希爾頓酒店 (HLT) 2006 Q2 法說會逐字稿

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

My name is Oneka, and I'll be your operator for today.

At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, this conference call is being recorded replay purposes.

At this time I would now like to turn the call over to Mr. Atish Shah, Vice President of Investor Relations at Hilton Hotels Corporation.

Please procedure, sir.

Thank you, Oneka.

Good morning, everyone, and thank you for joining us for Hilton's second quarter 2006 earnings discussion.

Here, with me in Beverly Hills today are Steve Bollenbach, Matt Hart, Bob La Forgia, and other members of our senior management team.

In addition Ian Carter, Tom Keltner, and Marc Grossman are each calling in from other locations to participate.

In terms of the format for this call, we are going to go directly to Q&A so we can quickly get to the topics that are of high interest to you.

Before we get started, please note the press release that we issued this morning as well as the conference call today contain forward-looking statements within the meaning of the federal securities laws, 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 call today are subject to numerous risks and uncertainties as described in our SEC filings which could cause actual results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the press release along with our comments today are effective only today August 1, 2006, and will not be updated as actual events unfold.

This call is being webcast.

You can access the webcast via Hilton worldwide.com, clicking on the Investor Relations link and then clicking on the conference call link.

Additionally a telephone replay of this call will be available until Wednesday, August 9 at 8 PM Eastern time.

To access the replay, dial 888-286-8010 in the U.S. or 617-801-6888 overseas.

The pass code is 34899717.

Additionally, a replay will be archived indefinitely on Hilton worldwide.com.

So with that, let's get started to Q&A.

Oneka, may we please have the first question?

(OPERATOR INSTRUCTIONS).

Jeff Randall, AG Edwards.

Just wanted a couple of housekeeping items.

First the year-over-year percentage change in cost per occupied room, I wondered if you could share that with me.

We were up probably about 8.5% in the quarter if you adjust for the -- disruptions alone, we were up about 7% and then further adjusting for the energy and marketing cost increases that we highlighted in the release that were up probably about in the 6% range.

Okay.

And diluted share count as of the end of the quarter?

That was in our press release on the first page.

It is 419 million shares.

419.

Okay.

On the time-share business, the second quarter has had flat contract sales and I think that is the same spot you were at in the first quarter.

Have you guys seen any weakness in time-share?

No, we continue to be -- this is Matt -- continue to be strong.

We are able to raise prices.

I would say the only issue and it isn't really a big issue is just the markets that we are building in tend to be higher cost markets in terms of construction costs, but sales front, doing really well.

And just a follow up on that, what is the product backlog look like in terms of weeks in inventory?

I don't have that data as yet.

We can get back to you on that.

Last question and then I'll yield the floor.

Marketing expenses, I wonder how you all think about that as being a return on investment.

Obviously, it didn't seem like you got much lift in average daily rate to offset the hit to margins.

Is there much of a lag?

I wouldn't think there would be in terms of the benefit in those marketing dollars?

No, actually I think that there is a lag.

If you think about it, particularly for the Hilton brand, we hadn't done any kind of national or even regional advertising for the Hilton brand probably in 15 years.

And we started that this year.

We had two very successful campaigns, the A to B Campaign and Be Hospitable.

We have very good recognition from all the surveys that we have done on that so I think that it does take some time.

It's a thing where you have to invest in the brand, and we hadn't been doing that for some time.

David Anders, Hilton.

It's actually with Merrill Lynch.

I thought you came over.

Let's keep that clear.

With respect to the margins, kind of as we look at the third and fourth quarters, so third quarter some of these disruptions start to grind off and in the fourth quarter, do we get the margin bump or is it permanently impaired because of the increased marketing spend and whatnot?

Dave, this is Bob.

In terms of the impact in the third and fourth quarters related to the disruption, you will see some impact, remaining impact in the third quarter, though, as we stated in the release.

At the New York Hilton, we are done with the phase, the renovation phase for this year.

So we will see a better performance certainly out of the New York Hilton and the other properties as well, as those properties wrap up their renovation programs for the current year.

In total, for the full yea, if you look at the North American margin impact of the disruption, it is about 40 bips in total margin cost.

We have stated earlier that the increase in marketing costs and energy cost, that's probably another 30 bips in margin impact for the full-year guidance.

And then a new item has cropped up, and that is the area of property insurance.

We just renewed our property insurance program at the end of the second quarter, and it was, to say the least, a very difficult renewal.

I don't know if there is a lot going on in the insurance industry, as you well know.

