萬豪國際 (MAR) 2002 Q1 法說會逐字稿

Good day and welcome to this Marriott International first quarter 2002 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like turn the call over to the Executive and Vice President and Chief Financial Officer, Mr. Arne Sorenson. Please, go ahead Sir.

Thank you, Chester.

Good morning everyone. Welcome to our first quarter 2002 earnings conference call. Before I get in to the discussion of our results, let me first remind everyone that many of my comments today are not historical facts and are considered forward-looking statements under Federal Securities Laws. These statements are subject to numerous and uncertainties as described in our SEC filings, which could cause future results to differ materially from those, expressed in, or implied by our comments.

This morning Marriott reported thirty-two cents per share for the first quarter; five cents ahead of first call estimates. The decline in year over year revenue per available room or REVPAR came in within the range we provided during February conference call. Nevertheless, we exceeded consensus earnings estimates in four areas. In summary here is why;

First, almost two cents of our stronger earnings per share was due to stronger lodging operating profits and senior living services results. Almost two cents of our upside was due to better than expected net interest expense. In addition to favorable interest rates we have completed approximately one hundred dollars in asset sales so far this year. Better than expected savings on the corporate line helped to buy less than one cent and our synthetic fuel investment also generated a bit less than one cent in bottom line impact. This was the first quarter of what we expect would be steady recovery from a most difficult year.

While we are still experiencing negative REVPAR comparisons year over year and these negative comparisons continue to shrink period by period.

During the first quarter, some business customers resumed travel, especially to regional mediums. Many more, especially technology companies kept meetings to a minimum and transient travel restrictions were made in place. Many customers are permitted to travel only when necessary for direct customer support. Price sensitive leisure demand at MAR hotels was clearly stronger than business demand. However, leisure occupancy could not make up the loss catering and higher room rates that generally accompanied business demand. Group business showed considerable strengthening from forth quarter levels.

While bookings at our largest group houses are still running down from last year, each period, we are seeing the gap narrow. Marriott hotels, resorts, and suites, group and convention REVPAR declined only five percent during our first quarter. The booking window for group and transient demand has become very short. Just last week, our mid east, excuse me, mid west region recorded a rate for a three thousand room night group meeting to take place just five weeks in the future. I am not sure which is more unusual, that the demand is so short term or that we were able to accommodate a group that size, at the last minute. While group meeting attendance continues to run below average, meeting planners are now assuming lower attendance and booking inventory accordingly. Although the north east and west fly-to properties were hit especially hard in the forth quarter. In the first quarter, REVPAR performance was more consistent to region to region. The

South Central region was the best performer with REVPAR down only ten percent. The region benefited from drive-to locations. The Super

in New Orleans and lawyers and media fill in hotels in Houston. In the west, the large group houses and drive-to leisure destinations are seeing improvement including Palm Springs, San Diego, and

. The Bay Area and Los Angeles are still the most difficult market with REVPAR down over twenty percent. Suburban and airport hotels suffer with poor business transient occupancy. Demand in New York is slowly returning. The New York Marriott Marquis ran better than ninety one percent occupancy in the first quarter with a two hundred and five dollar average rate, while REVPAR was down ten percent. The property sides REVPAR premium over competiting hotels increased. Washington DC also has seen improvement in demand trends. With the recent warm weather, the Cherry Blossom festival drew tremendous crowds and hotels

were sold out.

Outside the United States, problem markets include the Caribbean and Mexico. Price sensitive leisure travelers are finding bargains there as average rates are down ten percent. Egypt suffers from the decline of western travelers to the Middle East.

Although Russian tourism is adding occupancy in the region. As American business has avoided International travel, we have become even more focused on inter-regional travel.

, Moscow, and Germany are doing quite well, and we are optimistic about the recovery among Asian markets. Overall, REVPAR at our hotels outside the US declined seven percent in US dollars with occupancy accounting for only one percentage point of the decline. Occupancy at many hotels, both inside and outside the US has recovered. While not our traditional customer base, we have seen meaningful increases in customers from triple A (AAA), Airline cruise, and Government travelers as they take the place of business transient customers. With a lower demand compared to a year ago, we have also seen less cross sales from sold out properties. As a result, some hotels in our system, which over the last year benefited from cross sale business are suffering relatively more. While good for the customer, this environment is obviously difficult for the industry. The combination of soft demand and a short of booking window have contributed to an industry scramble for group and transient customers. While occupancy has recovered nicely in many markets worldwide, most hotels have seen significant erosion in room rates.

