希爾頓酒店 (HLT) 2004 Q3 法說會逐字稿

Welcome to the third-quarter earnings conference call.

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

We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Marc Grossman.

Good morning, everybody, or afternoon noon time for those of you on the East Coast.

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

As usual I am joined by members of our senior management team.

Before we get started just a few things to say.

First, the press release 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 the press release and in the call this morning are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed in or implied by the statements therein.

I will also tell you that this call is being webcast and that can be accessed at www.Hiltonworldwide.com; click on Investor Relations and then go to quarterly conference calls.

There will also be a replay of this call available and that will be available until November 1st at 8 PM Eastern Time.

The replay call number is 888-286-8010 pass code 112-60772.

The call is also being archived on our Investor Relations website.

We do have a few remarks that we have at the beginning but, as usual, we will spend most of our time answering your questions.

So to start it off let me turn it over to our co-chairman and CEO, Steve Bollenbach.

Good morning.

I’ve got just a few things to say before I turn it over to Matt and Bob.

First, we really are having a terrific quarter and good results across all of our three businesses.

I think that demonstrates that the business is getting stronger and that we’re taking full advantage of these improving trends and that we’re running our business well.

I think that what’s even more important, though, is to look at the bigger picture and the outlook for Hilton as a company and as a compelling investment story.

What our investors should take away, I believe, from these calls is not just the information we have here, but that this is a company that we have the people, the products, the services, the brands and the financial resources and the mindset to lead our industry.

We are committed to taking care of our customers, continuing to develop the best team of employees, enhancing our already great relationships with our owners and our franchisees and bringing value to our shareholders.

So with demand for lodging improving steadily I think investors should be focused on just a few points.

First, we have the right products and services in the right locations; first-rate management at the corporate level and in the field.

We have -- much of the battle for the lodging industry leadership is going to be fought in the area of technology.

And we’ve moved ahead in this area.

And as I discussed on our last call, we’re doing more and more – more than anyone else in our industry to effectively employ these new systems.

We‘ve our business efficiently and as a steward for our shareholder's money, and we will continue to do this.

And finally, our history of prudent financial management combined with major improvement -- with the major improvement in our business means we can expect to be a significant generator of free cash flow for the foreseeable future.

We'll talk more about that later in some of the opportunities that are available to us.

So Matt, you want to continue it?

Thanks, Steve.

All facets of our business -- our owned hotels, our fee and brand development business and our time-share operations showed very good results in the quarter, and I'll start with the owned hotels and take a quick tour of our key market.

The eastern corridor -- New York, Boston and Washington D.C. -- continues to be very strong.

Our owned hotels in each of those markets all showed double-digit RevPAR gains in the quarter.

We did really well in New York and Boston from the two political conventions in August and September along with relatively vibrant business transient demand for those markets.

Our hotels in New York and Boston each ran about 90 percent occupancy in the quarter at significantly increased room rates.

The other end of the country -- our hotels in Hawaii and San Diego -- both benefited from what was an outstanding summer travel season.

Both of our owned properties in Hawaii and Honolulu and on the big island showed strong rate increases.

And the Hilton Hawaiian village is continuing to see a steady increase in business from Asia.

Room nights from Asian markets were up 45 percent in the third quarter versus the third quarter of 2003.

San Francisco is starting to show some modest improvement in occupancy due in part to greater overseas inbound travel to the market, an increase in groups and absorption of some of the new supply introduced into that market over the last 2 years.

Clearly business travel and particularly business transient continues to improve in a big way.

This more favorable mix of business helps us drive rate and that in turn helps us bring in industry-leading margins, 25.8 percent in this quarter.

In the third quarter just a little bit less than half of our 7.3 percent RevPAR increase at our owned hotels was from rate.

Strong international travel to the U.S. is benefiting our gateway hotels, particularly those in New York, Washington, Hawaii and San Francisco and we're seeing particularly strong inbound travel from Japan, Canada and Germany.

And a number of industry segments that were strong for most of the 1990s are back -- traveling and spending money in hotels notably financial services, pharmaceuticals and technology.

So to conclude the market tour in the central part of the country -- Chicago saw some modest occupancy improvement in the third quarter, but the citywide softness there is expected to continue through the first quarter of 2005.

We believe we will see some improvement in Chicago for full year 2005.

In New Orleans the third quarter saw a decline in citywide conventions compared to 2003 and the threat of hurricanes there also contributed to a very weak quarter.

But we believe this is a one quarter anomaly.

We expect that the New Orleans Hilton will improve in the fourth quarter and have a solid 2005.

Let's turn to the group business.

In the third quarter our group room nights were up 5 percent over last year.

So far in the fourth quarter our group room nights are up 7 percent over last year with recently strong rates.

Company meetings is the component of the group business coming back the strongest and we expect that our 2004 group business in terms of room nights will be up 5 to 6 percent over last year and that includes that soft Chicago market.

Taking a quick look at 2005, we expect that this preliminary stage our 2005 group business will be up in the mid single digits over 2004 with higher room rates.

As of September our 2005 definites were up about 5 percent.

We're seeing improvement in 2005 group bookings on a monthly basis.