I don't know that any of you have been following this, but the catastrophic events that occurred around the globe last year, hurricanes and floods and the increasing geopolitical risk, drove a lot of insurers for these types of exposures out of the market and created a capacity squeeze, and the insurers that were writing the coverage took advantage of this, imposed much stricter terms and conditions and as a result significantly higher pricing on properties exposed to catastrophic events.

So all that being said, we expect our property insurance to be up substantially for the remaining part of the year, and that is going to cost us about 30 basis points in margin.

Okay.

But let me back up for a moment because to reconcile your North American -- we are not going to be able to reconcile North America basis point change any longer, is that correct?

Because your international is going to be carrying the gap number, so we can't see, per se, your North America at year-end?

Or will we be able to?

Well, we give the information on the last page of the financial schedules.

We pro forma all the numbers for you for the three months and the six months.

Right.

So you should be able to get there.

Okay.

And if you can't, we will lend a hand.

Thanks.

Bill Crow, Raymond James.

Just a few questions.

We'll go from the narrow to the broad.

Any update on asset sales and when we can expect to hear something?

I would have thought we would've heard something by now.

It's Bob.

First of all, on the domestic front, as we said previously, we are basically done.

We are working on a few smaller deals to sell, like a JV position or a lease position.

But, in fact, besides the three owned assets that we sold in the first quarter, we also sold equity interest in a couple of JVs in the second quarter.

So we are working on the couple of these small deals, domestically.

Internationally, we are currently working on documentation with the preferred bidder on the sale of the two Hilton Metropoles in the U.K.

So that is progressing well.

And we are -- hopefully, we are targeting a close of that deal sometime in the fall.

Other potential deals are in various stages of evaluation and/or documentation, some involving single assets, some involving more than a single asset.

I think over the next few weeks, we should have more to announce on the subject of asset sales so stay tuned.

That would be great.

Is there any way you can quantify that total deals that you are in some form of negotiation or discussion on?

We hesitate to do that.

We just don't want to speculate on the quantum of asset sales or the timing.

We just hesitate to do that just as we have in the past.

Fair enough.

Matt, a question for you.

The announcement on the negotiation, the labor negotiations, seems to indicate that card check neutrality is now on the table in other markets, not just those markets where it already exist.

Is that fair and, if so, it sounds like you gained some maybe some easing on work rules, in food and beverage, and maybe other areas.

Could you talk about that all?

Yes, Bill.

Overall, we are very happy that we settled this negotiation with the unions.

As you know in New York, we got a six-year deal which is good, identical economic terms as the other hotel companies.

We had a few relatively small items that we hashed out with the local unions, so we are happy with that.

Then, on the national front, we wanted to make sure that we got this out before the call so that we could answer your questions.

And we labeled that agreement a partnership for future growth, and we had three points in that agreement.

On the first point, as you point out, we did agree to card check in certain cities.

Now, this covers only full-service hotels that we may have an opportunity to manage in the future.

It is a limited number of cities in North America, and we also allowed for card check in a handful of our existing own properties.

The second point that we made there is, two very important point.

One is that we have now five years of labor peace, and we have status with the UNITE HERE as their hotel management company of choice.

And this, I think, can be a big positive for us.

This refers to situations that often come up in big cities where the union can influence who gets a particular management contract, and we had that happen with us before.

And then the third point is the one that you pointed out and that is an agreement to work together to make particular restaurant offerings and food and beverage more productive, more competitive in many of the cities around the country.

And that really fits well with what we are working on.

I think we have done a good job in the hotels with the in-room product, the beds and TVs.

We did a deal with Precor on fitness and now we want to focus on improving our food and beverage offerings.

I think this is a big step to take as part of that.

Thanks for the answer there.

And then finally and I don't know if this matters.

Steve's on the line, but we are seeing a battle here between the fundamentals and the results that you and others are putting up and the sentiment in the market which seems to be signaling pretty severe economic slowdown.

How do you look at that as a management team, trying to grow this Company and build this Company?

And I don't want to accuse you of being economists, but if you could kind of give us your view on where we stand today?

This is Steve.

We, all of us, I think on the call, recognize that we are in a cyclical business and it's my belief and management's here belief that the most important driver in the cycle is supply and, of course, demand is important.

But it is really supply that over any reasonable period is what is important.

And so the basic economic fundamental is particularly for our big owned properties where we make so much money, we are in markets where supply is simply not a concern.

You think about New York and Hawaii and places where entitlements can take years.

We just -- and New York where we have hotel product leaving the market and converting to residential use.

So we are in such favorable shape there that I think even with the various upsets in the market, the rising interest rates, the fear of inflation, I just don't think that that is going to have a big impact on us going forward.

