希爾頓酒店 (HLT) 2004 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Hilton Hotels Corporation fourth quarter earnings conference call.

My name is Carlo and I will your your coordinator for today's presentation.

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

We will be facilitating the question-and-answer session towards the end of today's conference.

If at any time during this call you require assistance, feel free to press star followed by 0 and a coordinator will be happy to assist you.

It is now my pleasure to turn the presentation over to your host for today's call Mr. Mark Grossman, Senior Vice President of Corporate Affairs for Hilton Hotels Corporation.

Please proceed, sir.

Thank you, Carlo, and good morning, everybody or good afternoon if you're on the East Coast.

Thanks for joining us today.

I'm joined as usual by members of our senior management team.

And before we get started, just a little housekeeping, I want to remind everyone that the press release that we put out this morning and today's conference call contains 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 herein.

Also I want to let everyone know that today's call is being webcast.

To access that go on www.hiltonworldwide.com.

Go to the Investor Relations link.

And then click on quarterly conference calls.

There will also be a replay of this call and that will be available until February 7th at 8:00 p.m. eastern time.

The replay number is 888-286-8010, pass code number 75881787.

And we've also -- we'll have this all archived on our Investor Relations website as well.

So with that, as we mentioned, last time around, we're doing something a little new and different this time and hopefully make the calls a little more efficient and we want to get to the things that are of interest to you.

So, we're going to go right to your questions and I'll answer.

So, Carlo, we're ready for the first question.

Thank you sir.

Ladies and gentlemen at this time if you wish to ask a question, please press star 1 on your touchtone telephone.

Again, star 1 at this time for any questions.

One moment, please.

Sir, first question's from the line of Jay Cogan with Banc of America Securities.

Hey, Mark, you can hear me okay?

Yeah, Jay.

Okay.

Sorry about that.

I thought I lost you.

It's probably is a good day for this new format.

If I can ask maybe a couple of quickies.

First I was wondering if you guys can tell us what the San Francisco and the bedding expenses were maybe individually or in the aggregate for the quarter and kind of help us better understand what the flow through would have been otherwise in the quarter.

And then also, I was wondering if maybe you can talk a little bit, when it comes to your '05 guidance, I think obviously people thought the RevPAR numbers were pretty solid, but wondering what the flow through with the EBITDA margin expansion expectations are at the owned hotels for, you know, this current year.

Hey, Jay, it's Bob.

In terms of the fourth quarter, and -- and those one-time costs, about $6 million in total, Jay. 5 million for the linen costs, and roughly about a million for the strike-related costs.

So, you know, if you take those costs out of the mix, our -- our margin would have been about 30 percent or up 150 basis points, and the flow-through would have been about -- a little over 1.6 times versus what we reported, which was about 1.1.

Got you.

And so just to be clear, the bedding costs is just a one-time, it's gone, it's behind us?

Yes.

Yeah, and at this point now , 100% of the rooms that we own have our new bedding product.

Gotcha.

And in terms of '05, Jay, the assumed -- in our budget, our -- our flow-through, for '05 for owned hotels is 1.5 times.

Okay.

And do you have roughly what that would mean to the margins, you know, just off the top of your head?

It's probably, you know, in the 100 -- 125 up range.

Increase 125 basis points.

Gotcha.

And is there any upside to that?

I mean are things pretty well locked in?

Do you -- that's -- that fully includes the new -- the new RevPAR guidance or --

You know, there's a lot of assumptions that go into the preparation of the budget, Jay.

I mean there's assumptions with regards to energy costs, and -- and wages, and things like that, but that's our best estimate this -- at this time.

Okay.

Great.

Thanks.

I'll let others ask questions.

Okay.

And sir our next question's from the line of Joe Greff with Bear Stearns.

Hey, guys.

Hi Joe.

I -- I know it's been sort of the last year or so standard operating procedure not talking about, you know, the following quarter or the present quarter.

But I was just kind of hoping you can talk about maybe RevPAR in '05, you know, along the lines of quarter out and if you just want to talk about it real broadly before I ask some couple more questions.

Cause I didn't understand the quick question --

If you can kind of go through how you see RevPAR and also, just kind of, margin improvement throughout the course of the year.

Is it first-half weighted, is it second-half weighted; is it gradually throughout the course of the year from a margin perspective, and a RevPAR should be, I would imagine, you know, stronger in the first half than the back half?

Yes, I mean Joe, we're just really not going to go into a quarter by quarter discussion.

I mean, you know -- you know the way the seasonality works in the business, you know, the second and fourth quarters are typically the strongest, first and third the -- the weaker of the -- the year's, but you know, we're just going to -- going to stick to the -- the full year and the guidance that we put out this morning.

Okay.

And then your '05 guidance does not incorporate any asset sales, any property sales, correct?

That's correct.

Nor does it include any additional share repurchases other than just what you announced in the fourth quarter?

That's correct.

We haven't built in any assumptions with regard to either of those items.

Okay.

Great.

Thanks, guys.

Thanks.

And sir our next question is from the line of Mike Rietbrock with Citigroup New York.

Hey, guys.

Hi Mike.

Hey.

A couple of things.

Can you give us an update where you stand in the process of asset sales,see -- either specifically or kind of what your -- your view of the overall market is, and -- number one?

