希爾頓酒店 (HLT) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter earnings conference call.

My name is [Sharelle], and I will be your facilitator for today.

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

We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the presentation over to Marc Grossman, Senior Vice President of Corporate Affairs for Hilton Hotels Corporation.

You may proceed, sir.

Thank you very much and good morning everybody or good afternoon if you're on the East Coast and thank you for joining us for our third quarter earnings call.

I'm joined by Steve Bollenbach and members of our senior management team.

Before we get started, let me just remind everyone that the press release we put out this morning and this conference call contain forward-looking statements within the meaning of 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 fact.

The forward-looking statements in the press release and in this call 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'll also tell you that the call this morning is being web cast, and to access that, go to hiltonworldwide.com, click on the investor relations link, and then go to quarterly conference calls.

In addition, there will be a replay of this call available until November 7 at 8:00 PM Eastern time, and the playback numbers are 888-286-8010; that's for domestic callers.

For international callers, 617-801-6888, and the passcode is 51331419.

With all that, before we get into the Q&A and (technical difficulty) we know there are a few areas of interest and a few specific items that we want to get to.

But to do that, we're going to turn it over first to Matt Hart, our President and Chief Operating Officer, and then he will be followed by Bob LaForgia, our Chief Financial Officer.

Matt?

Thank you, Mark.

What I will do is highlight a few important points about the quarter.

Just briefly on our own hotels, worldwide RevPAR was up 9.8% and 92% of that growth was rate-driven, and our four biggest markets -- New York, Hawaii, Chicago and London -- showed particularly strong demand.

In the third quarter, we saw strong group rates worldwide with U.S. rates up 6% and international up over 12%.

Our fee business is vibrant and we are on track to add 225 hotels, 36,000 rooms in 2006.

We are seeing lots of deals and we continue to have the largest development pipeline of any U.S. hotel company, around 775 hotels and 110,000 new rooms.

The really exciting opportunity for us is on the international side which I will address in a minute.

As to the third leg of our stool, our time-share business, the fundamentals are very solid.

We're continuing to increase both sales and unit prices of focusing on our key market strategy in Hawaii, Las Vegas, Orlando and New York.

In terms of operations, the only soft spot for us in the quarter was Washington D.C. due to a lack of city-wide conventions and the fact that Congress was out of time for a longer period of time due to mid-term elections.

Overall, a very strong quarter from operations.

Looking out further, we see continued favorable supply and demand environment which should, again, benefit our property in our most important markets.

We are very positive on the trends that are showing up in the group market for 2007.

Our outlook currently calls for high-single-digit increase in group volume and a mid-single-digit increase in rate.

In terms of corporate negotiated rates, with our big customers, we are seeing rate increases in the high-single digits.

The industry segments that are showing particular strength are pharmaceuticals, financial services, insurance and technology.

Our management and (technical difficulty) as we increase room rates and continue adding new units here in the U.S. and internationally.

And as we have guided previously, we're expecting 7% room growth in 2007.

Our time-share business continues to be really strong on top of robust sales and unit price increases.

We have some very exciting projects in development in Orlando and Hawaii and a new build stand-alone time-share project on 57th Street near the New York Hilton.

We are on schedule with the buildout of our Las Vegas strip property, which is enjoying terrific sales, and the only issue we have with time-share going forward relates to the timing of profit recognition, and Bob is going to address that in a few minutes.

Let me now highlight our activities relating to our international operations.

It is a very busy and very exciting time for our company.

I can tell you that our team members all around the world are really pumped up, are really enthusiastic.

Our teams are working well together, our international people are getting to know our new brands and our brand teams are getting to know the international markets.

We have begun to install our OnQ property management system around the world and we completed our third installation last week with no problems.

On the development front we are finalizing big deals for midpriced hotels in high-growth international markets, specifically China and India and we expect to have some exciting official announcements on those topics very soon.

On top of that, we see good opportunities and we are pursuing them in the UK, on the continent, in Eastern Europe, South America and selected other countries in Asia.

While working on these big deals, we have also been able to pick up some new properties, like the first Hilton Garden Inns in Germany and Italy and the first Doubletrees in Thailand and China.

Most of the 250 hotels that were added to our system in 2007 will be in the U.S., but we expect international to account for an increasingly large percentage of the total in future years.

This is really a terrific story for our company.

Our prospects know no bounds and this worldwide growth strategy will become an increasingly large part of the overall Hilton story in terms of our company's global presence and our shift to a more fee-based model.

The last point I want to make is on margins.

Our margins in North America were up 10 basis points in the quarter, which is nice, but they would have been up more except for three factors which we have mentioned previously.

One is a displacement from renovations at the Waldorf Astoria and the Hilton Hawaiian Village, two is increases in property insurance, and three were increased marketing costs.