So I am quite satisfied with where we are from kind of a general broad economic point of view.

Matt?

I agree.

I don't think -- as a team, we haven't seen any weakness in any of the numbers that we have seen come through in our forecast.

I mean the top line is growing pretty strong.

Our reservation activity continues to be strong.

In fact, in July we had a record week, in terms of reservation activity, being up 18% from the prior year, the third week of July.

So there are no signs of weakness that we are seeing coming through any of the distribution channels.

I've been in this business a long time, as all of us have, and the times when you really get worried about economic fundamentals is when there is obvious oversupply, and we have lived through times where there is oversupply and continued construction.

And there is nothing like that going.

So we are sanguine.

That's helpful.

Thank you, guys.

Chris Woronka, Deutsche Bank.

It's Bill Lerner.

Sorry, guys.

Two questions.

One, can you comment on any strategy to reduce the amount of floating rate debt you have, or do we wait for asset sales there?

And then I have got a follow-up.

Right now we are using available cash flow that we generate out of the business and we will be using proceeds from asset sales to reduce our floating rate debt.

Okay.

And then a follow-up, as it relates to the reno disruption that you had in the period with some extending, just taking a step back, why do those -- why do those renos now at this point in the cycle?

Why not wait until demand pulls back in, who knows, some period of months or years?

This is Matt.

You hit it right on the head.

I mean that is the issue, is very hard, and what was kind of unfortunate for us is that the three large projects that we have going on are all in probably our three top earners for the Company.

But when you look at each one of them individually, you say, yes, that makes sense to do.

The New York Hilton is roughly 2000 hotel rooms.

We have now got nine floors fully renovated, beautiful rooms, very high guest acceptance.

We are getting a significant rate premium for those rooms.

They are just beautiful rooms and that's always the hard part in the business.

You say, geez, we're running 90% occupancy; how can we afford not to have those rooms open?

Well, the flip side is, how can you afford not to have really a nice room product in such an important hotel for us?

So we accelerated getting those rooms open.

I was a little concerned about the union timetable there.

We didn't want to have a situation where we had construction workers going in and out of the hotel, with potential pickets outside.

And so we did move this as fast as we could and we got all nine rooms open, nine floors open middle of July.

We have five more floors to do.

We will do that in the first quarter of '07 and then we will be done with any kind of extraordinary disruption at the New York Hilton.

We will have our rooms product will be really good.

Hilton Hawaiian Village, you may recall we had a problem two or three years ago with the fan coil units at one of the towers.

We had to effectively close that and redo the whole ventilation system.

So we decided, let's do the whole resort.

We don't want to take any chances, and so we are replacing all of the fan coil units in that big resort and that is an 3000 room hotel.

By the end of September we will have about two-thirds of it done.

We'll still have some to do, but the disruption will be a lot smaller for next year.

And at the Waldorf, we have a rewiring program that, for the most part, will be done this year.

We will have a little bit more to do next year so it is just kind of unfortunate, but things that needed to get done in the long run, we're going to be very happy that we did this when we did.

In terms of acceleration, can you just put some time frame around it?

Was it -- so -- accelerated the quarter or several quarters, that sort of thing?

Normally, what we have done at the New York Hilton which, I think, personally I think kind of got us in trouble over the years, is we would look at it the way you did.

It's like, oh, boy, we can't afford to take rooms out of service.

So we would do as much as we could from like January 5 to February 15.

And usually we'd only get two floors done.

And so we got way behind on the cycle there, and we had some rooms that just weren't right.

Okay.

Thanks, guys.

Joseph Greff, Bear Stearns.

Bob, what is the annual EBITDA impact from the renovations from these two properties for full year 2006?

$15 million.

$15 million.

And then next year in terms of some of these things continuing, what sort of EBITDA impact do you expect relative to some sort of normalized basis?

Well, we haven't really put our budget together yet.

Maybe we will have something on that on the next call.

It will be a lot lower.

It will be a lot lower.

And then, depreciation for the 40 Hilton international owned assets, could you break that out for us?

And while you're doing that, do you have a D&A number for the two Metropole assets?

I don't have a break down of the D&A for the international assets with me and certainly not the two Metropoles.

And one question for Matt, you talked about the card check neutrality issues where you are allowing it in a handful of markets where you have owned assets.

Would that be -- would one of those markets be Hawaii?

And can you talk about which markets you're talking about?

I don't want to talk about the markets that we have or haven't, Joe.

Okay.

Thanks.

Will Truelove, UBS.

Just a little add-on to Bill Crow's question about asset sales.

Can you talk a little bit about not trying to quantify the amount but generally speaking, what kind of valuation multiples on EBITDA do you see those kind of properties generating maybe on asset sales?