Number two, could you give us an update on Chicago?

It seems as if when we spoke offline earlier today, sort of the expectation of recovery there may be sliding out to 2006 a little bit, and if you could react to that.

You know, what do you have on the books today for '05 for Chicago relative to what you had, you know, on at this time last year, and all those sorts of things.

Then last question, what should we -- what should we be using for tax rate in '05?

Mike, let me start -- this is Steve.

And then we'll -- we'll have Dieter do the second one on Chicago and Bob will talk about the tax.

In terms of the asset sales, you asked how's the market.

The market is sensational.

Yes.

And so we're going to take advantage of that if we can.

We've got some -- a lot of assets that we don't think that are core to our business, if we could sell, but of course we're only going to do that if we can take advantage of what is -- what we view is a very strong market.

So we're going to be careful and we'll only sell these assets if we can get, you know, really high prices for them.

I think that we'll have a pretty good execution during the year, but -- but I don't know, because we're setting high standards.

We want high prices.

And so far, we've got tremendous interest, because there's just a lot of money available for assets and for hotel assets.

So it's the right time to be looking at an opportunity to make a significant or a meaningful -- let me say meaningful change in our mix of business, and take our business more to an operating bus -- business and less of an asset intensive business.

So that's our objective.

So relative to how you fou -- you saw it say a quarter ago, are you really just saying, hey, these things take time, or has -- have you learned something, you know, through this process that you -- you know hadn't anticipated?

Nothing we haven't anticipated.

But, you know, these things do take time, particularly when we're in pursuit of the -- the person that pays the highest price, so we -- we want to do that carefully.

Yes..

We've -- we've sold a couple of small hotels, so I mean -- it's not meaningful in terms of trying to change the -- the operating -- the income that comes from operation -- or from -- from fee business, from asset-driven business, that sales we've done are not at all significant in that arena, but it does show that there is a really good market for hotel assets today.

You want to know, Mike, we're not forced sellers by any means.

Yes.

Understood.

Chicago, we're looking at a positive RevPAR increase.

The group business the first quarter was a little soft and we see some of the business going towards the North Shore, the Navy Pier, of course that's the proximity to the other hotels is much better than ours, as we are closer to the main convention center, but then for the year, we have some solid bookings, and -- and of course, in '06, that's where the business is really coming up, we have over 26 percent up in confirmed bookings at the Palmer House -- even 40 or 50 percent.

And once the expansion -- extension of the main convention center is done, you know they're adding another 800,000 square -- square feet, we should benefit from that as well.

So, just -- just to kind of put that in perspective,who -- have you guys said what -- what RevPAR in Chicago did in '04?

No, we --

I know.

I mean we-- we traditionally have not given, you know, market specific RevPAR.

Would you expect it in 2005 to sort of be back to the portfolio average or that doesn't happen until 2006.

No, it'll probably be a little less than that.

And -- and you know it's really two markets in Chicago when we talk about it.

O'Hare is fine.

Yes.

It's the Palmer House and the Chicago Hilton.

And so if we're saying 7.5 to 8.5 systemwide, we're more like probably 6 to 7 at the convention property.

Yes.

Okay.

And Mike, the effective tax rate in '05, I think for modeling purposes, you can use 35.5 percent and that includes the, you know, the syn fuel credits that we have baked into our provisions.

Okay.

Thanks guys.

Thanks, Mike.

And sir our next question is from the line of Steven Kent with Goldman Sachs.

Hi, good morning.

Just a -- a couple of question, you -- you -- you talked about unit growth of 10 percent or more in -- in '04 which is a great acceleration from '03, and I think talks to your franchise and management focus, but could you just talk about where that's going to be?

I think it is going to be in franchise and -- and the mid price, but is it in the full service hotels that you're seeing that unit growth that you're talking about?

Second, Bob, could you just talk about the FASB accounting changes in regard to time share?

What do you think that impact is to you in -- in '06?

Do you have any capitalized or marketing sales expenses that might be written down?

And finally, just go -- going back to Mike's question, about the asset sales, you know, you -- you were quoted, I think it was in the L.A.

Times yesterday, about two tronchas -- different groups of properties that were you going to sell or you were looking to sell.

Is it possible, could you have -- that -- that these sales would actually be dilutive to EPS or would you, you know, use that cash in a much more meaningful way to-- to buy back stock or pay down debt or -- or -- or something, I mean I just -- I'm wondering if -- I'm assuming the long term that's what happens but could you have a couple of quarters where these transactions actually could lower your EPS?

Take the first question?

Yes, Steve, Tom Keltner here.

Let's be clear.

We said that unit growth would be 10 percent higher in '05 than it was in '04.

And we're looking at 130 to 150 hotels, 16,000 to 20,000 hotel rooms.

The bulk of that in '05, like in '04, will come from a Hampton Inn, Hilton Garden Inn, and Homewood.

But, having said that, we've got a quite a few hotels on our pipeline that are full service hotels, and a lot of interest in the Doubletree brand.

And we would expect in -- in '05 that we're going to open, you know, 8 to 10 to 12 hotels each in those brands.

A lot of interest, but the bulk of the -- bulk of the hotels will be in the mid-priced and most of those will be -- will be franchise.

