferences.

A lot of the conferences that I’ve gone through, it’s hard to get people there at 9 in the morning.

I just think there is enough to go around.

Two last questions are, what are you seeing in the advance window booking trends in markets where demand has been strong.

Is it shortened, unchanged, or is there an improvement here?

On the group side?

Yes.

I think the booking window is still short, the pace is up 20 percent but the trend certainly is that many of the groups are now asking for more space, they were very conservative.

That number is going up which is very healthy for us.

The last question was, do you guys have a sense of what percentage of your rooms have been renovated in the past three years?

Three years I don’t.

What we’ve said is that our owned rooms, 80 percent in the last five years.

We are very aggressively making sure on our owned hotels that we have our bed by Hilton in place quickly.

We want to make sure all the TVs are the standard, we want to make sure we have all the high speed Internet access in all the rooms by year end.

So on our owned hotels we are being very aggressive about making sure we’ve got the right room products and we are quite confident that the rest of the system is going to follow in that quickly too.

I guess I should ask, system-wide, do you know what it would be then?

Tom Keltner No, the point is I think you’ve got to talk about which brand.

If you are talking about the Hilton brand I think Matt gave you the color on the owned hotels, and we said earlier that half of the franchise system is under a major renovation to the tune of about $275m.

You have to remember too Jeff that when you are talking Hilton Garden Inn especially, that brand didn’t even exist six years ago, so these are really new hotels.

Harder number to get at system-wide.

One of the things we are doing is the Promise system I think had a really, really good quality assurance program, quality assurance team that we’ve kind of bled over into the Hilton system and we are definitely listening to what those guys are telling us.

Thanks, guys.

And the last question comes from Keith Mills with UBS.

You already asked like, eight questions.

He figured no one else was in the queue so he was going to jump back in.

Here’s the ninth.

You didn’t provide second quarter expectations at this point, can you explain why and at what point do you think you can start to provide expectations for the quarter that you are reporting in?

We haven’t done that now for a year, Keith, in terms of giving quarterly guidance so we are going to stick to giving full year at this point.

We would expect to continue that [inaudible].

I think a year ago the rational was because it was very difficult to try to get your arms around trends because of the war and SARS, but now that we’ve moved past that and we are looking for more positive booking trends, you don’t anticipate changing that in the near future?

We will continue giving full year.

Any other questions?

There are no further questions, Mr. Grossman.

Okay, well once again, we thank you for joining us this morning and we will be talking to you soon.

Thanks.

This concludes your Hilton Hotel’s Corporation first quarter earnings conference call.

Thank you for your participation today.

You may now disconnect.