Is it somewhere between 10 times; is it 15 times?

What kind of valuations do you see out there?

If I give you an EBITDA multiple, then you could assume some valuation in your model, and it really -- it comes down to a lot of different factors.

It comes down to the asset itself in terms of the physical plant.

It comes down to the type of management contract or franchise contract, the terms of the contract.

It comes down to the level of capital expenditures that are needed in the property.

So there is no one multiple that would apply to the whole portfolio.

It's really very asset specific, so it's very difficult to come up with a multiple and say, here it is, and you should this in your valuation analysis.

Okay.

And then can you give us some color update on the synergies from -- I believe you guys talked about having $15 million the first year and maybe $30 million on a pro forma basis per-share, then $30 million thereafter on synergies.

Where will we be seeing the synergies coming from on the income statement?

Well, first of all we are on track in terms of delivering our synergies and they are in a number of different places.

From lower distribution costs, which really will show up in the hotel financials.

They are in terms of corporate expenses; they will show up there and in our operating costs.

So they're kind of all over the map, difficult to really highlight within our total P&L.

But, Will, let me just kick in on that, because the really big synergy from the acquisition of Hilton International is our ability to take our limited service products and begin to export them around the world.

And you saw we put out a couple of press releases recently where we've got some agreement to do a couple of -- Four Garden Inns actually in Europe and a Doubletree in Asia.

But the big play of course is trying to do something on a larger scale in some of the big developing travel markets around the world.

And although we don't have anything at this point to announce, I can just tell you that we are very optimistic.

We have a lot of very interesting things going.

We are all traveling a lot more, but when you go into these markets and you see, number one, just the sheer volume of travel and new aircraft deliveries and so on, going into some of these markets, and then you combine that with the very, very strong position Hilton has in these markets, and then overlay that, the great success we have had in developing our limited service product, it is just -- it's the best opportunity I have ever seen in this industry.

And we are very, very excited about being able to take advantage of that.

That is the real synergy from buying Hilton International.

This is Steve.

Let me go back on this price question, because Bob, of course, is reluctant to talk about specific deals.

But I think just where we are here.

We bought Hilton International and we are delighted to find that we are in an even stronger market, particularly in Western Europe than we had anticipated.

We are making more money on these properties.

The discount rates are very low, i.e. the price is very high, based on the income, and we have done over the years -- I mean we have done lots of this.

We know how to sell into the hotel market and we know how to balance the desire to take back a management contract or franchise contract and how you trade off price against that.

So while Bob doesn't want to talk about specific properties sales, we are going to get really high prices for these things, and you can be comfortable with that.

Thanks, Steve.

I appreciate that.

Jay Cogan, Banc of America Securities.

I got on the call a little bit late so, hopefully, I am not repeating a question.

But I was wondering if you have talked at all about just the general kind of concern on the leisure side in terms of the weekly comps.

Obviously, you had very good RevPAR numbers in the quarter and you have actually moved up your guidance a little bit for the year.

But if you can talk a little bit about what you are seeing in regard to leisure.

And also can you give us any sense as to how the early discussions or the current discussions as it relates to corporate rates, negotiated rates, or group as we look into 2007 are shaping up, that would be helpful?

This is Matt.

We haven't seen any slowdown on the leisure side of things.

Bob gave some statistics about our call volumes.

For the second quarter our calls through HRW were up 5%, so we are doing fine.

On the group side, I would say just generally the group side remains competitive.

We will probably be up in volume for this year like two points.

Our rates will be up, you know, in high single digits.

For next year I think we will be the same.

We'll probably be up another two points or so in volume, and our rates may be up a little bit higher, maybe up in the higher single digits.

Generally, that is still a competitive area.

You know, I think what happens is the big groups still have some leverage.

You know we try to combine food and beverage and catering activities with the groups.

We are seeing strength in the shorter bookings, the smaller groups that are coming in later.

But generally, on the group side, we are good and on the leisure side we are good.

And as it relates, just to kind of close the loop, as it relates to negotiated corporate, anything to talk about at this point in time?

We still see that we have pricing power.

Steve Kent, Goldman Sachs.

Could you just talk a little bit about the market -- marketing expense as it moves into Q3 and Q4, does it begin to slow down in there, especially because it seems that demand seems very, very high, and as you've pointed out, the supply is very low.

So do you start to slow that down, and was this also in response to any other competitive initiatives?

And finally was it more on the international side, the marketing expense, than the domestic side?

Let me talk about the marketing, Steve, and this is Matt again.

This is a big push that we have called to reignite the Hilton brand, and we have increased our allocation for marketing costs.