These three items combined to impact margins by 190 basis points, so absent them, margins would have been up 200 basis points.

We anticipate some margin impact in 2007, but to a lesser extent as we continue with the guestroom renovations at the New York Hilton, (indiscernible) replacement at the Hawaiian Village and important behind-the-wall improvements at the Waldorf Astoria.

We expect most of this work to be completed by the end of 2007 and displacement to be much less of an issue for us after that.

For marketing, spending the last few years was effectively catch up.

Going forward, this should normalize and so would have a minimal impact on margins.

And as we discussed on our last call, we are hopeful that more capacity will come into the insurance market next year.

While our margins were up only nominally in the third quarter, it's important to note that absolute North America owned margins are still strong at 29%.

We see margin strength continuing if the favorable rate environment stays in place.

And as I said earlier, the supply-demand dynamics are still in our favor.

The big story for us is rate increases.

Average daily rate was up almost 9% in North America in the third quarter and we see this positive rate environment remaining in place in our large markets, like New York, Hawaii, Chicago and London.

We understand that North America owned hotels drive a lot of margin, but it's important to know that our international owned margins were up 270 basis points and we saw especially strong results in our own hotels in the U.S. and on the continent.

We expect the margin story to improve significantly in 2007, and Bob is going to talk about that in a minute.

So in summary, just let me to say our core day-to-day business is really solid.

We have lots of exciting opportunities on the worldwide development front and our margin story has room for improvement.

So now I will turn it over to Bob.

Thanks, Matt.

First on the 2006 guidance, on a recurring EPS basis, our guidance is now $1.15.

That is a $0.05 per share increase from the midpoint of our previously issued guidance and it's due primarily to a lower full-year effective tax rate for 2006.

As we noted in the release, the tax implications of selling the five Canadian assets afforded us additional foreign tax credit utilization and that had the effect of lowering our full-year tax provisions.

Other than that, we are on target, though we are at the low end of the previous guidance ranges in terms of total adjusted EBITDA and owned hotel RevPAR and margin growth, but this is due primarily to the impact of asset sales since the end of the second quarter.

Absent the asset sales, we would generally been in line with the midpoint of our previously issued guidance in these areas.

Turning to our preliminary guidance for 2007, as we noted in the release, we are currently engaged in the 2007 operating budget process.

However, we did poll the field for their initial views on a few key metrics, all of which could change as the budgets are finalized.

In general though, the mood among our operators is very upbeat for 2007 and this is reflected in our preliminary numbers.

Our fee business is expected to show continued strength in 2007 with growth currently estimated in the 15% range, a combination of systemwide RevPAR gains and the addition of new units.

Next year as Matt mentioned, we expect to add approximately 250 hotels and 35,000 rooms to the system, and we will also have a full year of fee income from the 10 hotels we sold so far this year, plus the two Metropoles.

For worldwide comparable owned hotels assuming no additional asset sales beyond the Metropole (indiscernible), our preliminary expectation for 2007 RevPAR growth is in the 7% to 9% range with margin improvement expected in the 125 to 175 basis point range.

For comparable leased hotels, including Scandic, our preliminary expectations for 2007 RevPAR growth is in the 4% to 5% range with margin improvement expected in the 30 to 70 basis point range.

Now to help investors and analysts in their 2007 modeling, we have provided a supplemental schedule in the financial pack which provides an estimate of full-year 2006 projected operating results for the owned and leased hotels, adjusted for asset sales, including the expected sale of the two Metropoles before year end, and pro forma assuming that we had purchased Hilton International on January 1,2006.

We also provide an estimate of full-year 2006 pro forma depreciation and amortization expense on the same basis.

Given that we are still very much in the thick of the budgeting process, we have not provided total adjusted EBITDA and EPS guidance ranges for 2007.

However, we did note a few items in the release which will impact 2007 results, both of which are timing related.

The first is simply related to the timing of HI deal.

We closed on the acquisition of Hilton International in late February after a period of traditionally weak results internationally.

Had we closed on January 1, 2006, our full-year 2006 results would have been $0.05 per share lower.

Put simply, the EBITDA generated by HI during the first seven weeks of '06 was insufficient to cover the fixed cost and depreciation, amortization and interest expense on a pro forma basis.

And given that this is typically as easily weak period internationally no matter what year it is, we would expect the EPS impact for the same period in '07 to be more or less in a similar range.

The second timing-related item is the net change in deferred profits in the time-share business related to percentage of completion accounting.

This year, we had a small benefit related to deferrals.

Next year, it will be a significant detriment.

Currently, we are estimating reported time-share profits to be down about 25% in '07 primarily as a result of the required accounting.

This net change in deferrals, which we estimate to be about $65 million, will adversely impact 2007 EPS growth by about $0.10 a share.

However, we do expect that 2007 deferrals will reverse in '08.