Okay.

FASB.

Yes, on the FASB changes in regarding to time share, we've always had very conservative accounting practices with regards to capitalization of -- of marketing costs.

So as far as our earnings are concerned, we're going to have very little impact from the -- the new FASB when it takes place in 2006.

We've -- we've had, as I said, we've expensed this stuff already, and so, I think there's going to be little -- little impact from the rest of the -- what's in that standard.

And you reported profit line from that, also, no significant change there?

I'm sorry, the reported profit?

Meaning if -- I don't think there's any change in your cash, in the cash accounting for time share, but you may have to X out some of the marketing expenses from revenues, so on a go forward basis, --

Yeah, net net it's not going to be much of a change.

Okay.

And then on the -- in terms of the asset sales, it -- it's -- our asset sales are probably not going to be dilutive to earnings, and I -- and with regards to, you know, use of proceeds and everything, we're just -- we're not going to try to match use of proceeds with stock buybacks in order to, let's say, you know, to -- for this -- for these asset sales to be a -- accretive.

You know, our -- our proceeds from asset sales are going to go into, you know, our -- our coffers and, you know, we're going to weight use of those proceeds like we weigh our existing cash

Okay.

Thank you.

And sir, our next question is from the line of Will Marks with JMP securities.

Great, thank you.

Good morning, everyone.

Just on-- on some of the other markets you talked about Chicago, but can you I guess, three markets in particular I'm curious about, New Orleans, and then I guess the Hawaii markets, and -- and New York, just any kind of outlook information you can give us?

Bob?

Hawaii looks really strong, really high RevPAR increases.

The group business basis, has a strong foundation, and we see a lot of particularly Asian business coming more from Japan, from Asia in general so the mainland business is very strong.

Going to New York, hard to find some space.

That's the good news.

We're running 90 percent occupancy.

And so the year is -- is shifting really in our favor.

We see more bar rates or rack weighted business that should help us tremendously to increase the ADR and to increase our yield.

New Orleans has some really strong convention association business and as well as the leisure business very strong, we should really have a good year.

And, Will, you know the -- the question is a good one, because when we ranked the cities that are in the areas that are most important to us, Hawaii is number one.

Hawaii is the area that generates the most EBITDA for us in our company.

And the other good news, and Mark didn't want us to start going here, but January is really strong there, so, you know, we're -- we're comfortable with the guidance we've given, but pretty darn strong results coming out of Hawaii, and as Dieter said, as the group business continues to strengthen, we start cutting out more and more of the leisure business that goes there.

Now, we like the high-end leisure business, but we still have some third party Internet business that goes there, so that's the mix of business chains that really is helpful.

And Hawaii and New York are probably the stronger markets that we see.

Great.

And just one other question.

Do you -- are you capital -- priority on capitalizing on this whole condo hotel concept and then, you know, if -- if there is a place to go in that area?

Yes, we are.

We have quite a few properties that are being done as condo hotels, but areas where we're the management company.

So on our own, we're not, but as far as picking up new contracts and new deal, that is the -- a very popular method to finance these new build projects.

We were in Hawa -- we were in Miami last week, the Conrad there, was essen -- essentially financed with condo sales.

And the Fountainbleu, there's a big new condo hotel next door that's going in the rental pool, and I think there's like 420 new units and 85 percent of them go into the rental pool.

So we make some money off of that.

Okay, that's good.

Thank you very much.

Sir, our next question is from the line of Asad Kazim with Reef Funds.

Hey, guys.

A couple quick questions.

First one, if I just do the math on the RevPAR guidance which is 8 percent of the midpoint, 75 percent of that coming from ADR, it's roughly 6 percent from ADR, plus then 3.5 to 4 percent expense growth, that results in roughly 200-plus perc -- 200 basis points-plus of GOP margin growth.

I'm not really sure how you guys got to the 125 basis point increase.

If you would help me with that.

And then number two, is when I look at the fee business, roughly 40 percent of the increase was a consequence of higher RevPAR.

If you could kind of help me understand how much increase in the fee -- management franchise fee, fees line item in '05 is a function of higher RevPAR, versus more contracts?

And the last question is on the balance sheet.

You guys targeted 3 3/4 times on debt to EBITDA, you're actually below that now on a trailing 12-month basis.

Where do you see the balance sheet headed from here?

Thanks.

You said quick questions. [ Laughter ]

They -- they were all quick.

The questions are quick.

The answers are long.

On the -- Assad, on the flow-through, yes, I'm just -- what were your assumptions, I'm sorry, I didn't catch them, I was trying to write as fast as I can on the cost per occupied room.

Sure, I -- I assume it is roughly 3.5 percent so if I -- if it's 8 percent RevPAR, 6 percent from rate since 75 percent of RevPAR is coming from rate, then, I think if you just do -- do back of the envelope match that results in over 200 basis points of GOP margin expansion.

l don't know -- I -- I do the same math and I come up with less than that so maybe if you could -- I can understand your math offline because our -- you know our -- our cost per occupied room next year is room next year is roughly up what you're suggesting, and our math comes out a little bit differently so I'd -- I'd like to see your numbers, cause I'm --it's -- it's -- I don't know how you're getting to your numbers.

Sure.

We -- I guess we can follow offline then Yes. on that.