We used to charge about 1% of sales.

We moved it up to 1.25% for our own properties, right, three years ago and then this last year we moved it up to 1.4% and I am quite confident we're going to stay there.

So we're not going to see anymore increases in that allocation.

So we started a national advertising campaign.

We have done a lot of things that you know you think of as target marketing, like with the U.S.

Olympic Committee.

We did a sponsorship of the Grammys.

We sponsor the AVP, the volleyball professionals.

We have done some things in the rooms.

You know we have changed out all the amenities.

We put stainless-steel amenities in the rooms.

I think we announced a couple of weeks ago we put new coffee makers in the rooms.

So we are doing a lot of things to improve the product.

So I think that the, comparatively speaking, it is going to be better for the investors going forward, because we are not going to see those kinds of increases.

But as I said earlier I think that in terms of marketing support for the Hilton brand, we were a little short on it over the years.

So I think we're catching up.

And Matt, again it is mostly in the U.S., not international, where you're seeing this pick up?

Correct.

Harry Curtis, JP Morgan.

Just following up on that question, in broad terms, do you think that in 2007 you will be likely to get closer to the industry average of margin expansion?

Well, I think we still are the margin leaders, Harry.

I think that some of the other guys have caught up to us.

Not in terms of the absolute level of your margin.

I was thinking about the growth in your margin.

Well, the high point for us was 2000.

We were 35.5% EBITDA margin and this year we are going to be, yes, around 30, maybe a little bit above that.

So the question is can you get to that high point, and it is hard to say.

I think on the positive side, we continue to see -- going off on what Steve was talking about -- limited supply in the full-service end, so that should augur well for continued rate growth.

I think that, you know, along with that, we will have some latitude on the groups that we take and so we are hopeful we can get some more and better food and beverage business out of that in the future.

But then on the negative side you have insurance costs that Bob talked about.

Real estate taxes aren't going away.

I think we have done a good job on the healthcare side of things, but it is hard to know.

I think generally we feel that their margins will increase as time goes by.

Do they get to 35.5%?

I don't know.

Do you think that your expense growth in 2007 should be reasonably close to that of the overall industry, or is there anything specific to Hilton that would perhaps get your expense growth higher than the industry average?

I can't think of anything one way or the other that would affect us.

That's great.

Thank you.

Jeff Donnelly, Wachovia Securities.

I think I'm asking Harry's question a little bit differently, but excluding the impact or the unfavorable impact of the renovations, North American owned margin growth for '06 is lower than what we're hearing from your peers.

I was curious, is that a function, do you think of maybe some unique geographic concentration or, perhaps, how Hilton buys energy insurance and labor?

No, I don't think it's -- Jeff, this is Bob.

I don't think there is anything unique to us or our geographic distribution or how we buy property insurance or how we buy energy.

I think we are all -- most our competitors are all seeking to minimize those cost increases and employ various strategies to try to mitigate the expense creeps in those areas.

But there are certain things that are just out of your control unfortunately.

And when you have a crazy property insurance market because of hurricanes and earthquakes and all kinds of things, I think everybody suffers, not just us.

I think most industries I believe are also suffering from the energy situation.

Right.

I guess that there are other companies are seeing that same experience but, nevertheless, their operating margins growth expectation is somewhat higher.

I can follow up with you guys on that offline.

Steve, just looking at the industry supply pipeline, particularly, in the urban resort full-service segments and, knowing what construction costs are, how realistic in your view is it that we see much the product out there in the pipeline come to fruition, and what confidence do you have that Hilton products will survive any shakeout of the construction pipeline?

Well, in terms of the Hilton products, the Hilton Hotels that we own, the important ones, you know you can look in four or five markets and you can see that our concentration is such that we are in exactly the right markets.

So I think we continue to be a winner in the reduced ability of people to build.

I mean it is not just the entitlement process.

New York is such a great example.

If somebody gets the right to build something today, they are going to build residential as opposed to build a hotel and then convert it into a condominium.

So I think we are in the perfect spot with our own properties to prosper.

I guess I should be clear.

I'm just thinking about the supply pipeline that is out there.

The construction costs seen to be obviously hurting everybody out there.

And my question really is about the Hilton properties that are in the pipeline for construction out there.

Tom, can you answer that one?

Yes, Matt, I can.

Tom Keltner speaking.

You know our pipeline this quarter versus last is close to the same, 700 hotels over 100,000 rooms.

About 40% of that actually is full-service, including the international properties.

So we have seen a continued growth in applications and, obviously, applications sort of matched openings over the last quarter since the pipeline stayed about the same.