Now one additional item worth mentioning is that we expect our corporate-related costs (technical difficulty) in '07 due to the addition of development and brand resources in select regions of the world.

These expenses are a necessary investment to execute our brand development strategy around the globe.

As we are still developing our corporate expense budget, it is difficult to provide any guidance or order of magnitude beyond saying that these costs will be up.

Now moving quickly onto asset sales, we have been busy.

Two weeks ago, we exchanged contracts on the two Hilton Metropoles in the UK.

In the third quarter, we closed on the sale of five owned hotels in Canada, (indiscernible) trade hotel we sold in Chicago and the stand-alone LivingWell Health Club business.

By year end, including the expected closing of the Metropoles, we will have sold over $2 billion of assets since the beginning of 2005, all at great prices with strong contracts on properties we wanted to retain, which is all but one hotel and the LivingWell brand, and we sold to owners who are committed to significant capital investments in the property.

Additionally, we have listed for sale 10 hotels in continental Europe and we have listed the Hilton Caledonian in Edinborough, Scotland.

This is a unique hotel and one that has attracted significant interest.

And in fact, we have a long list of interested buyers in all of these assets as well as in the Scandic portfolio.

In today's press release, we announced the continuation of our domestic asset sale program.

In the next few weeks, we will be bringing to market five hotels -- our airport properties in Boston, Atlanta and New Orleans and an Embassy Suites and Homewood Suites in Memphis.

Additionally, we have recently listed for sale the 1119-room Hilton Washington.

This is a large and important asset to the Hilton system with CapEx challenges, different in scope but similar in dollar terms to the (indiscernible) House which we sold last year.

As many of you know, asset sales are one component of our overall strategy to shift our mix of business to be more fee-based.

The other component is unit growth, and Matt covered that in his remarks.

And with that, I will turn it back over to Mark.

Okay, thanks Bob.

Operator, with that, we're now ready for Q&A.

(OPERATOR INSTRUCTIONS).

David Katz, CIBC World Markets.

On some of the international pipeline stuff, I noticed Matt made some comments, and I apologize if I missed any of it.

But if you could just help us gauge how we should measure you out over the next several quarters and what we should be looking for in terms of additional rooms, et cetera, and how quickly we should expect that pipeline to grow internationally, right?

Because when we look at it, 10% is outside the Americas, which implies a pretty big opportunity.

But help me not get my expectations too a far ahead of myself.

I'm not sure I want to do that.

I want your expectations to be high, and then we want to meet your expectations.

I think the way to measure in the short-term is to see what kind of deals that we start to structure, because -- and I'm going to have Tom Keltner talk about this some more -- but what we are really interested in doing is looking at big opportunities and hooking up with big, important developers, people that can do the job done.

It's going to be a hockey stick, meaning to get a partner to announce who you're going to do things with, and then there is a leadtime in terms of finding the site, developing the properties, building the hotels and so on.

So I think it's going to take just a little bit of time to get going.

So I would say in the early stages, it's evaluating the market opportunities that are there, the types of properties that we're going to offer, and then just think big.

So we're spending a lot of time and energy designing the right products, thinking about staffing.

We're moving some of our people outside the United States into some of these high-growth market.

So the early stages are going to be hard to gauge.

We still feel very confident about the 7% per year growth target.

I think we have all been surprised that the U.S. continues to be really strong, but we think long-term, an even bigger driver will be international.

So Tom, do you want to supplement that?

I'll just add a few things, David.

One, I think the fact that 10% of our pipeline is outside of the Americas shows just what a huge opportunity we have to grow our business globally.

We have no brand, except for Hilton and the two Garden Inns that we announced in Europe, outside at the Americas.

So the opportunity is to grow Hilton, Garden Inn, Hampton Inn, as well as we grow the Hilton brand.

And Matt is right, and particularly in developing countries like China and India, most of that growth is going to be ground-up, so you should be looking at the pipeline first.

It will change in composition as we announce deals that are real deals.

Remember, our pipeline are real deals with signed contracts.

As we announce those, the pipeline will become more international, but it will take those deals two years to three years to get open.

So most of the unit growth is going to be out a few years, particularly in developing countries.

Western Europe is a little bit of a different story because we have a lot of conversion opportunities and we're very excited about the Doubletree brand, particularly in Europe, that can add some unit growth faster.

But to reiterate Matt's point, 7%, you will see that become over time more balanced towards global or international than it is for the U.S.

But quite frankly, our pipeline in the U.S. is outstanding right now, and we continue to have owners that want to build one hotels with us.

We've increased our development staff under [Ian's] (indiscernible) globally by quite a few people.

Just a month ago, we had all of those people into the corporate headquarters in Beverly Hills.

The objective was to work with them, to educate them on what the brands are, how they need to be sold, and then equip them with the tools to go back out into their part of the world and sell the brand story.

