希爾頓酒店 (HLT) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter earnings conference call; my name is Candace and I will be your coordinator for today.

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

We will conduct a question-and-answer session towards the end of this presentation. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's conference, Senior Vice President of corporate affairs for Hilton Hotels Corp., Mr. Marc Grossman.

Please proceed.

Thank you.

Good morning everybody, thanks for joining us for our first quarter earnings discussion.

Before we get started I want to just remind everyone that the press release we put out this morning and the conference call today contains forward-looking statements within the meaning of federal securities law, including statements concerning business strategies and (technical difficulty) result, similar statements concerning anticipated future events and expectations that are not historical facts.

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

I am joined here in Beverly Hills by our CEO, Steve Bollenbach and some of our senior management team.

Let me also tell you that the conference call is being webcast, and you can access the webcast by logging on to www.Hiltonworldwide.com, go on the Investor Relations tag and click on the quarterly conference call link.

In addition there will be a replay of the call available until Tuesday, May 9th at 8 PM Eastern time, and that is the phone number is 888-286-8010, pass code 88087955.

Additionally a replay will be archived indefinitely on our Hiltonworldwide.com website.

So once again I am here with members of our senior management team and before we go into Q&A, our President Matt Hart and CFO, Bob LaForgia, have a few remarks they want to make so, Matt.

Okay.

Thank you, Mark.

I just want to take a few minutes to convey to you the excitement that we feel in our headquarters, in our support offices and most importantly among our team members around the world.

We can now compete with anyone anywhere.

It's great for our customers, our owners and for our team members who recognize that there are so many more opportunities for them in terms of growth, advancement and promotions.

We are all very excited, very optimistic about the acquisition we made and I think the timing will prove to be fortuitous.

(technical difficulty) that the international side is ahead of their forecast for the year.

But before I get to some of the specifics related to the integration of the two companies, I want to cover off a couple of operational topics.

You saw from the press release that our business is really solid, good RevPAR that is rate driven, fees (technical difficulty) and another great performance in timeshare.

However, even in this great environment there are challenges, so let me cover off on two that we face.

The first is margins.

Our margins were decent but not outstanding.

I believe we will still run the highest EBITDA margins in the industry for the year, but probably not as big a gap as we are used to.

They were affected by a number of factors that we alluded to in the press release, energy costs, more particularly renovations that took rooms out of service, caused lower food and beverage profits and trimmed some of our EBITDA growth.

There were some additional factors; more money for training, a higher spend on advertising, additional amenities in the room.

This part of our push to reignite the Hilton brand, improving the product and service levels at our flagship brand probably adds a little pain to us on these conference calls but it is the absolute right thing for us to do for the Hilton brand.

And these factors will again impact margins in the second quarter.

We are seeing improvements in our customer tracking and our guest satisfaction scores which will eventually lead to higher RevPAR gains so we know it is the right strategy.

My best example is the New York Hilton; we are doing a very exciting room's redo.

On the one hand you can argue that the New York market is so strong that we should slow the rooms redo and only take rooms out in January.

The flip side is the two floors that we did as a test we are getting a significant rate premium and very high marks from our guests.

So our decision is to push ahead and get it done as quickly as we can, and we have similar situations at the Waldorf-Astoria and the Hilton Hawaiian Village.

The second challenge we have is with our labor unions.

As you know contracts expire this year in several important cities.

We're spending a lot of time, energy and attention on this very important topic and I am hopeful that we can reach a reasonable and satisfactory arrangement with our union this summer.

Just to touch on a few other fronts, timeshare continued great results, a great outlook, some very exciting new projects that we're working on.

The Waldorf-Astoria collection going well with the three new properties, lots of deal activity in the works.

Brand development and franchise growth exceeding even our high expectations.

What I really wanted to do with these remarks is to give you an update on our integration activities.

And as you saw in Steve's comments in the press release, the integration is going really well.

Operationally this is centered on three areas.

The first is Hilton International Americas group which had been headquartered in Miami.

We have already absorbed that division into our U.S. regional operating team and things are going smoothly.

We're using this transition as a laboratory to compare best practices between the two companies.

The second area has to do with the Conrad brand which we will begin to transition into the local operations area.

For example, the Conrad in Dublin will now report to the Ireland area operating team, and the Conrad in Indianapolis will report to our Chicago based regional management team.

We can save money and improve operations by doing this.