And then I guess if you could answer the other two questions.

Yes, on the -- the fee business and particularly the franchise business, the assumption is to split between room growth and rate increases.

And the -- the -- about 60 percent is rate next year and 40 percent room growth.

And on the -- the debt portion -- or the debt on the -- the balance sheet and how -- where we see the balance sheet going, our objective for a long time is to get to about where we are now, and the reason there is to preserve an investment grade rating for the company, so we're now in that territory where we see a lot of cash flow coming our way, and that's before we sell any of the properties, if we sell any properties, so over the next few months, we'll be making decisions regarding further investment in our properties, where we can and where we can get very, very high returns, and if not that, returning money to the shareholders, either by continuing to buy in stock, or through a dividend, a special dividend or even a dividend increase.

But we -- we're satisfied that we're at the right place with our balance sheet now.

And we recognize that we're going to have very significant cash flow over the near and long term.

Great.

Thanks for your time.

Sir, our next question is from the line of Bill Crow with Raymond James.

Hi.

Good morning, guys.

As -- as you look at that flow-through that you're anticipating for next year, the 1 1/2 times, in order to get that higher, is that purely a function at this point of higher top line or are there expense items that may come in lower or that you can manipulate to make lower, you know, during the year?

Manipulate, (Laughter) excuse me?

You know, I -- I think there is some opportunity on the cost side, opportunity, let me say that, because we've -- we've been able to control costs very well over the last few years, and one of the ways is by increased efficiency in the way we do things.

And -- and better productivity.

And so, you know, it's an area that we work on all the time.

We've got a good track record there.

But this is our best budget assumption that we've -- we've got baked in now.

And you got to keep in mind, as we see our better convention business is higher, food and beverage revenue we're going to -- you know, that will have an impact with our food beverage profit, is -- is -- is going to be up this year.

All right.

Great.

Thanks.

Sir, our next question is from the line of David Anders with Merrill Lynch.

Great.

A couple of quick ones.

Bob, does the syn fuel show up anywhere else in the income statement or is it just an adjustment to the tax rate?

And that's number one.

Number two is, with respect to the option hit to earnings should we assume that's kind of the going forward rate, I mean, or will the board change the -- the comp structure for executives?

And lastly, I don't know who wants to address, time share growth for the next several years, how should we think about that?

Is it a 10 percent grower top line or -- or higher?

On -- on the syn fuel, no, there is a -- a -- there is a benefit that flows through the provision, but, you know there is a loss at the pre-tax line also, and -- and we had guided that to be on our last conference call, roughly to be 16 to 17 million in pre-tax losses.

So -- and -- and -- and we also talked about kind of -- the way you look at it on an after-tax basis, and we expect there to be about a $6 million benefit in '05.

I think we said, you know, 1.5 million a quarter is what our expectations were.

So that's -- it's consistent with what we had guided to previously.

Okay.

And then on -- in terms of the stock compensation expense, I would say that, yes, it's -- you know, of course, it all -- it depends on, you know, the board, and it's -- you know, and -- and they're -- they ultimately determine the amount of compensation -- stock compensation that the team members get here, you know, but I think if -- if you assume roughly that $30 million a year number, on a go forward basis, you're going to be really close.

On the time share.

Okay.

And the time share, if you think about the way we do time share, we're in three big venues, we're in Orlando, we're out in Las Vegas, and we're in Hawaii.

And we've been very, very successful in all three of them, and I think we've said in some prior things that we plan to increase the spending there.

Yeah, we -- we put that out last time.

So, you know, that's either building the buildings faster, where we already have a site, or locating additional inventory in those areas, but that part is really going well.

And what we are doing is we're looking for a fourth sales center.

We -- we really like the notion of doing big projects in one area, keeping the sales force there for a long time, knowing what the markets are, and just milking those areas.

The good news is that in Las Vegas and Hawaii, we're -- we still have a lot of product available where we don't have to go outside the area.

In Orlando, we're -- we're starting to look at some sell-outs and so we will be looking at some other venues close by.

But we've been very, very happy with how time share has worked and we expect to increase our spending there.

All right.

Thank you.

Sir, our next question is from the line of Harry Curtis with J.P. Morgan.

Good morning.

Can you address the percentage of your total occupied room nights that have been booked through the Internet?

And as we go forward, as this number increases, do you think it has a meaningful impact on your dis -- distribution costs?

Tom.

Harry, let me give you a little background on that question.

I'm surprised it took so long for somebody to ask it, since for the last eight quarters people ask it really quickly.

And I think the -- the background is -- was illustrative to me when I was at the Alice (ph) Conference last week and went to the whole breakout session on Internet distribution in third parties and there were only 10 percent of the seats full and I think that's because hotel companies and we, I think, have led -- led or amongst the leaders of hotel companies, have done a great job using the Internet to be our friend.

Today, about 15 percent of our room nights come through the Internet.

About 85 percent of those come through our own brand site.

And the ones that come through our own brand site are obviously at very attractive room rates.

Our brand site year-over-year grew in revenue by about 36 percent.

And that is in contrast to third party sites which grew in revenue about 10 percent on actually lower room night volume, but higher average rates.