I would mention again that the booking window for groups still remains short.

In terms of corporate negotiated business, the RFP process has just started, so it's hard to draw any definitive conclusions.

At this point in time we would anticipate that 2005 corporate negotiated rates will be up in the mid single digits.

Remember that our system is over weighted towards 1,000 room plus convention oriented hotels, so as group demand continues to increase our big hotels will reap the benefits.

Turning now to our fee business, it's the same fantastic story we've been able to tell you for the last several quarters.

There are two ways that we make money in this business, RevPAR growth at our franchised and managed hotels and the addition of new units, and we're doing extremely well on both counts.

About 40 percent of our fee growth in the third quarter came from RevPAR growth and 60 percent from new units.

Our brands showed very good RevPAR growth in the quarter, over 7 percent at Hilton and Doubletree, over 6 percent at Hampton Inn and Hilton Garden Inn.

The RevPAR premium commanded by our brands along with the terrific relationships we enjoy with our owners enable us to continue adding units in the U.S. at a faster pace than anyone in the industry.

We're on target to add 122 hotels and (technical difficulty) rooms to our system in 2004.

And just as important, our pipeline remains full with 450 hotels and 58,000 rooms.

I'd like to spend just a few minutes talking about the brands -- Hampton, Homewood, Hilton Garden Inn and Embassy Suites are all doing great.

Hilton Garden Inn is the fastest-growing brand in the industry.

Homewood Suites has 75 hotels in its pipeline and that's a 50 percent increase over 2003.

Our product improvement plan at Hampton Inn, called Make it Hampton, is exceeding our expectations.

At the end of the third quarter 1,000 Hampton Inns have implemented the Make it Hampton improvements.

And Embassy Suites, of course, continues to be the category killer in the upscale all suite market.

Doubletree is making great strides.

I talked last call about the renovation projects underway at several Doubletree hotels and that there are 15 strong Doubletree deals in the works.

Our luxury brand, Conrad, is beginning to gain some traction in the U.S.

Property in Miami is off to a very good start.

And our third Conrad in the U.S. is three floors out of the ground in Indianapolis.

We are getting more calls and developing more leads on this brand even as we speak.

Let's turn now to our flagship brand, the most recognized brand name in our industry, Hilton.

And our focus here is on improving the product and service consistency across the brand.

In terms of product it starts with a room and our goal is to have new beds and new TVs in all of our owned hotels by the end of the first quarter 2005.

Our new beds have a plush top mattress, the linens have a high thread count, and the pillows are all of high quality; bedspreads are out, duvets are in and the colors are lighter and more appealing.

As for the TVs, all of our Hilton owned rooms are getting 27" or 32" flat tube TVs.

And in markets where we believe we can get a rate premium we are installing 30" LCDs.

Armoires are going out freeing up a lot more space in the room.

As we're busy getting our owned rooms up to speed we're working hard to get our third-party owners and franchisees to do the same.

This is not a hard sell because of the purchasing power that we offer in getting the best prices on these products and the return on investment that they offer.

Owners of 80 Hilton franchised hotels are investing around $275 million in their properties, a program that should be completed at the end of next year and these are all important things that are being done to enhance the profile of the Hilton brand.

And our company and this brand are strong enough to pull the flag on owners that won't play.

There are a number of additional programs that we're working on related to products, but we're not ready to discuss them yet.

The other part of the consistency equation is service and we addressed this through increased training and technology.

We talked before about the self-service kiosk we're putting in at our larger hotels.

They are cost-efficient, customers love them and you can change your room at the kiosk.

We'll have them in 45 of our bigger hotels by the end of this year.

We also have kiosks at Honolulu International Airport so guests can now check in to the Hilton's Hawaiian Village and get their key while they're waiting for their luggage.

This is the first in our industry and customer reaction has been great.

In fact, about a third of all of our self-service check ins at the Hawaiian Village are occurring at the airport.

One of the great ironies of the hospitality business is that we spend tons of money training our front desk people to be friendly and welcoming.

But a lot of travelers really don't want to make a friend, they just want their key and they want it fast, and that's okay by us too.

Also by the end of this year all of our 2,200 plus hotels will be equipped with high-speed Internet access and, by the way, we're 95 percent deployed now.

We have just announced two new technology-based programs that will help our customers -- web-based check in and electronic folios.

With web-based check in our Golden Diamond Hilton honors members with password protected accounts who will be able to check into their rooms in advance of arrival no matter how they made their reservation.

Guests simply access their reservation on one of our brand websites, select a room with the features they want and print the confirmation.

The hotel is then notified electronically of the arrivals so all the paperwork is done in advance and the guest key and registration packet are waiting when he or she arrives.

If you're one of those business travelers who misplaces paper receipts for your expense account then electronic folio is for you.

Simply put you can access and print your folio electronically for stays that you've had with us over the past 3 months.

I'd like to spend a minute or two on items that have been in the news a lot recently -- hurricanes in the Southeast and the current labor situation in our industry.

We did have some hurricane damage to our hotels in Florida, but mostly to smaller franchise properties. 10 of the 200 properties that we have in Florida remain closed.

There was negligible damage or business impact at our two large managed hotels in the state.