In this buyers market, we have maintained a consistent and rational pricing strategy while continuing our aggressive sales in marketing activities. As a result, our brands were driving the highest REVPARs. As reported by Smith Travel through February, Marriott hotels, resorts, and suites US REVPAR index increased to a hundred and

percent.

Courtyard REVPAR index was a hundred and twenty seven percent and Residence Inn was a hundred and thirty three e percent. As you know, an index of one hundred percent represents the hotels fair share of market revenue. So, with these scores, each of these brands show tremendous REVPAR premiums above its' competitors. And it is not just our REVPARs that are doing well. Despite our rate declines, we maintained both margins and guest satisfaction. In fact, first quarter guest satisfaction scores improved from a year ago levels.

So, it is surprisingly in the first quarter, our full service hotels REVPAR declined less than our Courtyard and Residence in brands. In the near term, our managed Courtyard and Residence are in a competitive disadvantage in this environment, especially those in urban markets. Upper up-scale quality tier hotels have moved significantly down market looking for customers and narrowing the rate differential between full service and limited service hotels. The Courtyard and Residency in brands also do not have the extensive meeting space for group business and so remain dependent on the smaller base of transient business customers which remained the most depressed segment of travelers in terms of year over year volume.

Our franchise systems, which tends to locate in less urban markets has performed significantly better. In contrast, our Spring

suites, Town

suites and Fair

in brands tend to be less urban focused, and have been less impacted by the decline in business travel, over the price compression from the upper quality tier.

Ritz-Carlton US REVPAR declined fourteen percent during the quarter with only two percentage points of the decline coming from occupancy. Ritz-Carlton reports monthly rather than bi-accounting period like the rest of Marriott. So, Ritz-Carlton's first quarter, included only January and February results.

The brands

resort business attracted leisure demands and helped results. The new properties at Key Biscayne and the Naples Golf Lodge in Florida, as well as Battery Park in New York showed stronger than expected performance. Ritz-Carlton's house profit margins also were excellent, declining only three points of the fourteen percents REVPAR decline. Again, despite the tough environment, customer satisfaction scores rose.

March REVPAR, which came in following the quarter close, showed Ritz-Carlton US managed REVPAR down roughly twelve percent. One thing is certain. Lodging fundamentals in all price tiers will improve meaningfully only when transient business demand returns. As we had explained in the past, the best sign of upcoming strength for business transient travel will be growing corporate profits. Shorter booking cycles and uncertain corporate profit limit everyone's ability of forecast today. We are aware that pricing decisions made today, particularly for feature group business can have longer-term consequences. As a result, we have put steps in place to ensure that we maintain flexibility but also discipline in our pricing for group business in 2003 and 2004.

We have learnt from past down turns that this will place us in a better position to drive overall

when demands come back slowly. Last week, Price water House Coopers published their outlook for top line industry performance. They are expecting US industry REVPAR to grow three percent for the full year 2002. We hope they are right. Despite their

views, we remain concerned about REVPAR trends in 2002, and continue to expect REVPARs for our mix of hotels, which are obviously in higher segments than in the industry average encompassed in TWC's numbers to decline two to three percent for the full year 2002. While we are sticking for our quarterly REVPAR guidance from February, compared to few months ago, we are a bit more

in the second quarter, which is seasonally more dependent on business travels. Travelers that I have mentioned that have not materialized.

While REVPAR only met MAR's expectations in the first quarter, operating margins definitely exceeded our expectations.

We continue to place emphasis on efficiency and cost savings even as occupancy slowly returns slowly to our hotels.

Overall, house profit margins decreased approximately one percentage point during the first quarter, despite the double-digit decline in REVPAR. The improvement from the margins that we might have expected was primarily due to lower management wages productivity improvements, and lower utility costs. These were offset somewhat by higher medical and

Casualty insurance rates and lower telephone profits.

Hours per occupied room declined approximately nine percent during the quarter. Property level management wage expense overall declined eleven percent. Utility costs declined by eighteen percent, and causality and Insurance rose twenty nine percent during the quarter.

Food and Beverage revenues declined eight percent as occupancy declines impacted restaurants and catering businesses. Profits increased slightly as labor efficiency improved margins. Bottom line dividing the change in estimated owners EBITDA by the change in US REVPAR yielded an estimated flow through of one point one times for our owners. Our operating team simply continues to do a fabulous job controlling margins. We expect margins to remain strong in 2002.