At the same time, we're going to be sending over U.S.-focused people that understand the brand because they've worked in them, and they will work alongside of the development staff -- we sort of call them brand ambassadors -- to make sure that we are educating potential owners about what those brands are going to be and working with the regional developers.

So we're putting a foundation in place that is going to yield a result.

You will see a first in the pipeline and then in the openings as we go forward.

If I can just ask two quick follow-ups.

One, do you expect to be making any [sliver] equity investments in any of these countries?

And then two, are you tailoring any of your brands or having to alter them in any way?

I'm not sure if Ian's today as well, or maybe, Tom, that's a good question for you.

But are you having to tailor your brands as you enter new markets?

Let me start on the first one.

The answer on sliver equity is -- it depends on the country and it depends on the deal, but if that's what it takes, the answer will be yes.

In terms of altering the brands, absolutely, we've already got new he had new prototypical designs [by] region of the world for both Hampton and for Garden Inn.

The most obvious difference is that we need a little more robust food and beverage offering for both of those brands, but they'll still remain mid-scale brands in the case of Garden Inn and sort of economy brand in the case of Hampton, but they will be redesigned in terms of food and beverage offering, room size and meeting space, and that's already underway, done not just by the brands here, but by actually traveling, visiting competitors, using the international expertise of (indiscernible) to come up with modified brand prototypes different from what we have here in the U.S.

Thanks so much.

Jeff Randall, A.G. Edwards.

Could you talk about the comments on the -- reigniting the Hilton brand?

And I guess reconcile that with -- I think, Bob, you made some comments about the moderating marketing spend going forward.

What exactly does that re-ignition entail?

It has really been three things.

It has been improvements to the product, it has been improvements in the service levels, and then it has been a reinforcement of the marketing message.

On the product, we've been very focused on particularly the rooms, both for our owned, our managed and our franchise properties -- new beds, new TVs, new colors, a clock radio that a human being can set.

We have tried to make some changes were we could in the bathrooms.

But overall, a big, big change in the look of the Hilton brand.

We're pretty much through with the room and now we have moved on to fitness.

A couple months ago, we announced a deal with Precor where for all of our full-service hotels, the brand standard will be a much improved updated fitness facility with new flooring, great product, and we're very excited about that.

We are looking next into the area of food and beverage and improving our restaurant operations, in particular.

On the service side, it's combining technology with personal attention, so we have greatly increased our training budget.

Marc told me not to brag about our industry-leading OnQ technology, but it truly is.

So the combination of technology and a personal touch we think is what gives us the edge on the service side.

And then on the marketing side, we have spent a lot more time, energy and money in terms of better defining the Hilton brand, expanding our target market, making more of an emotional connection to the customer.

And, we have made a big push on the Hilton family of brands with our Be Hospitable campaign.

And so I think the key there is to be consistent, and we plan to continue with that marketing message throughout.

Matt, any thoughts ongoing smoke-free at a brand or systemwide?

And if the answer is no, is there any downside risk to attracting I guess human capital going forward, given that I guess employees would prefer to work in a smoke-free environment?

We have thought about smoke-free, and if you think about all of our brands, they are really about giving customers choice and control, and we have a real nearly 90% of our guestrooms or more that are smoke-free rooms today.

So we have made the choice not to go smoke-free, and that's a choice across all of our brands.

Over the years, we have moved up the percentage of nonsmoking rooms, started off like 50%, and it's now nearly 90%.

So we are going to remain with that option for our guests.

Of course in every jurisdiction, we abide by local laws, so if the local laws require things to be smokeless, we are.

But we just think at this time, it's right to give them the choice.

Okay one last question if I may.

What does management attribute to the discounted valuation of Hilton's shares relative to its peers?

Looking back, you could argue it was higher that levels (indiscernible) [at] 16, 17 months ago as debt levels started to moderate, you all still traded at a discount.

How do you guys think about that?

Well, we think of it the way you should think of it -- as a big opportunity.

My own view is that the market for a while was either doubting us that we would be able to sell hotels at good prices, and I think Bob and his team have demonstrated that that criticism is not accurate.

And then I think there is some skepticism that we're going to be able to fill out the development pipeline, so that one, just watch the headlines.

My open guess is that people like share buyback and we're just not in a position at this point to offer that.

That is my best guess.

Those are typically the things that we hear when we are out meeting with investors, and as Tom indicated, especially on kind of having this worldwide development capability, that was always the big one, that we just didn't have the growth opportunities that the (indiscernible) had, but now we do.

And that, over the next couple of years, is going to reap terrific benefits for the Company and for our investors.

Great, thank you.

Before we get to the next question, I do want to mention that Ian Carter, who runs each Hilton International, is on the phone as well.

So (technical difficulty) (inaudible).

Next question, please.

Will Truelove, UBS.

Hey guys, good quarter.