The Hilton Walt Disney World in Orlando and the Fountainbleau in Miami.

We also had some very brief interruption at our time-share operation in Orlando, but nothing major.

As to the labor situation in the hotel business, there was little net impact from the strike in San Francisco.

The hotel is open and running, (indiscernible) and we're hopeful of a good outcome.

Reflecting the increased demand we're seeing across our system, I want to note some of the strong trends we're seeing in call and reservation volume.

We noted in our press release this morning that call volume in the third quarter to our call centers was up 7 percent over last year.

Reservations through Hilton Reservations Worldwide, GDS and all Internet sources were up 12 percent.

So far in October total bookings are up about 15 percent over October 2003.

These are very encouraging signs particularly as comps have gotten more difficult as the year has gone on.

I'd like to make a couple of other points here.

Hilton Reservations Worldwide average rate of converting calls to bookings is running at a record high this year, over 40 percent.

According to an industry survey, and that's from an independent group, that's the highest rate in the industry.

And as a result of volume increases, this high conversion rate, our technology niche (indiscernible) we believe that our cost per reservation is the lowest in the industry.

And with the volume of business we do that's a big advantage for us and for our owners.

Bookings through our proprietary website continue to grow at a faster rate than bookings through third party Internet sources.

In the third quarter consumed room nights booked on our own websites grew by (technical difficulty) percent over 2003 while those through the third parties declined by about 10 percent.

So our own website is up 31 percent, third party is down 10 percent.

I'll wrap up with our time-share business which had another really great quarter.

Revenue was up 16 percent, unit sales were up 36 percent, and the average unit sales price increased 9 percent.

Our strategy has been to focus on three markets -- Las Vegas, Orlando and Hawaii.

We are doing very well selling existing inventory in those markets and we have opportunities for new developments in all of them.

In Orlando we'll break ground early next year on Phase 5 of our International Drive property and we're also replacing the sales center at our Sea World property with another 48 time-share units.

In Las Vegas we started work a few months ago on Phase 2 of our Las Vegas strip property and that's Phase 2 out of 4.

And that property is a 431 unit tower.

And we have additional opportunities we're exploring in Hawaii.

Timeshare has been a terrific business for us with outstanding returns on investment.

Bob is going to talk about CapEx going forward, but I'll just mention that our intention going forward is to increase our annual spending on time-share from its current average 100 million to something more in the range of $200 million, but again, continuing to focus on large projects and year-round destinations with an existing infrastructure in place.

So we had a really good quarter on all fronts; we're working hard, getting good results; laying the groundwork for continued improvement, and now I'll turn it over to Bob.

Thanks, Matt.

Before discussing our outlook, the balance sheet and free cash flow, you'll note that we added a new line on the financial highlights page below operating income called loss from nonoperating affiliates.

The $3 million pre-tax loss on this line in the quarter is related to a 24 percent minority interest in a section 29 synthetic fuel facility that we purchased in August for approximately 32 million.

Our interest was purchased from a subsidiary of a major financial institution that has retained an interest in the facility and that institution will be responsible for managing it, not us.

Our investment in this facility is expected to produce pre-tax losses, but because of the tax benefits provided under the tax code, we expect it to generate after-tax income.

I mentioned the investment generated a pre-tax loss for the third quarter of 3 million, but on an after-tax basis it generated income of 900,000.

Looking ahead we project a fourth-quarter pre-tax loss of about 4 million and after-tax income of about 1.5 million.

And we expect the pre-tax losses and after-tax income for each quarter in 2005 to be in line with our expectations for the fourth quarter.

I would point out that this is strictly an investment strategy that provides us an opportunity to enhance cash flow and it is not an attempt to enter a new line of business.

Now moving on to guidance, our updated estimates for full year 2004 are as follows.

Total revenue of approximately 4.14 billion, total adjusted EBITDA of approximately 1 billion, and total operating income of approximately 650 million.

We now expect RevPAR at our comparable owned hotels to be up approximately 7 percent for the year and that includes Chicago which we anticipate will impact our RevPAR growth by about 150 basis points for the year.

Diluted earnings per share for 2004 are expected to be in the high 50 cent range.

Full year 2004 CapEx is expected to be in line with the guidance we've previously given, a total of about 275 million with approximately 155 million of that amount for routine improvements in technology, 60 million for time-share projects and 60 million for owned hotel renovation, ROI and special projects.

We know you're all interested in 2005, we're in the initial stages of our budgeting process but we can provide some very preliminary guidance for '05 based on the trends we're seeing today.

When the budgeting process is complete we will be able to provide more specific guidance and you can expect that on our next earnings call in January.

At this time we expect RevPAR from comparable owned hotels to increase in the range of 5 to 7 percent in 2005.

We would expect about two-thirds of that increase to come from rate and therefore anticipate margin improvement as well.

But again, we'll get more specific on the next call.

As to unit growth, we expect to add 130 to 150 hotels, 16,000 to 20,000 rooms to our system in 2005.

Coupled with expected RevPAR growth at our franchised and managed properties, we look for continued growth in fee business and we're anticipating another good year at our time-share business.