We are seeing some indications that it is taking longer for people to get under construction in the U.S., but we are not seeing any more hotels being dropped out of our pipeline because they are not going to build.

And I am not saying that is not happening but the reality is that we have one of the largest pipelines in the industry and that is because we have got strong brands, and those brands perform very well.

And so we are the hotel brands of choice that are easier for our owners to get financing, and so I think there may be a slight slowdown, but we haven't seen anything falling out of our pipeline.

Just one last question, actually, I guess for Matt.

Lots of attention now of late on the consumer.

Any trends you guys have been seeing in weekend bookings here domestically or leisure markets in June and July, and have you changed your expectation for any customer segment out there for the remainder of the year?

No, no changes.

We still see strength there throughout.

Thanks, guys.

Celeste Brown, Morgan Stanley.

I know you guys don't like to give quarterly guidance, but if you can just give us a little bit of color on timeshare.

Can we expect the third and fourth quarter to both be up around 20%, or will one quarter be more heavily weighted than the other?

This is Bob.

Our timeshare business actually we expect in the back half to slow a bit in terms of growth.

We kept our guidance the same, up 20% in terms of profitability.

We came in above that in the first half, so we expect the back half to be kind of in the sort of the mid to high teens, which is still strong growth, except that we are selling more of our higher cost of product inventory and less of our lower cost of product inventory.

An example would be such as our new project in Hawaii at Waikoloa and our new tower in Las Vegas, where the cost of product percentages there are sort of in the 30% plus range, whereas we are selling less of our Lagoon Tower projects because that is nearing sellout, and the cost of product for that property was more in the high teens because we already owned the building and the land there.

So it's more of a mix issue in the back half than anything.

The unit sales are expected to be strong.

Price is up, but it is more of a profitability being impacted by the mix more than anything.

In terms of mid to high teens, should we see around the same in both 3Q and 4Q, or will 4Q be higher?

The last year's fourth quarter number was relatively low versus the rest of the year.

Let me check here real quickly.

Fourth quarter on timeshare, yes, was low last year.

So in terms of sequencing, the fourth quarter will be stronger than the third quarter.

Will Marks, JMP Securities.

Just a quick question, a refresher on when you do sell these properties, maybe you can just give a little detail on -- and I know it varies contract to contract, but the average length of term you're looking to sign type of incentive agreement.

And then also I know there has been talk lately about some contract having cancelable upon sale clauses with the management contract.

Any thoughts on those lines?

Yes, most of the contracts, nearly all the contracts that we have written, you know, we've sold a lot of assets, $1.3 billion of assets since the beginning of 2005, and none of those contracts were their cancellation on sale provisions.

So in terms of going forward, we don't expect to have those types of provisions in our contracts.

In terms of the term of the contract, generally we were able to get a 20-year contract on franchises and 15 to 20 years on management contracts, and in terms of the base versus incentive component, the base fees are typically depending on the hotel.

And the full-service could be like 2.5% to 3% base on average, and incentive fees is really where a lot of the negotiations take place.

And there is really no consistent or general guidance I can give you in terms of the incentive fee provision.

In the U.S., they are a little bit different than international, but it is just -- you just can't capitalize it into one statement.

Okay, that's helpful.

And then just one other unrelated question, and it relates to some other questions that were asked.

And obviously, the reason we are questioning the leisure business in the summer is Choice pointed to some higher gas price impact on their brands, albeit they're obviously lower scale on average.

And then one of the REITs pointed to even with their upscale hotels some weakness in the Southeast due to weaker leisure travel.

So I understand you're just saying you're not seeing it at all, but are there any areas you want to point to, or you're generally seeing very strong growth across the board?

Yes, we are seeing strong growth.

You know if you said, okay, is there one area -- you always look at Hawaii, the Hawaiian travel business.

They have had some airplanes that have diverted elsewhere, but we haven't seen any indications at all of slowdown on the leisure side for our business.

And that is -- go ahead.

Steve, why don't you jump in?

And that is indicated in our guidance too.

We have moved up our RevPAR guidance from a midpoint to midpoint.

You can see it did increase and our fee business in terms of the guidance that we gave it's higher than what we previously gave, so it is clearly reflected in our revised guidance for the quarter.

This is Steve.

I also just wanted to make the point that gasoline prices, for example, and I can understand how it would impact Choice.

But for us, that is more a question that was asked earlier, how does it impact our pipeline, because we don't make a lot of money owning hotels that will be impacted by gasoline prices.

So, potentially, if the consumer and the leisure traveler were to have a dramatic change, it might have some tiny impact, I think, on our pipeline of properties.