My question relates to the possibility of additional debt paydown or any kind of restrictions around that.

As you are selling these assets, how quickly can you take those proceeds to reduce debt?

Bob, if you could help us with that?

Very quickly, because as you know we refinanced -- or we financed the Hilton International acquisition with all floating-rate debt.

So we have the ability immediately, almost immediately upon getting proceeds from assets sales to paydown that debt.

Just one additional question.

In terms of your renovation disruptions that you were talking about with some additional things going on, that is baked into that 125 to 175 basis point improvement in terms of your guidance in the press release, correct?

That is correct.

Thanks a bunch.

Bill Crow, Raymond James.

Good morning, guys, just a couple of questions.

On the guidance or lack of guidance for next year, should we anticipate that we'd hear the EPS and EBITDA guidance at your event in New York in December?

We're talking about that now, but our plan is to flesh things out at that event.

And for those of you who wonder what Bill's talking about, I was going to mention it at the end.

We are having an investor day in December in New York.

We sent out (indiscernible) save the date on that, so we will look forward to seeing many of you there.

But, yes, our intent is to update guidance at that point.

As we look at the RevPAR growth expectations for next year, the 7 to 9%, and the margin improvement, which looks pretty strong from my perspective, how would you break that out between U.S. and international?

Is it possible to get those numbers?

Bill, we have not provided that.

Again, we mentioned that we're still very much in the throes of the whole budgeting process now, and I really didn't want to provide that breakout at this point in time.

Two other questions then.

You noted that margins would be up 200 basis points in the quarter without the three items.

Could you just give me what the margins would be up without the disruptions if you were to single out that one item?

The displacement impact, Bill, was 60 basis points.

60s -- okay, that's helpful.

And then finally, congratulations on the Metropole sales.

Any sort of valuation metrics you can give us affiliated with those sales?

Bill, what we typically do is, and just because of issues regarding confidentiality with the buyers, what we will do as we have done in the past is, after we get assets sold and closed and behind us, we will send out a kind of recap of the prior six or nine months of assets sales and kind of talk about things in an aggregate basis in terms of valuations and multiples.

Okay, that's it for me.

Thanks.

Harry Curtis, JP Morgan.

Quick question about assets sales.

In the United States, as of the last conference call, you mentioned you were basically done.

That strategy seems to have changed now that you have five more -- actually six more on the block for sale.

Does that suggest that all of the hotels really are for sale in the U.S.?

And then turning to the international side, you don't seem to be in too much of a hurry there, and I'm wondering if your strategy there is to create more shareholder value by being patient, or does this suggest that the demand for hotels is drying up?

Harry, first of all, we are not [poor] sellers at all by any means.

Our objective here is to get the best prices, and that's what we're striving for.

The market is still hot for asset sales, certainly domestically, but I think even more so internationally.

So in terms of -- yes, we did.

Last call, we did say we were done domestically, but we've kind of taken a look at our asset holdings and we have adjusted a little bit.

I think we feel that eventually we want to get down to both domestically and internationally, but most of this will be domestic holdings, maybe about 10 or so owned assets.

And don't think about it as okay, that's going to be our final number, because there are a number of assets out there that we either cannot or really don't want to exit right now.

And I guess on the don't want to side, it's maybe assets that are still -- have a lot of potential upside.

But as our hotel in Sydney, maybe we do execute that asset sale in a couple of years.

And on the can't side is some of the assets that are encumbered by our CNBS financing that we put in place six years ago.

And we could if we wanted to prepay the debt, but economically at this point in time, it just doesn't make sense to.

We also have some assets that are encumbered with brown leases we'd either classify as either difficult to exit, or they have relatively short remaining terms of the lease, which kind of make it difficult to extract value.

So, over the long-term or over the next three years at least, you could think about as having 10 core assets, plus a number of other assets that will be in the portfolio because it just doesn't make sense to sell what we can't sell.

Kind of remember what we're trying to do here.

It's a couple of different objectives.

First is to move our business to a fee-driven business model, and it helps to sell an asset and take back a management contract.

So that's one important part of the strategy.

The second is, in that process, to maximize the shareholder value if we believe an asset can be sold today for an amount greater than its present value to the shareholders.

So it's balancing those two things.

So when, as the environment changes, as prices for example go up, we're much more likely to be focused on that shareholder value part of the equation.

So there is a price at which we would probably sell any asset.

So, in Europe, it sounds like we should conclude that there is really a fair amount more for sale?

I think we have a lot of things on market how and there would be things for sale, but another part of your question was whether we view the European market as being weak, and we certainly don't.

We have tons of interest in the properties that we have said we would like to sell.

Excellent, thank you.

Joseph Greff, Bear Stearns.

I think you talked about it a little bit in someone's question earlier, but are you rethinking all of your leverage levels and the timing of the buybacks?