And our third area of integration is with OnQ, our property management and customer relationship system.

This installation will take around two years to complete, but when it's done it will link all of our systems, all of our guest profiles across every one of our Hilton family of brands worldwide.

Aside from the blocking and tackling of those integration activities we believe there's a significant opportunity to extend the reach of our leading select service brands around the world.

The fundamentals to support this opportunity are compelling.

Expanding population base, emerging market-based economies, rapidly improving global travel infrastructure, a boom in aircraft manufacturing delivery, a growing middle and traveling class in many countries.

Tom Keltner, Ian Carter and I have been working on our global brand development strategy and have already had some very encouraging meetings with potential owners and developers of select service brands in many different parts of the world.

There is nothing to announce yet but suffice it to say that there is lots of interest in our brands in new markets.

The Hilton brand is still the best known and most respected hotel brand name in the world.

Combine that with our technology capabilities and our extremely successful select service brands, especially Hilton Garden Inn and Hampton Inn, and you can sense the opportunity that is before us.

With that I will turn it over to Bob who will give you some color on the outlook for the remainder of the year.

In terms of our full year 2006 guidance, I would like to point out that our revenue adjusted EBITDA, operating income, fees, timeshare, and EPS guidance includes the impact of Hilton International from the acquisition date of February 23, 2006.

Our RevPAR growth guidance, though, is pro forma as if the acquisition had occurred on January 1, 2005.

In the financial text we have provided you select pro forma information quarterly for 2005, and in 2006 first quarter for owned hotels, leased hotels and fees, again assuming the HI acquisition had occurred on January 1, 2005.

This additional disclosure should assist you in your modeling.

As indicated in our press release this morning for 2006, we are expecting adjusted EBITDA to be in the $1.720 to $1.765 billion range.

We are expecting pro forma comparable owned hotels RevPAR to be up 8 to 10% in North America, and 7 to 9% worldwide.

Margins on a pro forma basis are expected to be up 50 to 100 basis points in North America and up 70 to 120 basis points worldwide.

We estimate that the full year impact of the renovations that Matt spoke to on North America RevPAR growth is approximately 140 basis points of growth, and a North America margin impact of the renovation and higher energy and marketing cost will be in the 80 basis point range.

For comparable leased hotels we are expecting RevPAR growth to be in the 3 to 4% range and margin growth in the 60 to 90 basis point range.

RevPAR growth stated in U.S. dollar terms for the owned hotels outside of North America, and the majority of the leased hotels which are also outside North America, are impacted by fluctuations in exchange rates.

Generally the dollar has weakened against most major currencies over the last year in many of the countries where we own and lease hotels, and that has adversely impacted our RevPAR growth assumptions for 2006.

Now to use the first quarter as an example, we noted in the release that outside North America pro forma RevPAR for owned hotels improved 3.5% over the first quarter last year.

However, adjusting for the impact of foreign currency movements RevPAR was up almost 11%.

The leased hotels showed an even wider gap on a U.S. dollar basis first- quarter RevPAR improved 3.6% whereas in local currencies RevPAR improved 12.6%.

So the movement in currencies will be a factor in our reported numbers from this point forward.

The good news in all of this is that we expect our owned and leased hotel business around the globe to see increased occupancies, stronger average rates in local currencies and improved margins.

The fee business continues to be a strong contributor and we expect to end the year with record fee revenues.

We estimate full year fee growth which has been bolstered by the HI acquisition to be up approximately 42% to 45%.

Timeshare continues to perform extremely well for us and this business is also expected to have another year of record profits.

We expect timeshare profitability to increase approximately 20% this year.

On an earnings basis we are estimating $1.12 per share to $1.19 per share or $1.06 to $1.13 per share on a recurring basis.

Our estimate includes a cost equal to approximately $0.02 per share for the accounting change that required the expensing of unvested stock options.

We expect our total worldwide CapEx to be in the $760 million range, broken out as $265 million for maintenance CapEx, $195 million for timeshare projects, and $300 million for hotel renovation and special projects.

This number is up about $125 million from the guidance that we had given previously and that is the result of renovations and special projects at the HI owned hotels.

Both our earnings guidance and our CapEx guidance exclude the impact of any future asset sales.

And in terms of asset sales we are certainly encouraged by the positive trends that we're seeing in the hotel transaction market in the UK and in Continental Europe.