When you exclude the effect of the proposed revision to FASB statement 123 on share based payments our preliminary estimate for EPS for full year 2005 is in the low to mid 70 cent range.

Total capital spending for 2005 is expected to be in the range of 430 million with approximately 140 million of that amount for routine improvements at our own hotels, 190 million for time-share projects and 100 million for hotel renovation, ROI and special projects.

Based on our preliminary estimate for earnings in 2005, also factoring in our CapEx guidance, we anticipate generating approximately 300 million of excess cash in 2005.

So I'll wrap up with a general discussion of the balance sheet and thoughts on the use of excess cash next year.

Remaining investment grade is a priority and we believe keeping debt to EBITDA below 3.75 times will enable us to remain there.

We were very pleased that Moody's last month raised us to an investment-grade rating of Baa3, specifically citing our debt reduction efforts and improvement in industry trends.

So we now are an investment-grade credit from both Moody's and S&P.

We will continue our commitment to invest in our business at attractive returns for our shareholders.

We currently don't see many opportunities outside of reinvestment in our own hotels and continued investment in our time-share business.

We're doing both of those things and that's reflected in our CapEx guidance for 2005.

Of course, we also want the flexibility to be opportunistic should the current environment change.

We will also look to return excess cash to our shareholders.

Our bias at this time to accomplish that is to buy in our stock.

But while we cannot be more specific at this stage as to the when or how much, investors should know that we will always look for the right opportunity to use our excess cash in ways that bring value to our shareholders.

So the story from a financial standpoint is we're running the business well, the balance sheet is in great shape and we expect to be significant generators of excess cash in 2005.

With that I'll turn it back to Mark.

At this time we will now take your questions.

(OPERATOR INSTRUCTIONS) Jay Cogan, Banc of America Securities.

I got a couple questions on the '05 CapEx guidance.

I was wondering if maybe you can give us a little bit better sense or some examples of what that $100 million for the special hotel projects could be.

When you say high return projects exactly what are you talking about and when will we see those benefits?

The way to think about it, Jay, is in a couple of ways.

First, we said we're spending 140 million for routine improvements at our own hotels and that's what we've traditionally done is we've estimated the revenues from our hotels, we budget about 6 percent of revenues for normal FF&E replacements at the property.

So that we're keeping the same.

Then we said we'll have $100 million for hotel renovation, ROI and special projects.

And the way I think you should think about that is roughly a third each.

A third of it is various infrastructure projects that we have in our owned hotels; that's different mechanical and electrical and plumbing, air conditioning -- all things behind the walls at our owned hotels that we feel we need to do.

About a third of it is ROI projects; many of them we haven't identified yet.

We kind of hold that as a place holder.

We challenge our general managers to come up with ideas that they have to find storage space that they convert to rooms, to take restaurants typically that are converted to different concepts.

Sometimes we'll take -- we have a lot of times we see sporting areas that are better used as meeting space, things like that.

And then another third of the money is really just to speed up the normal process that we have in terms of refurbishing, replacing the room's products, the public space.

We just think that, particularly for the Hilton brand, we need to improve the product quality on the assets that we own.

So that's how that spreads out.

And typically, Jay, when we think about these ROI projects, as a rule of thumb we're looking for at or north of a 15, 16 percent return.

But when you say that you're speaking of the one-third really?

Yes, the ROI.

And then if I could just ask a follow up on the time-share spending, I think historically you guys have said you don't want time-share to become more than ex percent of your operating cash flow, yet now it sounds like you're accelerating the build out of that.

I was just wondering -- you spoke to the major markets, but I was wondering if you could talk a little bit more about what's really driving that decision here relative to let's say buying back more stock or increasing dividends or looking elsewhere for opportunities?

Most of our time-share budget for 2005 is really just a continuation of the existing projects that we have.

It's Phase 5 at the existing Tuscany Village project; it's Phase 2 at our Las Vegas strip project; and it's CapEx associated with our new Waikoloa project.

So there's really nothing new in terms of projects.

I think in terms of percentage of EBITDA next year it's going to be roughly the same.

Going forward, though, we are going to look for opportunities just to move that up a little bit.

But in terms of '05, it's roughly a continuation of our existing projects.

Jay, this is Steve.

The direct answer to your question is that these we've found to be very high return investments and if we spend a little bit more which is within our ability to closely manage, we think that maybe over a few years that time-share would move up to be 12 or 13 percent of our EBITDA instead of 9 percent.

But this is over maybe a 5 or 6 year period.

And as a use of capital -- of course, we're not committed to do that that far out -- but as a use of capital, these are such high return investments that it's probably really a good idea.

But it still will never -- certainly not in a 5-year time frame -- be that big a piece of our business.

Appreciate the color.

Smedes Rose, J.P. Morgan.

We were wondering about the time-share -- which you've sort of talked about more -- but on the operating margin increasing 210 basis points, I guess backing out the property tax reversals I think in Chicago was it more like 130 basis points?

That's correct.

Where do you see that going from here over the next several quarters?

Should that start to moderate or should we look for similar increases on a quarterly basis?

That's hard to project, but we're seeing the ability to raise rates in our business and that's the key.