Now I haven't seen any of that, but just consumer prices for the leisure market probably really don't impact property like the Waldorf because you are going to have -- when you decide to go stay at the Waldorf, you are up for a big budget item and another $20 or $30 or $40 or $50 on your gasoline bill does not make your decision.

So as you think about our Company, we have got these big owned hotels.

They are impacted primarily I think by supply and then we've got this huge business of providing services to other owners who are building at a much higher level than Choice.

So they are probably much less impacted by consumer prices.

Great.

Thank you.

That's very helpful.

Smedes Rose, Calyon Securities.

My question is on the leased side and your revised guidance, or updated guidance, you significantly increased lease RevPAR expectations in margin growth.

Is that mostly to do with currency issues, or is there something going on at the business level?

It's a combination of a lot of things.

At the PAR line, part of it is due to the foreign currency exchange, but at the margin line, it wouldn't make a difference because you are exchanging your revenues at the same rate as you are expenses.

So again, part of it is exchange rates, but it's also because our business is doing much better across the lease portfolio, certainly across the European estates.

Scandic is doing well.

If we look at our lease portfolio, we have pretty significant presence in London and Germany.

And they have all performed very, very well in the second quarter and we believe that the rest of the year is going -- they're going to perform strongly.

So we are seeing a strength in the portfolio.

So is a percent -- I think when you did your presentation in December of '05, you talked about leased EBITDA being something like about 16%, as I recall, of your total EBITDA contribution?

Is it still in that range or is it moving up?

I think it is just a function of where the expectation of the EBITDA for '06 will come out.

I think in terms of the total percentage, we are not -- it's not a business we're looking at growth.

That is the first thought I really want to get out on the tables.

So we're not going to be growing the lease business model going forward.

So fluctuations in the terms of the percentage of EBITDA contribution really depend upon the amount of EBITDA generated in each of the other categories as well.

So how EBITDA is growing, or how the – on the owned business how EBITDA is growing on the fee business.

So I think for the full year, you may see that lease EBITDA percentage move north a little bit, maybe by a few hundred basis points.

And then just, I think I know the answer to this, but on your insurance contracts, I mean do those reset every year, or are they multiple --multiyear contracts of property insurance you're talking about?

We have a renewal period that is from 6/1 to 5/31.

So it renews June 1 of every year.

Asad Kazim with RREEF.

A couple of questions.

One on timeshare.

Can you kind of walk us through what are the thought processes in buying land in New York today and developing timeshare from ground up as opposed to doing some timeshare fractional existing selling assets in New York and maybe the answer is that you guys think at some point those assets are for sale and that is why don't have timeshare there?

Well, I didn't understand the second part of question, but the first part was -- this is Matt -- because we think there is a big opportunity there to make a lot of money.

You know what we have done is we have had three specific areas that we have built in and continue to develop.

Those have been Orlando, Hawaii, and Las Vegas, and our strategy is to pick a market and then just know that market and just build it, build it out.

And build a sales force, because that is the big asset is building a sales force and then keeping them supplied with product.

And the second part of your question, we are talking about the New York Hilton or the Waldorf.

They are not assets that are for sale, but at the time we announced our share -- our timeshare at the New York Hilton, we did make the point that we were going to sell leases because even though the hotel is not for sale, we were concerned about a value reduction in the event that someday it was sold, that a value reduction in how you would then deal with hundreds or thousands of owners of the property.

So we just reluctant to sell little tiny pieces of that gigantic valuable asset.

So what happened was when we did those two floors, we've seen very good response from the market place, and we are hitting the numbers that we thought.

But our sales guys tell us that not giving that fee ownership interest has hurt their -- they are not maximizing the price.

And so what we did is we looked for a good site close by to that particular area, so we can use the New York Hilton for vacation packages and so on, to market that site.

We are very excited about the potential for that.

And then if that goes well, which we think it will, then you can open up additional areas in Manhattan.

You've got a lot of different characteristics for a timeshare owner in New York.

So we think this -- to us, this is our fourth market, Manhattan.

Now, if we could have gotten the land price lower, we would have, but that is the price of poker in Manhattan.

Understood.

And if you guys could just give us a sense -- I know you run the cost of a new bedding and all the changes you have done to the rooms through the rooms' expense line item.

Can you give us a sense of what that number was and the impact just from all the case goods, etc. on that line through this year?

And when should we expect that expense to have been rolled out, at least, of the owned portfolio?

So we can kind of get a sense of what impact that would have a year-over-year comp next year?

Why don't you let us do a little bit of homework on that, and we'll get back you?