So we're -- we've -- you know, we've gotten I think much better skilled at taking the business when we want it, making sure that we get the rates that are attractive, and I expect our sites are -- continue to grow at -- at -- at double digit rates as people become more and more comfortable booking on the Internet.

And -- and so that's good for us, it reduces the Internet costs on a marginal basis, is obviously cheaper than a call center reservation.

But remember, we've all been busy building these sites, and changing these sites, so on a fully-loaded basis, they're -- they're -- they're closer than you might -- you might think.

But over the long term, it has to reduce our cost of distribution.

And we're going to continue to make our websites amongst the friendliest in the industry.

And also, Harry, don't -- you know, don't underestimate the power of Hilton Honors, and as we've, you know, communicated with customers, you know, we've been able to communicate to them the fact that, you know, you book on one of our brand websites, you get your Hilton Honors points, you go on the third parties, you don't, and that's -- that's very powerful.

Given your current trends, how long do you think it -- it will take to increase the percentage of your occupied room nights to -- from -- from 15 to 20 percent, and can you give us some sense of what impact that could have on the margin?

You know, I think it's going to be a couple of years before we get to the level of 20 percent.

Remember, with 2,250 hotels and a few of those owned, most of those are franchise hotels, and it really doesn't have much of an effect on our company margin.

So I -- I think that's a -- a sort of a difficult way to think about it because we've got such a large franchise and manage base.

Thanks.

Thanks -- thanks, Harry.

And sir ,our next question is from the line of Arun Daniel with ING Investment.

Good morning.

Two questions.

On your pricing assumptions for '05, can you give us a sense of how much improvement are you assuming in business transient versus the group segment?

And the second question, can you prioritize the use of free cash flow in terms of dividend share buyback?

And you also mentioned special dividends, maybe you can give us a little bit more color on that.

Thank you.

Okay.

Let me talk first about the business mix, cause I think that's really important to understand our business.

And I think most of you do understand this, but part of moving the rate is just moving the rate, but a big part of it is changing the mix of business, and as you point out, we are going to increase the group segment of our business, we think in terms of room nights, probably 5 percent in '05.

In terms of the transient business, probably 3 to 4 percent.

And that'll come out of the leisure category and it'll come out of our contract segment of the business.

And if you think about the high water mark for our business was 2000 and we did 46 percent of our business was in the group segment, and 37 percent was transient.

The numbers for '04 were more like 38 percent in the group and 34 percent in transient, and so as we keep moving through this recovery, we'll put more business into group, and more business into transient, taking it out of leisure and contract.

Now, having said that, again, we really like a lot of the leisure business, and those of you in New York, see a lot of European travelers, and, you know, we take that -- the high end leisure business, but substituting it out for the business transients in the group generally the way that we go.

In terms of the priorities of cash flow, I think we laid out our -- our capital expenditure plan in our -- in our press release -- release, it's 430 million, and about 190 million of that is time share, and that includes kind of finishing out -- or not finishing but our -- our current existing development projects, and Matt had mentioned, you know, that we're currently looking at other additional investment opportunities in the time share, so that's certainly a priority going forward.

This's other investment opportunities out there that we believe are attractive from a -- a return standpoint, that we'll be looking at, and to the extent that we have cash available, you know, after looking at all of the investment alternatives, so we're going to look to -- look for opportunities to send that back to shareholders and as Steve mentioned it's going to be buying in the stock or -- or -- or -- or -- or another means but at this time, though, we're not giving specific guidance in terms of, you know, the amount of shares that we're buying back or the possibility of a -- of a one-time dividend.

It's -- you know, we'll be op -- opportunistic.

There's -- there's a -- you know, we're coming into a new year.

There is lots of opportunities on the table for investment.

So we're going to kind of shy away from right now giving specific items regar -- in regards to how much capital we'll return to shareholders by whatever means.

But Eric, take that in the context of our believe that our company is what we call strategically complete, so we don't feel compelled to be buying or building big hotels, and so, you know, if the world stays about where it is, we're going to have a lot of free cash flow over the next two or three years.

And it's going to be more cash flow than we can probably invest beneficially for the shareholders so they'll -- we'll need a mechanism to return some of it to the shareholders.

Can I just jump on that, operations, speaking for operations, so one of the things that we have done is we've looked very carefully at our own hotels, and decided that we do need to invest -- reinvest in those, you know, one of the consequences was expensing the bed sheets, in the fourth quarter, which some of you who are EPS nuts didn't like, but that's the right thing to do for our company.

We've got a really -- a exceptional bedding product.

We're putting in new TVs in all of the hotels that we own.

We are 100 percent high-speed Internet access compatible.

We're looking at a few new products in the rooms.

But we will make the rooms that we own really good.

We're spending money to do it.

It will take us another couple of years probably to get to where we need to be and then we are putting a lot of pressure on our third party owners and franchisees to get with the program to make the rooms product in particular where it needs to be.

But I would add to that, I think we talked about this on the last call, or -- or the call before that, that we're having a lot of success there, because, I think Tom's feeling like. you know half of the Hilton franchisees which is about, you know, 80 hotels or something, are undergoing a total of about $300 million worth of renovations, and that program continues through '05.

And I mean just some spectacular results and what some of the franchisees are doing at the full service Hiltons.

And a similar program as well, Mark in the -- in the Doubletree brand.