The more you can raise rates as your percentage of RevPAR increases then the stronger your margins can be.

What Bob said in his remarks is that we expect about two-thirds of our RevPAR increase next year to come from rate so we'd look for margin improvement as well.

When we get to the next call 3 months from now we should be able to get a little more definitive on some of that.

Will Chicago be still sort of a drag on your overall RevPAR growth next year?

You talked about what it was in the quarter or this year within/without Chicago.

We think the first quarter is going to be still rather tepid, but for the rest of the year I think the citywides are up 6 or 7 percent.

They booked about seven additional trade shows and the hotels are showing a good booking pace on their own.

So I think we're going to be positive.

And then of course '06 is going to be a really terrific year, back to 1999 levels.

Okay, thank you.

William Truelove, UBS.

I have a question about your preliminary 2005 EPS in the low to mid 70s.

Two questions on it.

One, did I hear that correctly that you're including the FASB 123 expense which was about $16 million after-tax in '03 so that is about 4 cents a share?

No, it's excluding.

Oh, that's excluding the impact.

Yes.

It's roughly 3 to 4 cents a share.

Second of all, does your preliminary 2005 EPS expectation -- does that include share repurchases?

You talked about having roughly $500 million of free cash flow.

Are share repurchases contemplated in that EPS figure?

No, they are not.

And in ’05 we talked about excess cash of about 300 million.

Thank you.

Bill Crow, Raymond James.

Easy question, first.

Sorry if I missed it, but what was the impact RevPAR growth in the quarter from Chicago?

It was marginal; excluding Chicago we would have been up about 7.8 percent as opposed to 7.3 percent.

As you look at New Orleans, you have some confidence that that's coming back, but it seems like the city has been impacted by strength in Vegas is it just a calendar issue for the citywides or what gives you the confidence that New Orleans is coming back next year?

It would have to be a soft quarter or the year was soft.

We knew that from the beginning.

The citywide conventions are not there as the previous years, but '05 looks much better and we think we are going to have a solid '05.

Plus in the third quarter, you've got to discount the hurricane impact where we lost one piece of business, a big piece of business.

Okay.

And then final question, if you could just tell us, the synthetic fuel investment, Marriott has -- it's been a very controversial issue for the Company and clogs the valuation for Marriott, and it seems like for $1.5 million a quarter after-tax or a couple a pennies a year, is it really worth clouding the picture and making the story a little more difficult to understand?

I don't think it clouds the picture.

It is a relatively small investment.

It was just really a unique opportunity for us to enhance cash flow and to lower our overall effective tax rate.

I think when you talk about a penny a share, a penny and a half a share, it doesn't really cloud the picture that much.

Okay, thanks.

Joe Greff, Fulcrum Global Partners.

Matt or Bob or Steve, can you talk about what you guys are seeing in terms of asset sales and how strong that market is and what opportunities might exist for you to rethink about some of your own hotel assets and perhaps sell them at fairly strong multiples relative to history?

How do you think about those things?

Well, let's each of us take a little cut at that.

We're certainly aware that prices being paid on individual hotels is very high relative to their current earning powers.

We have always been a company that looks at those opportunities.

So we are certainly looking at opportunities where we might be able to reduce the asset load of some of our hotels, but I don't want to make any promises to anybody, because it is that trade-off between getting a really high price, maintaining our brand positions in markets and control of really important properties.

So all we can say is that we are really closely monitoring the market.

I think we've got a good history of taking good advantage of an arbitrage between the public markets and the private markets.

So we're going to watch it really carefully, but we don't want to make any promises as to what we're going to do.

One more question on your '04 guidance, and these aren't enormous issues or items.

The total revenue number you guided to today is about 30 million less than the previous call.

I know the operating numbers are all the same in terms of EBITDA and EPS.

Is that related to timeshare; is that a percentage of completion, accounting issue?

Can you talk about that a little bit?

Yes, part of it is related to percentage of completion accounting, particularly as it relates to our Waikoloa project, and the other is just a reforecast of the gross-up amounts of other revenue from management and franchise properties, which has no impact on EBITDA or net income.

Great, thank you.

Mike Rietbrock of Smith Barney.

A follow-up to Joe's question.

I think what he was trying to ask you is can you comment on the reports that The Palmer House is for sale?

But anyway, so not to beat around the bush, if you'd answer that.

If you'd also talk about what the property needs in terms of CapEx, or more generally maybe what your inclination would be to do with a big chunk of cash if it were to come your way?

Well, let me try.

First, as to The Palmer House as a specific asset, we really aren't going to comment on whether that specific asset would be for sale.

But I will tell you that The Palmer House is one that is kind of tough to think about because it's an old hotel, it's a great hotel, it's in a great location.

But to bring it up to our operating standards, we'd have to put quite a bit of capital in it.

So it's one that we're looking at very, very carefully.

Kind of the more general question is if a big chunk of capital money came our way, I think we would treat it in the same way we do from our current ongoing operations, which is that first we get our debt in line, which really we have accomplished.

And secondly, look for some high-return investments, but other than what is truly a modest expansion in our timeshare business and some investment that we can find -- and again, these aren't big investments but investments like redoing bars and restaurants and special things in the hotels -- other than that, we really don't see good, necessary capital investments for our Company.