Capital flow is very strong both locally and from traditional global players and the sheer weight of this capital is compressing yields, which is good news for us as we look to sell select international assets.

And with that I will turn it back to Mark.

Okay, Bob, thanks.

And with that I believe we're ready for Q&A.

So Candace, we will take the first one.

(OPERATOR INSTRUCTIONS)

Jeremy Cogan, Banc of America Securities.

Good morning.

A couple quick questions for you Bob, just on the asset disposition is there anything incremental you can add in regards to timing, magnitude, etc. where should the Street expectations be on the disposition program?

And I have a couple quick follow-ups.

Yes, Jay, in terms of asset sales first of all as we mentioned on the last call, it is really a subset of our overall strategy to shift our mix of business to be more fee driven and have less emphasis on the real estate.

And certainly one way to get there is to grow the number of units which we are doing in a very big way, and the other way is to look for opportunities to sell assets and take back contracts.

And as you all know the market for selling assets has been robust, as I just mentioned, it is also robust in Europe as well.

Prices continue to be strong, and our strategy really is to take advantage of this market by selling assets just as we did within the U.S.

And also at the same time take back strong contracts and also work with the owners to invest capital.

In terms specifically, in terms of our asset sales strategy, we historically have not guided to timing of when specific assets will be sold or pricing indications.

It is not something we have done historically on the domestic side, Jay, and we're going to continue with that practice of going forward.

One thing I can say is that as most of you know we have put our two largest assets that we acquired in the HI deal, the two Hilton Metropoles on the market; one is located in London.

The other is in Birmingham.

Beyond the Metropoles, I can say also that there is significant amount of interest in those assets.

But beyond the Metropoles we are in the process now, we are evaluating the markets, evaluating the hotels, the capital needs and we will look forward to selling the assets over probably the next one to three years at the right time.

And in regards to capital, as you guys mentioned the CapEx number came up a bit relative to the last couple of guidance.

Can you talk a little bit about what those renovation programs, projects are in Europe, if that's where all the 120 or so million is going?

And what is a, if you exclude timeshare, what is an appropriate level of CapEx spend that we should anticipate kind of on a go forward basis beyond those (inaudible)?

In terms of the CapEx, and maybe Ian can add a little color to this, but a lot of the special project CapEx has to do with some room redos in select hotels, some restaurant reconfigurations, just general improvement throughout in the meeting space, its kind of all over the board, frankly Jay.

In terms of going forward we are, normally we spend about 6% of our total revenues on maintenance CapEx, and every year during our capital budgeting process we discuss among ourselves and our finance committee, the special projects that need to get done at our owned hotels.

So it is really tough to guide to a specific special project number a few years out.

Okay.

Thanks.

Bill Crow, Raymond James.

Good morning, guys.

On the timeshare, could you talk about what is driving the increased profit expectations from 10% to 20%?

Sure, there are really three things, first is the increase in the average sales price.

We are encouraged by the prices that we are getting particularly in Las Vegas and in Hawaii.

The second component of the increase is related to what we call a resort operations.

And a big portion of our resort operations is related to the fact that we sell our unsold inventory nightly, as a regular hotel room, and we are getting very strong rates nightly for those sales.

And a third component is our financing.

We are doing a little bit better than we expected on the interest on our timeshare receivables.

You still don't have any plans to sell those receivables at this point?

At this time we don't have any plans to sell those receivables.

To go back to the disposition program, the two large assets I think that have been on the market for a while -- would you give us -- I understand you don't want to forecast specifically, but is this sort of a second-quarter event, or do you have any feel for when we should expect to hear something on those two particular assets?

I can't really comment on that, Bill.

The assets are being marketed as I mentioned; there is lots of interest.

And one of the things that is interesting in this business is that it takes just as long to sell a single asset than it does to put a multi-billion dollar transaction together or to combine two companies, so it is a process that takes a while.

It's typically from start to finish could be six months or longer.

Okay, and then the final question is, when we think about dispositions, should we be thinking internationally only at this point.

Or is it possible or likely that you will look at some of your remaining domestic assets for sale?

Domestically we are basically done.

We sold, since the beginning of '05, we sold over $1.3 billion worth of assets.

There may be one or two more domestically, but our focus will be on the international side of the business.

Okay.

Thank you.

Will Mars, JMP Securities.

Just had a question on the mix of business right now, let's say owned income coming from overseas, owned in the U.S., and then the rest.