Okay.

Thanks, Arun.

Sir, our next question is from the line of Jeff Donnelly with Wachovia Securities.

Good morning, guys.

Three questions.

First, on share repurchases, have you guys been active in January, 2005?

Oh, come on.

Come on.

I had to try.

(Lots of overtalk conversation in background) You're a professional.

Don't ask those kinds of questions.

We will report such things as the appropriate time, Jeff.

I had to ask.

Who told you to you ask that?

Well I -- second question, actually just concerning RevPAR penetration, right after -- following 9/11, you guys and a couple of other national brands, you know, did capture kind of a nice pop there, but ever since that time, it has been trailing off just looking at your -- you trailing four quarter RevPAR penetration numbers.

What is the reason there?

I guess why are you losing it?

Who are you losing it to?

And, you know, is there anything you guys can do to head off that?

Let me -- let me handle that one, Jeff.

I -- I think as you come out of the trough of a cycle and -- and into an uptick, remember our RevPAR numbers are generally higher than our competitors, so even if we were to gain the absolute same dollar amount, we would still lose index.

And that's sort of what happened in '04 and it was, you know, it was small amounts.

It was tenths of a point.

So I think what you need to look at is what happens in '05 and also remember that we've run premiums, substantial premiums in everyone one of our brands, with the exception of Doubletree which hangs right around 100, and we expect it to get better as well.

So is it fair to say that maybe as time going forward, 2005, 2006, you expect that RevPAR penetration to -- to hold where it is so you won't, I guess I'll call it lose share?

Yes.

And then the last question is actually on asset sales.

Just a general comment, what -- what have you guys seen, general question, what have you guys seen on the moving cap rates for hotels over the last year?

And then specific to you folks, you know have you provided any guidance, or could you around perhaps what dollar volume of your nor -- non-core hotels you are looking or trying to sell in 2005?

The answer to the second question is no.

That means we turned it down.

Jeff, we've always announced them when we sold them.

But -- but cap rates have trended down.

The amount of money of course is driving that.

And it -- it appears to us to be the right time to consider changes in our asset mix that would make a difference in terms of where our earnings come from.

But the cap rates have gone down but the income has gone up, too.

That's right.

That's right.

And those cap rates got to keep going down.

That income's got to keep going up.

Especially good for selling.

Well I guess just one last question on the -- the non-core assets that you're not selling.

Is -- you know, but since we aren't privy I guess to what volume of assets are you selling, you know, can you share I guess are they subject to any secure debt or is there any some unique tax exce -- situation there that you might need to do a -- a tax efficient transaction?

Well, you know, the answer for us is to get the most after-tax so if there's opportunity with somebody to do a tax favored transaction, certainly, we would do that.

It -- it's probably not a big deal one way or another for us on the tax side.

Okay.

Thanks guys.

Thanks, Jeff.

And sir, our next question is from the line of Felecia Hendrix with Lehman Brothers.

Hi, guys.

Two questions for you.

First, just getting back to the margin, you know, for those of us who were at Alice we heard Matt Hart and his peers talk about peek margin levels possibly being achieved in '06, '07.

I'm wondering if you all can --

The peak margins were in 2000 and they were 34 percent.

Right.

For hotel.

And then potentially returning to those levels in '06, '07.

That's not really my question.

What my question is, is if I'm wondering if you can just, you know, talk about that a little bit more.

You know, given the cost pressures that are in the industry, now, you could argue that -- that they might not ever be achieved again and I'm wondering, you know, what you're seeing in your business that makes you optimistic and if it's specifically on the tech side or some other areas you might want to touch upon?

And then after that I have a bigger picture question.

I think that, you know, it all goes to the rates.

You know, who knows where the rates can go in our industry in the next 5 years.

And you know, to the extent that room rates can keep going up, and you know, there's a -- you know, you can really build a case that they are, if you think about the important products that we have, you know, we've always said we want to own properties that are -- have high barriers to entry.

And we have that.

If you think about it, in some of the markets that we're in, we're benefiting from hotel supply going out of the market, and usually, in our industry, when people would say that it was, you know, like the dumps that were going out and now what's happening is just the opposite, a lot of high end properties are going out of the market.

In Beverly Hills here, the Saint Regis is converting to condos.

I think in New York, the Plaza is converting.

And there's no new supply that's coming in to replace them.

If you think about all of the airplanes that are flying all over the world, those airplanes are going to continue to fly and air fares I think are going to stay really low.

So. you know, there are a lot of factors that could lead to you think, that, you know, that we can, as an industry, be even more aggressive in raising the rates.

So I think that's the biggest factor.

If you think about a couple of years ago, you know, we had health care costs and insurance costs that were, you know, really astronomical and I think we've all done a good job of reigning those in, you know, the employees are having to share with it, and so, no, I think that the outlook is extremely favorable in terms of continued margin growth.

Okay.

And then just bigger picture.

As -- as you think about the growth of the convention business in your major markets, I'm wondering if you can speak for a second to the competitive pressure that Las Vegas convention business might -- might be creating and, you know, as you talk to meeting planners, do you sense the potential market share loss to the Veg -- Vegas convention business from your major markets?

The first part of it is, the group business is strong.