We don't need from a strategic point of view to buy into certain markets or any new markets, for example.

So if cash were to come our way from an asset sale, it would probably just get put in that same pot as the other funds that over the next few years, we're going to generate more cash than we are likely, likely to be able to reinvest it at the kind of returns that our shareholders would expect.

And then we would return the funds to our shareholders.

Thanks, Steve.

Amanda Bryant (ph) of Merrill Lynch.

What tax rate do you have implied in your '05 guidance?

We expect right now the effective tax rate to be in the 34 to 35 percent range.

And that's for '05?

Yes, it is.

Great, thank you.

Jeff Donnelly of Wachovia Securities.

First question, beyond buying in shares and selling off real estate, I guess what is your thinking as it relates to alternative corporate structures or even strategic alternatives for Hilton?

Because it strikes me that your constraints on international expansion, the excess cash you expect to produce and declining underappreciated real estate value that that you have on the balance sheet, I guess I'm wondering is there more value that could be had in separating the real estate from the management and franchising businesses that you guys have thought about?

Gee, we have looked at that on so many occasions, and it is something that we would -- if the numbers seemed to indicate that there was a value increase in that, we would certainly be interested in it.

But every time we look at it and we kind of compare, for example, a management company and a real estate company like the Marriott split-off of a few years ago, it just doesn't look as if there is any increase.

I mean, to make it make sense, you need to expect multiple increases on the separate companies; it's just probably not likely to happen.

So I guess what that's telling us is that the market appreciates or realizes the value, all of the possible values with the two companies together.

We will continue to look at it because that can change, those guys can change, but we just don't see it now.

And also from a strategic point of view, we don't really feel that we are really limited in international expansion in the sense that we have such a close and important contractual relationship with Hilton International that we believe we really get most of the benefit that comes from being an international company by working so closely with them.

So what we have said is that maybe someday these 2 companies will come together, but it will probably be around kind of a financial market, one company being out of favor in its markets and trading at too low a price and allowing the other company to do kind of a financially-oriented transaction.

But from an operating and fundamental value point of view, we just don't think that it is important for us, for example, to merge with Hilton International.

So that's kind of where we have been for an awful long time on those two questions and probably where we still are.

Yes, I know they've been asked and answered before, but I thought I would --.

It’s a good question to always ask because things can change.

But as of now, it seems like the world is in the place it's been for a long time now.

Just a question on conversions, both I guess between your brands and from competing brands;

I imagine that most hotel brands have been hesitant to be aggressive with their franchisees the last few years, and with lodging and the uptick.

And I guess, generally, do you think we should expect an increase, a little turnover both between Hilton family brands and perhaps from competing brands?

As a follow-up to that, what steps do you folks take to keep someone when you do pull a Hilton flag, trying to keep it as a Doubletree; and what is in your trend and incentive given to bring people in or keep people in the family?

Let me try that one because if you roll the clock back 5 years, I thought that we would see some of that.

I actually thought we would see some -- someone we kicked out of Hilton and turned over to Doubletree.

It just hasn't happened; it probably won't happen.

We had some conversions the other way.

We had some Red Lions that turned to Hilton; we had some Doubletrees that turned to Hilton.

But generally what happens is it becomes a personal thing.

You know, you and the owner don't get along on quality assurance issues; you put lines in the sand and you kind of get out of a good relationship.

And they don't want to deal with you, we don't want to deal with them.

So it just doesn't happen that you kind of move down the brand spectrum.

I thought that would happen, but it hasn't, and I don't think it will.

I think as far as conversions are concerned, we're very active and very interested in conversions.

I think that the big drawing point there are the frequent stay programs.

We are going to say we are better than Marriott and we're better than Starwood, and they're going to say they're better than us.

But in my view, if you are not in one of those programs, your future in this business, particularly in the full-service end of the business, actually in all of the areas, is limited.

Because it is such a powerful tool for us because we are all starting with 40 percent of the hotels built with our honored guests, Hilton Honors members.

So it is just a very compelling program that we use extensively, and we are very attuned to those conversion opportunities.

Matt talked a little bit earlier about we have got 15 really good Doubletree deals in the works.

Tom, maybe you can correct me if I'm wrong, but I think the preponderance of those, maybe 10, 11 or so of those are conversion opportunities.

If you look at our overall pipeline of like 450 hotels, there is probably 10 percent or less that are conversions.

But if you look at Doubletree, probably 80 percent, 85 percent of those are conversions.

And even Hilton where we have nearly 30 hotels in the pipeline, about a quarter of those are conversions.

So you're seeing a lot of full-service hotels that are searching better flags, and with the performance of our brands and the fact that we have moved in the case of Doubletree from 92 percent up to 100 percent RevPAR index, we are getting a lot more interest.

So conversions are important and probably more important in the full-service business certainly than they are in the focus-service business.

Has there been much change in the incentives that you've had to give to folks in the last 12 months to 36 months to bring people into the brand?

Not really.

Once in a while like with Embassy we've got sort of an incentive to come and build new Embassys and the franchise fees ramp up maybe over 2 or 3 years up to the total fee that we charge of 4 percent.