In terms of the mix of business -- (inaudible) mix of business thinking in terms of EBITDA, in rough numbers 75% of our EBITDA comes from the historical HHD business, and 25% from Hilton International.

In terms of the mix of business, let's see if I remember (indiscernible) correctly here.

Now on a pro forma basis I want to say that 41% is from owned, 16% is from leased, 34% is from the fee business with the remainder being timeshare.

And just one broad question on overseas and understanding the 3 to 4% RevPAR growth and just where that has been in the last couple of years and what the outlook is like, is Europe and Asia, are they lagging us in the cycle?

Any comments?

I think that Bob explained it well in terms of what those currency conversions have been.

If you look at just the system wide statistics, Europe is strong, Asia is strong, Middle East is probably the laggard of the group, but we are seeing rate and occupancy growth quite strong throughout the world.

It is just that conversion that made it look like a lower number.

And Ian maybe you can add some color about the trends in the UK and in Europe.

Yes, can you hear me okay?

The UK continues to improve year-on-year and we forecast that continuing, high single digit RevPAR improvement year-over-year, important market for us both as an outbound and inbound market particularly with the U.S.

The same can be said for other major financial markets like Frankfurt and Stockholm, both of which are strong.

Middle East is improving and in particular, the United Arab Emirates which is extremely strong.

Particularly as an inbound market for us now from Europe in Holiday Makers.

And in Asia we've seen the same kind of strength and improvement year-on-year in places like Singapore, particularly in India in the major markets of India where we have our nine properties like New Delhi, Puna, Bangalore and Mumbai.

And then also in China, pretty much the same in Shanghai and Beijing, but particularly in Shanghai.

That's very helpful.

Thank you.

David Anders, Merrill Lynch.

Thank you very much.

Maybe if you could help us on the margin side, kind of what is soaking up -- I know you identified three buckets.

Can you kind of give us order of magnitude of what is soaking up some of the margin surprise in the quarter.

That is number one.

And the number two, when you look at your CapEx going forward, and the kind of room renovations and restaurants -- I mean shouldn't that really kind of group at CapEx or do you think of it as kind of positive NPD projects?

Help me think abut that incremental expenditure.

On the margins I will just break it out for you because we had indicated in our release for the first quarter, Dave, that our margins were impacted by 140 basis points.

Roughly 50 basis points of that was related to the displacement.

Another 50 related to energy, and 40 basis points was related to higher marketing expenses.

Let me talk about the rooms renovations, and I think you've got a good point whether it is a, is it a ROI project or is it just a normal replacement cycle.

On the one hand you have, you want to put a great room product in your properties.

On the other hand the business is so strong that you hate to suffer the displacement.

And so that's why I used New York as an example.

We are running 90% occupancies in New York at the two properties that we own, the New York Hilton and the Waldorf-Astoria and in Honolulu we are over 80%.

So for us it really became a brand call because we've had such a very enthusiastic response from our other owners about things that are going on within the Hilton brand, and we are making a big push on Waldorf-Astoria collection also.

So we became convinced that the right thing to do was to push ahead and make these improvements sooner rather than later.

But at the same time we also want to minimize disruptions in the hotels.

So in New York at the New York Hilton we've completed two floors, and I think at our investor conference we had some of you come by and look at the rooms and you all liked them.

We've completed two floors, the hallways, the rooms, the bathrooms.

The results have been great, very high guest satisfaction.

We are getting $75 rate premium for those rooms.

So we decided to take an additional seven floors out of service.

They will be back in service in July and then do six floors at the beginning of '07, and then we'll be done there.

And on average it costs about $1.5 million per month to do that kind of room's renovation on an accelerated basis.

At the Waldorf many of you have experienced the less than state-of-the-art heating and air conditioning system at that property.

So we decided to fix that.

There we take about 300 rooms out of service for 5 to 6 weeks at a time.

That probably costs us $2 million a quarter, and that will take about two years to complete that work.

And then finally in Hawaii as you all know we had a problem with humidity at the Kalia Tower.

We decided to aggressively head off any other kind of problem in those areas.

So we finished a fan coil replacement project at the Alii Tower and Diamond Head.

We are starting on Tapa and then we'll do the Rainbow Tower.

We will be finished with all of that next year.

That probably cost us $1.5 million a quarter.

So I know these are the right things to do.

It is just that the business is so strong that it costs us something on the margin.

But we know it is the right thing to do.