Pro forma at the end of the third quarter, you're just over four times.

And if you're not rethinking that, then why?

Our target still is, and our strategy, our financial strategy, is still to get down to about a 3.5 times debt to EBITDA.

And if we are able to sell all of the assets on the docket, and we expect to get great prices for them, and if we can get great prices for them and execute those assets sales, we would expect to get by the end of the year to below 3.5 times end of next year.

Steve Bollenbach And then that would put us in the position that we've set our strategy is, when we have an investment-grade level for our debt, that unless there are unique opportunities for us, we will be in a position to return money to the shareholders.

Okay, great.

One mundane question.

Bob, there was an increase in the routine improvements, capital spending for '07 versus '06.

Is that just an additional step for international, or is that domestic deferred maintenance CapEx, if you could help explain that a little bit?

It's really a combination of two.

We have continuation of the projects that Matt had called out in terms of the Hilton Hawaiian Village, the Hilton New York and the Waldorf Astoria, and we have some special projects at our international properties as well.

And then with respect to 2007 time-share, if I understand the pieces of it, the time-share guidance or outlook, you are looking at about $185 million in profits.

So if we're looking at 25% off of that in '07, am I off of my math?

We had guided to a 20% increase in profit in 2006, so that means we expect profits to be roughly $160 million this year.

In 2007, our guidance, including the impact of the deferrals, is for a 25% reduction in profit, which results roughly in about a $120 million GAAP number for '07.

And when you're saying profits, are you also talking about EBITDA?

Yes.

Great, that's helpful.

Thank you.

Will Marks, JMP Securities.

I was wondering about -- I don't think anyone has actually touched on union contracts.

Can you give us an update of maybe over the last 12 months everything that has been negotiated and if there is anything still outstanding?

Maybe you should come to Beverly Hills.

What happened is, if you remember just [encapsuled], there were six big cities that had union contracts all coming up in 2006, and basically we settled all of them, roughly it's like a 5% increase in wages and benefits.

What we had to do was give up card check on a handful of properties, and in return for that, we got effectively labor piece from (indiscernible) here for the next five years.

So, we thought that was a good trade-off.

Our team members are happy.

We also got the agreement with a labor head to help us on the food and beverage side of the business.

One of the things that has happened in our industry is a difficulty with the union in structuring contracts, particularly around the restaurant business.

And so it has been very difficult to have successful restaurant concepts within hotels.

They recognize that and they have agreed to take a more much more constructive approach with us to make some of those restaurant concepts more appealing both to the owner of the hotel and to the guests of the hotel.

Really important thing there (indiscernible) [give up] this year, the four of them in New York, Chicago, San Francisco and Honolulu are obviously (technical difficulty) the union issue is now behind us and we move on and move forward.

What about Los Angeles, is that all cleared up?

Los Angeles is still sticking out there because we have a couple of hotels that we manage -- one at LAX and one at Glendale -- where the owners did not really have the same view of the world that we did.

And so they have been resistant to unionization of their properties.

Keep in mind, this isn't financially significant to us.

Operationally it is, but they are managed properties and the owners' decisions are not to find a way to settle with the unions.

On the other hand, another hotel in the area, the Beverly Hilton, did reach an agreement with the union early on, so they are (inaudible).

Steve Bollenbach But it's the same -- in that case, it's a management contract of ours and we're happy that the owner has come to terms with the union.

So the six are New York, Chicago, Honolulu, San Francisco, and then is it Toronto?

Toronto and Puerto Rico.

And then is there anything -- is Boston still outstanding?

I'm not sure.

Boston was I think last year.

I don't remember.

Anyway, so that clears it up.

Great, thanks guys.

Celeste Brown, Morgan Stanley.

A couple of questions.

First, will you see any material change in your appreciation next year over the pro forma you provided in your press release for this year, given all of your CapEx?

Again, we haven't rolled up our budget for '07, and certainly we would expect the depreciation to increase relative to the number or the amount of projects that we have on the docket.

But also to the extent that we sell assets, you would expect that number to come down.

So, again, I don't have any specific guidance for you for '07.

We gave you a pro forma '06 number to build off of in our supplemental schedule, but to be exact or try to give you some run rate D&A is difficult at this point.

I was just trying to get a sense for like is there -- your CapEx projects, are the CapEx projects going to drive major increases, or would they be more modest over this year?

Unfortunately, we're just not in the position to provide '07 guidance on D&A at this time.

Okay, that's fine.

And could you give us the after-tax proceeds on the Metropole sales that are estimated at this point?

The good news on that deal is that we expect that the tax impact will be minimal to none.

Great.

And then finally, do you have a number, an EBITDA number, for all of the assets that you have listed, in terms of what that means to the Company I guess be negative offset to owned and leased, and then the incremental to managed?

The answer is, sure, we have the number.