But no, what people respond to are brands that perform.

And as we've continued to show how ours perform we have people that are very interested in joining one of our family of brands.

That's been our consistent story now for 5 years.

I would say, Jeff, in fact the playing field has leveled a lot because 2 or 3 years ago one of our competitors in particular was buying conversions, putting in big money into the deal in order to get the conversion.

And I believe that a lot of that has slowed down.

So it's now competing on the brands, what they can bring and so that playing field is a lot more level now.

Great, thanks.

Will Marks, JMP Securities.

It's actually Tony Wells (ph) for Will.

Could you just give us an update on the strike and maybe what's the potential impact on your business and if you have any clarity on when it may be resolved?

In San Francisco if both sides are talking we'll probably meet by the end of the week and the mayor has gotten involved.

He's looking for -- in San Francisco he's looking for a 90-day cooling off period -- no strikes, no lockouts.

We're talking and the impact has been minimal.

We have in San Francisco been able to supplement our team members around the country and the hotel is functioning very well.

(multiple speakers)(indiscernible)

picture all the hotel companies recognize the threat of trying to have all of the contracts come due in 1 year and so we're cooperating with one another.

Thanks.

And just one more question.

On your Q3 numbers without the $10 million gain would your EPS have been roughly 14 cents a share?

If you take out the Myrtle Beach condo sales and the property tax adjustment, yes, 14 cents a share.

Great.

Thank you.

Which we were delighted to make, by the way.

You guys just kind of discard that.

That was a nice $10 million gain, it was a great deal for us.

Brian Egger, Harris Nesbitt Gerard.

I joined the call a few minutes late, so I apologize if you answered this question already.

I know you mentioned in the quarter that your online bookings through your own branded websites were up 34 percent.

I was wondering if you had mentioned or could mention your percentage increase in your bookings from third party merchant websites or if you've given out that number.

I think you've given it out in previous quarters?

Those were actually down 10 percent.

Down 10 percent for third party, up 34 percent for your own I guess -- up 12 percent altogether I think is what the number was in the press release.

That's right.

Thanks very much.

Chris George, Omega Advisors.

I was a little disappointed to hear you say you didn't see additional value in perhaps splitting up the Company.

And your comments kind of implied that you thought the stock was fairly valued.

So I guess my question is this, what are your guidelines with regarding purchasing stock and how low would you let the debt to EBITDA ratio go?

I guess one of the concerns or criticisms has been that the Company has been run for the bondholders and now that we've got the investment-grade rating is there -- I'm just wondering how much conviction there is in the value of the equity at this level and how conservative you'd let the balance sheet get?

Let me try that.

I think of this as a transaction where you're returning money to shareholders whether by stock buyback or by dividend.

I think either special or regular dividends.

I think of those more as balance sheet items than indications of value of the stock price.

And at a point where a Company decides that it can't find investments that will clearly benefit the shareholders I think there's sort of an implicit obligation to send that money back to the shareholders.

And then the mechanism you choose is probably less important, but it's really a question of can I now or in the reasonably near future believe that the management can find investments that benefit the shareholders?

So -- and I know that's kind of theoretical, maybe a little too theoretical.

But I don't think if a company decides that its balance sheet is such that it ought to be sending money back to the shareholders it's probably not a question of trying to guess with precision the stock price if you send it back by stock price or the dividend level if you send it by way of dividends with exact precision.

So I don't think that the shareholders should take too much of the fact of whether a company sets a dividend at 5 cents or 6 cents or buys stock back at $100 or $101.

I don't think that's really what the Company's trying to do.

It's probably trying to work its balance sheet.

As to the question of where do you have to be in terms of the level of debt, I believe and we've said this for several years now -- because it took us that long to get to this position -- that we want to be investment-grade, but we're not looking to be a AAA credit.

So we're not -- also we're not going to be in the position of saying -- we're not going to have the ability to say that at the second decimal point this is where we buy -- in our leverage ratios at the second decimal point this is where we buy stock or make special dividends or increase regular dividends.

It's just not going to be that precise.

But I think it would be just kind of a financial mistake to think that we're in the business of running the Company for bondholders and trying to secure a very high investment-grade because we've never said we wanted to do that.

We said we wanted to be investment-grade.

Maybe I can ask a question -- follow up a little bit more pointedly.

Could you see yourself raising debt in order to purchase stock in order to keep your leverage ratios at moderate levels?

Because the amount of excess cash flow I see coming off the Company in the next 3 years would take your debt levels down dramatically.

I think the problem with that is that kind of mechanism that you suggested would take you out of an investment-grade.

If the idea was I'll borrow some money, I've got a lot of cash flow coming in the future, I'll use that, I’ll return that to the shareholders and then I'll pay down that debt.

I think during that period of time that that transaction was going on from the day you borrowed until the day you recaptured your leverage ratios I don't think you'd be investment-grade.

Even if your debt to EBITDA ratios continued to stay lower, even fell in the process over the course of the year?

We've got a company now that's growing EBITDA 10 to 12 percent a year.

But you don't have to borrow money per se, but I guess the point is there's two pieces to that equation -- there's the amount of debt and there's the amount of EBITDA.