Okay, thanks.

David Katz, CIBC World Markets.

Good morning.

Thank you.

As I look at the swelling pipeline, which is certainly encouraging, and I look at that of your larger competitors, I see similar news.

And I guess it begs the question, who are you -- who are you taking some of this market share from, or is there an implication of growing supply abroad specifically?

Because as I said, Marriott Starwood, Intercontinental also reporting swelling pipelines.

How should we think about that?

Tom, are you on the line?

Yes, I'm here if you can hear me.

Yes, we got you.

I've been outsourced to Mexico, so I hope everybody can hear me.

Our pipeline, as you know, David, we said is about 100,000 rooms.

At least relative to two of our competitors, it is about one-third larger than what they reported.

Most of that pipeline still today about 85% of it in terms of rooms is U.S.-based.

And of that, about three-quarters is focused-service brands, and about one- quarter is full-service brands.

Internationally, it is almost entirely Hiltons.

So who are they taking share from?

I think if you look at industry statistics, everybody, Smith Travel and others, are still forecasting supply growth less than 2% in '06, in fact down closer to 1.5% or 1.75%.

So we are surely taking share relative to virtually every other competitor, including our big competitors with our pipeline.

And in addition to that, I think we are ahead of our targets and starting construction on hotels out of that pipeline this year.

So for us, it is really a reaffirmation of the fact that if you have (indiscernible) that perform and customers would like them and owners that are happy, you're going to get more than your fair share, and I think our pipeline reflects that.

Tom, as we look out, let's say 12 months, presumably that smaller piece of international pipeline deals is going to grow.

Help us gauge our expectations.

How big a percentage of the whole pipeline could that really become?

And within what you have now if you could talk about management deals versus franchise deals.

In terms of the future we have talked about growing our gross room supply 7% as a company.

So as you go out I think you should see a larger and larger portion of that coming from international as maybe we maintain the growth in the U.S. but don't, but maybe not have it accelerate.

To that effect since the combination of HHC and HI, we've had several of our brand managers in Europe and Asia -- in fact some are there right now trying to gauge how do we adapt a Garden Inn, Hampton Inn, Homewood Suites, Doubletree, etc. to those markets where there are growth opportunities for the midscale are really beginning.

I think even in Europe the business is becoming more segmented.

Throughout Asia it is relatively slightly segmented, and so you're going to see us growing our brands there.

HI has got a good development team; we just have to give them the brands and the tools to grow it.

In the U.S. the pipeline is still primarily franchise, but I think you need to reflect that just this year we have converted -- we've added three hotels to the Waldorf-Astoria collection that are all managed, Grand Wailea, La Quinta and the Biltmore.

We've added the Hilton Anatole, which is a managed property to the Hilton brand.

We started construction in San Diego on a Hilton that we will manage.

We started in Baltimore.

We've announced both a Hilton and a Conrad in Bonnet Creek in Orlando.

So the number of hotels is not so high in terms of the total pipeline for managed, but the ones that we are doing are big and significant hotels.

Very helpful.

Thanks.

Justin Clifford, Omega Advisors.

Good afternoon.

I just want to check this.

About a year ago roughly Bob, you mentioned in a meeting in New York that when you sold a decent property you were receiving, let's say 80% more on an EBITDA per room basis than the market was valuing your own hotel chains at.

I am wondering if that's what you are still finding.

Are we still putting a very low valuation on your properties relative to what you are realizing when you sell something?

I think the comment was that the multiples that we are getting on our assets are higher than the multiple, the blended multiple on our stock price.

That's correct, that was the comment.

Right, and the answer to that and we certainly demonstrated that, I think last week or two weeks ago when we put out our release in terms of the last phase or the second phase of our domestic asset sales, at being 13 times EBITDA.

That is certainly not where our stock is at currently.

The other thing that we always consider is that within the mix of our portfolio, which is our fee driven businesses and our real estate, I mean if you look around the market the fee driven businesses are more highly valued.

So if you look at our mix multiple it probably overstates the value of the real estate as it trades in the market, so these private transactions are extraordinarily good for us, and it helps us in our strategy of moving to a more fee driven business so execution has been excellent.

The only question it raises is if it's so much more profitable than we are willing to pay you today or next week for the stock, why not do a lot more?

Well we are doing a lot.

We are doing a lot.

Thank you.

Steven Kent, Goldman Sachs.

Good morning.