We lo -- we looked at where we stood at the beginning of of this year, where we stood at the beginning of the year last year.

And if you look, one year out, two years out, and three years out, we're up about 10 percent in total group bookings.

Having said that, I think absolutely Las Vegas has taken a lot of the demand because the facilities are fantastic, the air lift is really good, there's lots to do in Las Vegas.

But, you know, there's some drawbacks with going there, too, like people don't go to the meetings.

But --

It also, it used to be a cheap destination and it's no longer a cheap destination.

Right, but you know, what we're saying is that there seems to be enough to go around for everybody.

So our room nights just in terms of volume is up smartly.

I think what sparked a lot of that discussion, Felicia, is, you know, we'vee been -- we talked all last year and even, you know, this year about Chicago, so of course that led to the question, you know, is Las Vegas taking business away from Chicago?

But, you know, when you think about it, you know, 2003, okay, just 2 years ago, was a tremendous convention year for the Chicago market.

So these thing does go in cycles.

And, you know, but clearly Las Vegas is one of the, you know, the top 3, 4 convention destinations, but, you know, Chicago and New York and other markets, you know, will continue to be real good convention destinations.

Okay.

Great.

Thanks.

Sir, our next question is from the line of William Truelove with UBS.

All right.

First of all I want to thank you very much for doing this new format.

I really appreciate it.

I have three questions.

First of all, how much was in the deferred revenue and expenses at the Waikiki property and when do you expect that percentage completion threshold to be crossed?

And my second question is, on terms of your balance sheet, you've got an awful lot of cash.

What do you consider sort of a normalized operating cash amount to have?

And then my third question would be, in ter -- going back to the question about the Internet and how much that might save you from transitioning from there to the 800 calls, since everyone's still paying that sales and marketing fee from your franchise hotels into your -- into that fund, dos that allow you to then transition more dollars to say more advertising campaigns, things like that, not really so much saving money but able to allocate more money to advertising?

Good questions there, Will.

That's a good hand there.

I'll -- I'll take the first two here.

In terms of time share, that we've -- the percentage of completion accounting got -- we got caught up in that accounting in -- in -- in the fourth quarter here, particularly as a result of our new project adjacent to the Hilton Waikoloa Village, and, you know, as you noticed our -- our time share earnings, you known were down slightly as -- as a result of that.

But the amount of deferral related in -- to that project in the fourth quarter was about $6 million.

And that's going to turn around in 2005.

In terms of a normalized cash balance, you really have to look at the -- the unrestricted cash balance, which at the end of the year was probably about 300 million or so.

And you know, I don't know, if there's -- if I think about it, that we have a normal balance.

If you want to model something for -- for -- for yourselves, you know, maybe it's -- you know, something in the 100 to $200 million range.

You know, but, you know, we're going to look at our -- when we think about our balance sheet, we think about our -- our total investment capacity and as -- as Steve mentioned earlier, you know, it's -- it's maintaining whatever it's -- maintaining our balance sheet in that 3.5 to 3.75 times debt to EBITDA, and beyond that, we look at our total investment capacity, not just the cash balance.

And Will, your last question, which was really a good one, about do we save money on distribution, are we able to use it elsewhere.

Most of our hotels across all of our brands pay us a percentage of rooms revenue that we call a program fee in the uniform franchise offering circulars, and with that fee, we're required to do things that support the -- the power of the individual brands.

Reservations, be it call centers or be it Internet or be it GDS hook-ups, advertising campaigns, field support, quality assurance, revenue management sort of things, so a lot of things go into the mix, and if we can save money in one area, then we've got more to use in other areas.

It may not be advertising, it may be other places, but you're exactly right, it does free up funds that we can use to make our brands continue to get stronger.

The money doesn't go to us, though, it stays with the brand.

Okay.

Yeah, great.

Thanks.

Thanks, Will.

Sir, our next question is from the line of David Katz with CIBC World Markets.

Hi, guys.

Good quarter.

Thanks.

Most of mine have been asked and answered already.

I just want to be clear about one of Matt's comments earlier.

Obviously, there was a lot of talk at Alice and -- and quite a lot of press about, you know, condo and residential opportunities and I just want to be clear that, you know, Matt said for the most part, you would be participating on a management contract basis.

But, you know, not necessarily investing the firm's capital.

That's correct.

We -- we -- it kind of goes back to that strategically complete idea, that we really don't need to own big properties or finance them through the condo developments.

So it provides management opportunities for us.

Like this hotel that Matt made reference to, the Conrad in Miami, which is just a magnificent hotel, but we just have the management contract.

Great.

Nice quarter, guys.

Thanks.

Thank you.

Sir, our next question is from the line of Cleo Murphy with NL Capital Management.

Hello.

Thank you for the format again.

Hope others follow.

I have three questions.

Number one, what is the percentage of capacity that you have booked now versus the same time last year?

And if you were to look at recent trends, would they point towards RevPAR growth at the low end or high end of guidance?

Number two, I 'd like to hear your view of -- of -- in terms of the comparison in EBITDA margin, whatever is the most -- the closest indicator of operating trends, how you'd compare '04 to '05 and the drivers there and what would be a long-term trend in EBITDA margin, X all of these noises from -- from accounting issues I'd like to see your view of how you look at it in terms of how you manage your business.