Will you give it to us? (multiple speakers) Sorry, I shouldn't have asked that one.

No, I think the key there Celeste again is without getting into specifics, and I understand you're modeling these and everything, but I think just getting back to the earlier question, the key thing that investors have to focus on I think is the fact that, if we are able to get these assets sold at great prices, then we would expect to be at below our 3.5 times debt to EBITDA target at the end of next year, and that's all we could say with regards to that.

So we are perhaps in the future or perhaps maybe -- we'll have to think about this.

On our investor day, we can get into a little bit detail on that.

Okay, great.

Thank you.

David Anders, Merrill Lynch.

Just asking the question one more way, and Matt or Bob, you could comment.

How does this -- as far as selling those assets you have lined up, how close does that get you to your end goal with respect to owned EBITDA relative to the rest of the total EBITDA of the firm?

And has it changed, or how do you think about that ratio?

David, I think all along, we have said that we have a result where it used to be about 60% of our profits came from owned hotels, and then it dropped about 50-50.

But all along, we said that's just a result of the strategy of moving towards the (technical difficulty) managed model.

So -- I'm sorry, to the fee model.

And so we don't really think about trying to get to a mix of income from owned assets and fee assets, but just as a result.

I believe that that result when we get to the debt levels that we want, I think it will have a result that will be in the low to mid 40% of our profits coming out of owned hotels.

But that is simply the result of the strategy.

It's not the strategy to get to a certain percentage of our profits coming from owned real estate.

Let me just add one thing that I think has been a big change in our industry, is that the buyers are very knowledgeable about the business and great believers in the business, and their willingness and desire to put new CapEx, to improve the product, is a big change in our business.

It used to be where you were selling assets, you were selling to insurance companies and true financial types, and it was a struggle to get them to invest up to your brand standards.

The big change now where the buyers are very knowledgeable, their owners and shareholders rewarded them for reinvesting in the properties.

And so I think that that's a really big change.

And so just beyond getting to a ratio, it's a big help to all of our brands when investors come in, buyers come in and are very anxious to improve the property.

Just as a follow-up Matt, do you think that's -- just (indiscernible) do you think that's just a function of the good environment we've been in for three or four years, and the minute it turns south, all of these new buyers start scrimping on you?

I honestly don't think so, and I think it's more a function of what they see in the future, less than what they have seen in the past.

The fundamentals of our business are still really, really good.

I get in trouble when I make this comment to a lot of our customers, but the fact is, the demand has grown at 3 to 4% and the supply has grown at less than 1%, and that gives us pricing power.

And I don't see anything that really is going to change that going forward.

So their view is they really believe in our brand, they believe in the family of brands, they love the technology advantage we have and all of the things that we're doing, and we are just so gratified when they come in.

They do more in terms of the property ownership than we do, than we have, and they are being rewarded by RevPAR gains and improved profitability.

I really don't think it's going to change because of the nature of the kind of people that they are.

You have some very large REITs and you have some very large hotel-targeted investment funds that know the business, recognize the business.

And so it's just a different profile, and I think that benefits us.

And the other dynamic that has changed for our company is that we've become so much bigger that we are better able to enforce brand standards than any market, anytime in the market.

So that's just another part of the equation.

Okay, thank you.

Jay Cogan, Banc of America Securities.

A few questions on a variety of subjects, kind of dotting some I's and crossing some T's.

As it relates to the dispositions, Bob, on the six hotels that you announced today that you're hoping to sell here in the U.S., is it fair to say, based on historical kind of price per key, does that mean we're talking $400 to $450 million in gross proceeds, and I was wondering if the efficiency from a tax standpoint will be as good as you've been recognizing on the bulk of your other dispositions?

Again, Jay, nice try.

Let's look at this way -- would tax efficiency deter you from selling any assets, other than the 10 that you mentioned that you want to keep and the ones that are kind of locked up due to CMBS, et cetera?

We look at all of the -- when we analyze the hold value of any asset, Jay, we look at it on an after-tax basis.

And so, the fact that an asset for instance has a low tax basis and you have to pay tax is not necessarily relevant because it's a question of whether you pay the tax today or you pay the tax in future years because you're not getting the benefit of a depreciation shield.

So it's one of the metrics that we take a look at -- it's an after-tax metric to see if the value after-tax today of holding the assets is less than or greater than the value of selling the assets.

I don't know if that answers your question.

I think I get.

In regards to the Metropoles in terms of low end of the range, medium end of the range high end of the range relative to valuations on other international assets you're looking to sell, how would you -- without giving the numbers away, how would you qualify the valuation on a relative basis?

I would qualify it as being a strong price.

And as it relates to 2007 kind of hotel trends or I guess margin trends, the 145 to 175 basis points you're talking about, obviously a good number.

But given the renovation impacts this year, what is baked into your expectation?