Matt, I think early on you discussed that your margins were being impacted maybe by the labor union discussions or something about that.

And I guess I was wondering what exactly are you pointing to?

Is there expenses that you are incurring right now?

Are you expecting expenses in Q2, Q3 associated with either a work stoppage or maybe training or bringing people in ahead of it?

I just wanted to get a little bit more of an understanding on that.

And then also just on the CapEx, the more extensive CapEx, I don't know if I got it right, but I thought you said something about there was an 80 basis point negative impact from it.

And I just wondered if you are expanding CapEx and it sounds like it will be over the next year or two, will that depress margins on the international side because it sounds like that's where you will be spending a little bit more of your CapEx dollars.

And just mostly from interruption or business interruption while you are doing these capital expenditures.

No, Steve you got most of that wrong.

That's why I'm asking.

What I said is that we face two issues as a company.

One was margin, and the other was labor unions.

I didn't mix the two of them at all.

So what I said was on the margin side we had some issues that Bob pointed out.

He said that energy was 50 basis points, the displacement from kind of accelerated approach to some rooms redos was 50 basis points and then 40 basis points of the 140 "shortfall" was from additional advertising programs, some things we did in the rooms in terms of amenities and so on.

So that was that, and the unions was a totally separate issue, just pointing out to our investors that that is something that we know that we need to deal with and we are hopeful that we will be able to deal with that in a positive and constructive way.

So your guidance going forward, does it assume any of those things that I mentioned or not?

We do not.

All right.

Thanks.

And then the question on CapEx or what the impact will be to margins from more sense of CapEx programs due to interruption?

No.

We don't anticipate that.

We have a normal cycle that we have for all of our properties.

These three properties are kind of out of cycle, and that is why they stick out.

The other part is that I think as Bob is, will be I know very successful on the asset sales, the complexion of the company changes as we become less ownership oriented and more fee driven.

Those issues really won't be our issues.

Harry Curtis, JPMorgan.

Good morning, quick follow-up on the renovations.

Do you see any other significant properties being renovated that we should know about over the next 12 months?

No.

Okay.

The second issue or question is if you look at the terrific growth on the fee side, what percentage of that dollar growth is due to unit expansion versus same-store fee growth?

And specifically what I'm curious about is that there is a fair amount of capacity coming in the midscale without food and beverage segment domestically.

And I'm wondering if you think ahead 12 to 18 months, if most of the same-store -- most of the fee growth is coming from same-store -- will it be at the expense of that very strong same-store growth rate?

Does that make sense?

I can speak to the breakout of the fees and maybe, Tom could add a little color or Matt.

Our guidance for the full year fee growth was 42 to 45%.

A little more than kind of take the midpoint of that roughly, a little more than half of that growth is related to the HI acquisition.

About 7 points of the growth is related to comparable hotels.

So in other words, they are benefiting from higher RevPAR at our managed and franchised properties.

And 10 points of the growth is related to new units and the remaining small piece is related to that onetime termination fee.

Okay, so for the units that are benefiting from higher RevPAR, the question is with the pipeline filling in the midscale without food and beverage, is sit going to threaten that growth rate say within the next 12 to 18 months?

Harry, I think one of the things that people often miss is that the pipeline in midscale without food and beverage is clearly growing.

The RevPAR growth in that segment has been outstanding.

What you need to understand that segment by also looking at what is happening to midscale with food and beverage, which is anemic and actually has a reduction in the supply.

There has been a big shift.

And as you know, we don't have really anything in the midscale with food and beverage, Garden Inn in a different category as does Doubletree.

And so midscale with food and beverage is really very competitive with midscale without.

And midscale without has been dominating it, growing its supply significantly at the expense of that other segment which is primarily much older hotels.

And Tom, let me add I just think there is a change in the business over the last ten years or so because the people that are the franchisee owners are putting up their own money.

They are familiar with the site.

They are familiar with the markets.

The leverage is reasonable, so you don't have any exogenous factor of a brand trying to buy market share or tax shelter deals.

These are people that know the market and so I don't think you have as big a risk as you might think that there is going to be a big overbuilding and a big fallout.

If you look at our RevPAR growth they are all in double digits across the select service brands.

These guys know what they're doing; they are smart investors and I just don't think it is the risk that those expanding pipelines might make you think about.

That's helpful.

Thank you.

William Truelove, UBS.