The amount of EBITDA is rising dramatically -- call it 10, 12 percent a year, not to go crazy with it, 10 to 12 percent a year, as I run the numbers you either get down to debt to EBITDA of two times within 3 years or --.

No, that's not going to happen.

That's not going to happen.

Fred Taylor, Lord Abbett.

I think most of my questions have been answered.

Just on the free cash flow estimate for '05 of 300 million, and other people have come.

Is this purely from operations or did that include a few asset sales in there?

That's purely from operations.

Then just the datapoints you gave, earnings per share and CapEx, I assume depreciation goes up with the higher CapEx in '05?

That's accurate.

And then just one last thing.

I believe you said 365 million of cash on the balance sheet today or maybe at the quarter end and that's substantially above the levels of sort of 50 to 80 million you’ve kept in the past.

Is that in addition to the excess cash flow available through either alternative investments or share repurchase.

Yes, it is.

Thank you.

Asad Kazim (ph), Reese (ph).

One for Dieter first.

F&B margins, where they are today and I guess in a time where you had normalized (indiscernible) group business where would F&B margins be then?

And then second is, how do you answer -- I guess just going back to the last caller's question your incremental tax rate is at the highest tax rate not at the weighted average tax rate so as the depreciation amount keeps declining you're getting taxed at the highest tax rate and so that number keeps on getting bigger as opposed to you guys shielding that and getting the highest multiple on it.

So effectively you keep increasing the benefit of spinning out to real estate into perpetuity.

So I guess if you could answer that as well?

On the margin -- our margins in the quarter were about flat with last year and a lot of that was frankly related to the -- I'd say the quality of the group business in the third quarter.

The third quarter typically is not a high margin F&B quarter and that contrasts out with the second and the fourth quarters.

We ran about 15 percent F&B margins in the quarter and second and fourth quarters really run in the mid to high 20s.

But these margins should increase as we see better corporate and the group business because the trend is that our revenue is going up and we are able to get 4 year management a better yield and they're looking also at the flowthrough in terms of food and beverage.

I think the F&B margins are going to be slightly up fourth quarter and going into '05.

I'm sorry, the question about the tax rate, can you repeat that?

I guess what I was saying is let's say the cash taxes next year are 120 million, you put a 12 multiple on it because you will have to put a multiple on it as the savings are into perpetuity.

So right now your depreciation, since the bases and the assets are so low it keeps declining every year so your cash taxes keep increasing and every increase is at the highest tax rate not at the marginal tax rate.

So they'll set the savings of spitting out or sheltering yourself from the taxes are pretty big -- I mean, just on -- assuming a normalized REIT multiple on those tax savings is about $3.50 to $5 a share and I would think that's a fairly meaningful amount, but you guys seem to think otherwise.

What constitutes a meaningful savings for you to, I guess capitalize on this potential savings?

It's such a complicated question because those potential savings you buy in effect by tax expenses that you incur at the point of a distribution or conversion to a REIT.

They're good questions, but I just don't think this is the right format to discuss that kind of -- we'd spend an hour answering that question.

So I think we're going to have to pass on that one.

Appreciate it, thank you.

We're at about an hour now so we have time for one more question.

But before we take that question just let me say a couple things.

Number one, if there are any other questions after the call you can certainly follow-up with me or Atish.

Atish's number is 310-205-8664.

I'm at 310-205-4030.

But the other thing I wanted to bring up with everyone is we're always looking for ways to make these calls more efficient, more productive really for all of you and we understand that during earnings season things get hectic, you have a lot of calls you have to get on, lots of notes you need to put out.

So we really want to use these calls to make sure that we're getting to the things that are most important to you.

So starting with our next call, which will be the end of January, we're going to be doing something a little different and we're going to be devoting the entire time to Q&A.

We think that will make the calls more interactive, it'll provide lots of opportunities for questions and that way we're really making sure that we're addressing the questions and the subjects that are really top of mind with all of you in the investment community.

So look for that new format in 3 months and looking forward to that.

So with that maybe we can take our last question.

Arun Daniel (ph), ING Investments.

When you look at your margin improvement and the opportunities that you have next year and the years to come what is your time frame in terms of being able to get back to the margins that you had in '98, ‘99 as the rate comes back to that level?

Well, I think firstly what we're seeing right now is really a positive displacement of our discounted business.

That means our mix of business is changing in our favor.

It's ADR, the higher the ADR the better the crossover, the better the margin that is a very positive trend and that's one way we can get up to 99.

I agree, I think it’s going to be mostly rate dependent.

Continue to do a great job on the cost side of the equation.

Our cost per occupied room continues to be up less than 1 percent this year which I think speaks to a great job that our operators are doing.

Dieter is right on this, it's going to be primarily rate driven and it's going to be the mix of business.

Remember, too, the mix of hotels that we have.

We've talked about that the last couple of quarters, these big thousand room hotels that really still have their best days ahead of them as the group business picks up and doing more of these big banquets and F&B business and the high margins associated with that.

That's another thing to factor in.

Thank you.

I think that wraps it up for today.

Thanks for joining us and we will talk to you again soon.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, good day.