I know it's kind of rough, but what are you baking in outside the labor cost that you talked about as it relates to energy costs, as it relates to property insurance et cetera?

Is there anything really significant that kind of holds that back, or maybe there could there be some upside to that target?

That's our current estimate, again, based on a very preliminary basis.

Energy, we are hoping that -- energy prices certainly have mitigated now in the back half of '06, so we're happy with that -- energy (indiscernible) increases, that is.

In '07, again, (technical difficulty) the great level of detail on the '07 budget yet with regard to energy costs.

Property taxes -- I'm sorry -- property insurance we expect will remain at high levels compared to the first half of 2006 because our policy renewed June 1, and so it goes from June 1 to June 1.

As we mentioned on the last call, the increase was very significant.

So what happens in the back half of the year on property insurance when we renew our policy, don't know.

We are hoping as Matt mentioned that we get more capacity into the market, and that will help drive property insurance rates down.

I think marketing costs will be more comparable year-over-year.

The wage costs will be up consistent with our negotiations with the union, roughly in the 5% range.

We did have some onetime union expenses in 2006 that we won't have in 2007.

So there's a lot of stuff kind of in the sausage grinder and we're still, again, walking through the numbers.

I cannot really answer the question (indiscernible) upside in the number.

I don't know yet.

We're still getting through all the details.

A couple of quickies for you.

Considering what you guys said earlier about the pipeline in regards to the '07 growth rate expectation on gross rooms, and then thinking down the road, should the India and China and other opportunities emerge as you hope, is 2008 still a 7% kind of growth year?

Is it going to be kind of linear, or should we expect some bumps on the gross number of rooms to increase in the pipeline?

I think you should expect it to be linear in the 7%, but as our base gets bigger, 7% basic is a bigger absolute number of rooms, and we believe that for the next several years, we can do 7% gross rooms annually.

Got it.

And then on time-share -- back to you, Bob, for the last questions.

First half of '07 stronger than the second half?

Understanding except for the full-year, but is there any kind of discrepancy through the year that we should be thinking about as we're modeling to kind of just get that out of the way?

And then what specific properties, projects are related to just the deferred revenue issue, just so we can make sure we are aware of which ones?

Again, Jay, we haven't even done quarterly forecasts yet for 2007, so I just don't have any data that could help me answer that question.

We will have to wait until the end of the year for that.

And what was your --?

Is it Hawaii, is it Orlando, Vegas -- which one is the issue --?

Well, it's Hawaii, and it will be -- the big one is Hawaii, and then we have New York, some New York, and then some in our new project in Orlando.

Thanks a lot.

(indiscernible) top of the hour, so we will take one more question.

Jeff Randall, A.G. Edwards.

Just another question on time-share.

It looked like the contract sales had been pretty anemic the last couple of quarters, and I wondered if that's a function of inventory constraints, and if so, how does I guess the contract sales looking out into '07?

And then secondly, a question for Tom.

Tom, if you could give an update on the Conrad brand.

And correct me if I'm wrong, but I thought you guys were targeting about 50 Conrads by 2010.

Just tell us where you are with regard to that goal.

Thanks.

I will start with the Conrad brand.

We have taken a couple of steps since we acquired Hilton International, one of which was distributing the Conrad management into all of those various regions and energizing our development force, not only international, but here.

So we have six or eight Conrads in the pipeline.

We had said I think 50 Conrads by 2010 or so, but we also subsequent to that introduced the Waldorf Astoria collection.

So between the two of those, we're going to focus on the luxury side of the business.

And I think we have some fabulous Conrads coming down the road, one in particular in Shanghai and [Shen Tan Di] that is going to be very impressive for the brand.

We have opened in Tokyo last year.

So we are putting a full-court press on.

I don't know whether it was 50 by 2010, but between Conrad and Waldorf Astoria, we have got a couple of good horses for the luxury segment.

And that's really how to think about if, Jeff, is our presence ion the luxury segment, and we have different brands that we can accomplish that with, and then the strategy (indiscernible).

Jeff, on the time-share, our unit sales we think have been very, very strong.

The issue has been that we're running out of inventory.

And if you look across our existing estate, our Lagoon Tower is 85% sold out, our (indiscernible) Tower is over 90% sold out.

Our initial project in Waikoloa is over 80% sold out.

Our Tuscany projects in Orlando is over 9% sold out.

Our New York Hilton project is near 90% sold out, so we're really running out of inventory and that's why we're reinvesting in the business with all of these new projects, and we will start those sales for the new projects next year.

Okay, sounds great.

Thanks guys.

Okay, well we're a little after 10:00, so again, we thank you for joining us this morning.

We look forward to seeing many of at our investor day next month, or actually in December 13 in New York, and we will be talking to you in the meantime.

Thanks, everybody.

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

This concludes the presentation.

You may now disconnect and have a wonderful day.