Just some housekeeping questions; of the $386 million in cash what is the split between restricted and unrestricted cash?

Restricted cash was $208 million and unrestricted is $178 million.

The second question is on the timeshare front.

When do you anticipate the Hawaiian projects that you recently started will generate reportable revenues?

You broke up there.

Yes, sorry, on the timeshare fronts when do you anticipate the Hawaiian projects to start generating reportable revenues?

Well, we have a number of projects in Hawaii.

Are you talking about the one on the big island?

Yes.

I think we are at least over -- probably two years away.

Two years, okay.

And finally on the unconsolidated joint ventures now that you have thrown in Hilton International what is the average ownership of your unconsolidated joint ventures?

I don't have that number.

It is not a number that I really track of.

There are very few unconsolidated JV's that we acquired with Hilton International so it is heavily weighted toward the domestic and I would have to -- we can get back to you on that.

Thanks, guys.

Joe Greff, Bear Stearns.

Hi, everyone.

Matt, question for you on the renovation impact in the 1Q and the 2Q, maybe you can put it in a different way at the three properties I guess the number of room nights that were disrupted?

Or room nights available impact?

I want to say it was like 5000 or 6000 in each per quarter.

So 5 to 6000 in 1Q and the same in the Q2 and in 3Q do you expect anything?

Let me get back to you with those numbers.

I don't have them with me, but I think it is better than speculating it would be best if --.

Fair enough, I will follow-up with you later.

And then Bob I think you kind of gave out a mix or the EBITDA mix between owned, leased fees, timeshare.

In terms of your adjusted EBITDA guidance for '06, what percentage of that relates to owned hotel EBITDA from HI?

You know, that's another follow-up, it is not a number I have.

Okay.

I have another question for you I think you can answer though.

Give us an easy one, Joe.

What is your favorite color?

Asset dispositions, just to beat that portion a little bit more here, just so I get this correctly -- the plan here is to sell all of the HI assets over time and convert those into management or franchise fees.

That's correct, correct?

Not necessarily.

In some of the assets may have issues in terms of titles and leases and will follow the same practice that we have done here in the United States, is that there will perhaps be some assets that we think are very important to the brand and we would hold them.

But by and large you are right, our strategy here is to move our business to a fee driven business and away from a real estate business assuming that we can get really good, strong, high prices for the real estate as we go.

And then Matt, maybe you can just talk about the pace of group business in '06 and the rate you're getting on that.

And I know you don't want to talk about '07 trends, but maybe you can just give us an idea of 2007 group bookings or pricing.

I mean anecdotally we are just hearing that the strength in group is continuing into next year if you just want to share from your experience and what you are seeing.

Yes, it is and where the group has been a little tough has been on the rates because the hotels -- we all have big boxes to fill and so the power has been with the group bookers for a while.

But we are starting to see that turn and we are seeing rates now that had been in low single digits, now into high single digits and that is moving pretty quickly.

The other thing that is happening is a lot of the smaller group short window business is coming to us, and that is a good trend, too.

Great.

Thanks, guys.

Smedes Rose, Calyon Securities.

A couple of quick questions.

Your lease coverage level is that still at about 1.5 times for your coverage?

Our EBITDA to rent coverage for '06, actually it has moved north of that; the lease properties are performing very well.

So we are expecting this year based on the guidance that we've given that the EBITDA to rent coverage would be 1.7.

And then I just I am sorry to keep coming back to this margin business but it sounds like for your full year, it sounds like your guidance may be 70 to 80 points of lower margin had you not been doing the renovations.

Is that a fair estimate?

Yes, for the full year?

Yes.

Yes, for the full year if you look at our guidance in terms of our North America owned hotels, the full year impact is roughly 80 basis points.

80 basis points, okay.

And the final thing is could you just talk maybe a little bit in general about the trends in Hawaii?

I realize there's not a lot of supply there but what are you seeing in the ways of demand from Japan, air lift trends, anything kind of outside that would hurt or help on the margin?

Really strong in Hawaii and I think you got it right.

No new supply, airlines keep flying there from the U.S. and from Japan.

I am just looking at our sheets here for this month, our average rate in Hawaiian Village is up 19% and we are up 8% at the Waikoloa Village just in rates because we're running pretty much full.

You said that was for this month?

Yes, you asked current trends.

Great.

Okay.

Thank you.

Jeremy Cogan, Banc of America Securities.