And lastly what is -- if there's any difference between EBITDA margins and return on capital, as we look forward, from the changes in [INAUDIBLE] that are you making, thank you very much.

You repeat the question, please? (Laughter)

Just kidding.

That was a joke.

So on the -- the -- the -- trends are -- are good.

Like I said, for where we are now versus where we were last year, our group booking pace is up about 10 percent.

And we're not, you know, in terms of trying to guide to a, you know, range within the range, I mean the range of 7.5 to 8.5, and, you know, that's -- you know that'll do as the guidance for now.

And your first question was percent of capacity, you mean the kind of average occupancy?

Yes, how --

At the owned hotels?

I think we put that in here. in here.

I mean for the --

In other words how much room is there left for this year's numbers to -- see see upside from bookings from -- from looking at prices better than you are currently see.

No we didn't --

Our occupancy is in the mid-70s.

Yes, it's in the mid-70s

There is room.

Yeah, there's --

There are markets like New York, where the -- the occupancy can be in the 90s.

And then you have to look the at the markets that are important to us, the most important from an earnings standpoint is like New York and Hawaii, where you can run very high occupancies.

Think about, you know, at the peak, though, back in 2000, you know, across our own hotels, across that system, occupancies were, you know, 76 percent, or, you know, approaching 77, somewhere in -- in that range.

And you know, the fact is, you know, it -- it's -- on a systemwide basis, across all those hotels, you know, if you're running 80 percent, you know, what it really means you're full during the week and then, you know, you do some discounting and run some promotions on the weekends, but, you know, to get to the -- the high 70s is -- is pretty good.

The other thing, Cleo, is to keep in mind is that at these big hotels when they're running very high occupancies, the food and beverage element also becomes very profitable because it means you're doing a lot of banquet business and things that are very, very profitable.

So if anybody was to qualify your guidance as conservative would you mind that a lot.

(Laughter - over talking) We're just, no.

Call it our guidance.

Let you guy's

I wouldn't mind it.

Somebody else might want to say something.

Somebody else.

In terms of the long-term EBITDA margins, you know, I -- I obviously I -- we think that they're a little bit -- there's a positive trend in the growth and EBITDA margin, particularly, you know, as we shift the balance of the business from -- from owned real estate to the fee business.

The fee business has substantially higher margins than -- than the owned business.

And you know, as we begin that -- that shift, you would expect to see both a -- a positive long-term trend in EBITDA margins as well as a -- a higher return on total capital.

Thank you.

Thank you.

And sir, we have a question from the line of Jay Cogan with Banc of America Securities.

He's back.

It's only one question, Jay.

Why did I --why did I not -- I never expected this kind of reaction to a second call.

Let me -- let me just ask this.

So far, I haven't heard anything that really squares with the fact that you guys bought only 2 million shares of stock in the quarter.

So I guess -- and let me ask the question this way.

Is it that you're actually thinking maybe about raising your CapEx budget primarily related to time share, I guess if you think about the IRRs maybe that makes sense, is it you've -- you've clearly been talking more about a dividend hike or a special dividend on this call than you have in past calls, where you have basically focused more on buyback activity.

Or maybe the strategically complete discussion is really maybe not all that complete on a longer term basis and -- and -- and -- and we should think about, you know, maybe some other transactions from that end.

I guess I'm trying to -- if you guys can maybe help --

You're reading -- your're reading way, way, way, way too much into it.

So I guess if you could maybe help outline that for us.

Cause it seems that things have been said may -- maybe a little bit different from a -- from of use of free cash flow, a little bit different this call than last calls, I'm trying to understand.

No, no if -- we -- we don't mean to say anything different.

What -- what we mean to say is that we think over the fullness of time, and we've said the next one, two, and three years, that we're going to have more money available to us than we can either invest for the benefit of the shareholders, and we're also conscious of the fact that while we want to be investment grade, we're not going to drive our -- our net debt down to a level that would be any, you know, we're -- we're comfortable with where we are.

So nothing's changed.

It's just on a quarter by quarter basis, we don't want to be -- it's balance sheet management.

So we're not stock pickers, we'll be in the market, we'll be returning capital, I believe, to the shareholders, but, you know, whether we buy 2 million shares or 10 million shares in a quarter, you really shouldn't use that as a gauge as to the strategy.

The strategy is unchanged.

Okay.

Appreciate that.

Okay.

Thanks, Jay.

Sir, we have a question from the line of Leo Schmidt with Hilton Hotels.

Hello, I was wondering if you could -- I'm not with Hilton Hotels by the way, Advent Capital Management.

But if you could give us your cash from operations number for the year?

We haven't published our GAAP cash flow so we're -- you will have to wait until we file our 10-K in order to get that number.

I'll wait patiently.

Okay.

I think we probably have time for one more question but before we get to that, anything anybody else has to add from our end here, Matt?

I think this format works very well, because we of course made a list of the things we want to be sure got said, and your your -- questions were complete, and so I think we -- nothing left on our list.

Covered a lot of ground.

So if there is one more question, we'll take that.

Sir, we have no further questions at this time.

Perfect timing.

Okay, everybody.

Well thanks for joining us.

And we will be talking to you soon.

Bye.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes your presentation.

And you may now disconnect.