And then just lastly, can you give us a sense, guys, of what group quality thus far looks like in '07 versus '06 in terms of citywides, maybe comment on Chicago or some of the large markets that impact your bottom line, just in terms of attendance etc. all that good stuff?

Yes, Chicago looks pretty good.

San Francisco, looking a lot better.

Comparisons continue to be easier there.

New York, we are seeing just a little softening on the social side of things, not quite as many galas and banquets and so on.

That market seems to be a little slower, but the regular group business is strong.

Probably the biggest question mark for us still is New Orleans.

We had -- we've had our first big group there in the last couple of weeks, but it is still remains to be seen what really happens in New Orleans.

We are fully open now.

We see pretty good leisure business and still a lot of contracting work and so on, but the big groups, they're really not to the level that they need to be there.

It's still an interesting story there.

Final question, as far as New York, the comment you made, Matt, about some of the small galas, etc. dropping off, shouldn't that be expected based on what you guys or where you guys are pricing the rooms?

I mean that shouldn't come as a surprise, right, that is done on purpose.

No, I wouldn't say that.

We tried to maximize the usage of that space.

It is a very popular space, but we -- this could be -- it's not a big deal, just trying to answer your question.

It could be -- what, it's like 110 degrees in New York or something today?

Not a good day for a black-tie event.

Understood.

Thanks, guys.

Brian Egger with BMO Capital Markets.

Good morning.

I'm not sure if you had mentioned this or not, but can you give us any update on your Internet bookings, year-over-year increase in your bookings on the website?

Tom Keltner here.

I can tell you that actually our websites are now producing a greater volume than our 800 number because the growth has been so good.

Year-to-date brand.com is, in terms of revenue, up about 15% again and we continue to have third party bookings that are no higher than they were last year, with increases in rate much higher than increases in room nights.

Does that help?

That's helpful.

Thank you.

Jeff Randall, AG Edwards.

Tom, I wondered if you could give an update on the Scandic brand.

The RevPARs were down this quarter; they were flat the prior quarter.

Are you guys going -- I think you said you weren't sure if you were going to grow that brand.

Is the Hilton Garden Inn sort of slide in in its place or what is the outlook there?

Maybe I can -- this is Ian Carter.

Let me just answer first of all the first quarter, second quarter comparison.

That actually is almost exclusively driven by the way Easter fell for us in April this year versus March last year.

So across -- if we look at the six-months, the Scandic brands performed well for us.

We've got slightly tougher comparisons versus last year than for the Hilton brand internationally just because Scandic's recovery was a little earlier in the key cities where we kind of dominate, like Stockholm, for example.

The second part of a question maybe Tom wants to comment on.

Well I think, Jeff, Ian and I can both comment on it, but in terms of Garden Inn, we feel very, very positive about the ability to grow Garden Inn in Europe, particularly outside of Scandinavia, Western and Eastern Europe, and you can see that with the announcements we have made about the new one to be built in Frankfurt and the three that will be opened yet this year in Germany and Italy.

So Garden Inn is going to be a good brand for us in Europe, I think, as well as some of our other brands we haven't said much about yet.

Okay.

And Tom, on the Embassy Suites, the unit counts look pretty flat for the last year with much of the other brands up pretty significantly.

What is behind the trend there and I guess is that evidence of the people waiting for the new prototype and maybe give an update on the status of the prototype?

Thanks for remembering what we called Design Option III that we announced in January at ALIS.

It's actually been very well received, and I think our Embassy Suites pipeline numbers -- of course, these are all new beds.

There is no chance to do conversions.

Our Embassy Suites pipeline numbers are as big as they have been in quite a few years.

In fact we have got more than 25 Embassy Suites in the pipeline today.

So you are going to see some growth of Embassy start up again as we made the new prototype more realistic, and we have put more focus on finding developers that think that that's a good brand.

It obviously has great margins, great customer awareness, and a super product.

The new prototype just makes it -- keeps all of those things and makes it a little more buildable, so thanks for noticing.

The growth hasn't been too great, so remember when you see it next time and it's greater, you'll say you did a good job.

Okay.

I have got one last question.

Matt, back to comments on the margin expansion for '07, is there a chance that that expansion accelerates in '07 if asset sales in Europe are accelerated, given those hotels being, I guess I would assume generally less profitable than in the U.S.?

Margins didn't -- margins internationally are about -- running about the same more or less than as U.S. margins currently.

So I don't know that necessarily asset sales will drive market expansion.

Okay.

Thank you.

I think that takes us to the top of the hour, so thanks, Oneka.

We appreciate everyone joining us this morning, and we'll be talking to you in the future.

Thanks, again.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Thank you and have a good day.