Just a couple quickies, back to the franchise managed and also timeshare, could it be possible that that 7% increase in gross rooms kind of in '07 beyond proves to be a low number; given the strength of the pipeline I was wondering if you could put any color on that.

And also, Bob, on the timeshare front, could you remind us of where you are from an accounting standpoint in terms of accounting treatment helping or not helping your reported numbers in '06 and how that should help or not help in '07?

Let me try the first one because Tom is always reluctant.

He's not as bad as Antoine, but he still holds back on things.

I think we have been surprised at how strong our business has been domestically.

Even recent trends we're getting a lot of applications.

Our brands truly are outperforming our competitive set.

We treat our owners fairly, and it has just been a great story.

More legs than we had thought.

So now you go to the international side, and I am telling you when you go to some of these emerging countries and you see the absolute dearth of lodging supply, it is either a one star or five star.

We think there's just a tremendous opportunity for us to take these brands into some of these countries.

The trick is not the money, there is plenty of money available.

They are all looking for it.

The opportunity is there, it is just a question of getting the right partner, the development partner, a construction company, the right connections, someone with integrity that can really take these brands and grow them.

And so we don't want to do two hotels in 100 countries.

We want to focus our efforts on some big opportunities and get things started in a big way.

So I think that is really the upside.

We have done a super job.

It has been quiet but in Canada and Mexico where we've taken our limited service properties and I don't know, Tom I think we went from like 10 to 90 in several years.

So that is where the upside is, Jay.

It is hard to know but the fundamentals line up.

I would just add one other thing.

In the last three, four years, five years -- whatever you want to say -- we've moved to be the brands of choice for a developer.

This is where you go first, and so we, I believe, have some great opportunity on the upside, and we've got the staff that will deliver on that.

So it is a bright future.

One other thing I will add about that is when you go to these emerging countries and cities, the competition among the five star is intense.

Everyone recognizes the opportunity.

And so the base fees are low.

Key money is prevalent.

It is really hard to make a buck in the luxury five star segment.

Time will tell, but I think that in the three star segment in the select service category where there is not that much competition, I think the opportunities for us to make money are a lot stronger.

On the timeshare, I don't have a 2007 forecast for you, but in terms of 2006 use the first quarter as an examples looking at our GAAP profits if you will and our economic profits, it did hurt us in the first quarter to the tune of about $3 million.

And I would expect that for the rest of the year and I'm hesitant to give you a forecast at this point, but I would expect for the rest of the year that it would -- the accounting would hurt us in terms of reportable profits versus what we make economically.

Any reason to believe that that wouldn't kind of turn to some degree in '07 or to an earlier question that some of that would flow really into '08 depending on some of the projects?

It does depend on the timing of the projects, is why I am a bit hesitant for '07 is it kind of depends on the timing of when we get our project on the big island.

When we get into sales mode on the project on the big island, so I would rather defer that to maybe until we start talking about 2007.

And the big thing for (indiscernible) you still consider this to be kind of the mid teen EBITDA grower, that segment of the business?

Broadly, through the accounting.

Mid teen growth through the accounting?

Yes, like if you exclude the noise in the account, how fast this business you expect to grow over the next few years.

Is it still kind of a mid teens grower or it could be a little bit faster given what you're doing on some of the developments or a little bit slower given your base?

Yes.

I think mid teens is probably the right number.

Very helpful color.

Appreciate it.

I think we have time for one more.

Bill Crow, Raymond James.

Couple follow-ups; first of all, Bob, I didn't see any 2Q guidance and given the (technical difficulty).

(multiple speakers) second quarter guidance, just consistent with what we have done over the last couple of years, what we do is we just give full year guidance, we don't give specific (indiscernible) on the guidance any more.

All right, and then your guidance for the year, is there any insurance recoveries from business interruption in New Orleans or Cancun?

And how large could that be if that is or is not included in your guidance?

Well, we have modeled in -- I don't have a specific dollar amount -- we have modeled in the [BI] recovery based on our forecast of business compared to what we, what our prior forecast was for 2006.

So it is in our numbers, specifically as it relates to the impact of Hurricane Katrina.

I just can't tell you what the total dollar amount is.

Okay.

Thank you.

Okay, well again we appreciate everyone joining us this morning, and we will be talking to you soon.

Thanks again.

Thank you for your participation in today's conference.

This does conclude the presentation and you may now disconnect.

Have a great day.