Although margin comparisons get tougher as we go through the year. We started to cut cost in April 2001 and became very aggressive after September eleventh. While first quarter REVPAR in margin performance was impressive, unit expansion was particularly not worthy.

During the quarter we added seven thousand rooms to our systems. Our room count grew ten percent year over year. Conversions accounted for seventeen percent of rooms added during the quarter. Twenty two percent of new rooms were located outside the US. Even after these openings, our development pipeline remained strong in about fifty five thousand rooms and we continue to expect to add twenty five thousand to thirty thousand gross rooms to our system both this year and next. Capital, remains a challenge for hotel developers, especially for new hotel development in the US, although conditions are improving slowly.

Today, senior debt for new property construction is available for only about fifty percentage of value and typically only for a few years. Many of our franchisees are hoping business conditions will improve. Although many had delayed construction starts, they are never the less keeping the projects alive for now. While new

wait for better times, conversions are more attractive, especially with our strong relative performance, and we are seeing significantly more conversion opportunities.

Our timeshare business also been impacted from the economy. Contract sales from the company's timeshare business increased eleven percent during the quarter, but operating profit declined twenty eight percent. Higher sales and marketing expenses impacted profits significantly as it took more customer traffic to land a sale. Timeshare note sale gains were flat year over year at approximately thirteen and a half million dollars. Contract sales were especially strong in our bachelor's Golf with Carlton Club in

as well as new resorts in Lake Taho and Hawaii, but similar to hotels, our Orlando properties continue to lag. Marriott distribution services reported six million dollar loss in the first quarter.

were down eight percent. The business suffered from a soft economy and changes in customer mix, including the substantially reduced level of Studio business. We further reduced administrative costs during the quarter. We expect to complete our strategic review of this business sometime in the next quarter or two.

Senior living services posted a nine percent increase in first quarter revenues. The growth in new supply continues to abate.

Profits increase substantially over 2001 first quarter levels, reflecting a two million dollar, one-time payment related to the sale of thirty-one full service retirement communities by Crestline Capital.

Property level profits were curtailed by the surge in casualty insurance expense. Our owners and we expect to see casualty insurance roughly double in the full year 2002 from 2001 levels. Corporate expenses for Marriott declined three percent during the quarter, largely due to cost containment plans implemented in 2001. Excluding the impact of a five million dollar reserve of the pending sale of a hotel under development, corporate expenses were down twenty percent. Interest expense declined during the quarter due to lower interest rates and lower average borrowings. We completed the sale of four hotels that were announced in 2001. Asset sales proceeds were approximately one hundred million dollars. Interest income increased nineteen percent year over year due to higher cash balances and higher average notes receivables outstanding.

Our synthetic fuel segment started operations in first quarter, producing two hundred and sixteen tons of treated fuel.

All four plans were up and running ahead of schedule. Our synthetic fuel operating loss totaled five point nine million during the quarter. The impact on taxes was seven point six million including deduction for operating losses and section twenty-nine tax credits for a net total of nearly one-cent incremental EPS. We expect synthetic fuel to add approximately twelve to fourteen cents in EPS in 2002. Excluding the impact of synthetic fuel during the quarter, the tax rate would have been thirty five percent. Our company's EBITDA excluding the impact of synthetic fuel was one hundred and eighty two million dollars during 1Q compared to two hundred and fifty million in the 2001 first quarter.

Our long-term debt net of cash reserves was two point two billion dollars at quarter-end, a slight decline from last quarter's two point three billion dollars. We did not repurchase repurchase any shares in the quarter and still have remaining thirteen point five million in share repurchase authorization from the board of directors. Our approximately four hundred million dollars in convertible debts may be put us on May eighth. If put, we will pay the purchase price in cash drawing on commercial paper, which is supported by committed and undrawn credit lines.

Incidentally, the six point four million first quarter equivalent shares from

was not included in the average diluted share count in the first quarter because, to do so would have been antidilutive. For your

, please feel free to call Laura or Lini, and they will out.

We talked in considerable detail at the end of the last quarter about our balance sheet and contingent liabilities. The numbers have not changed materially in the last three months. Our sliver hotel equity investments totaled approximately four hundred and ninety five million compared to two hundred and eighty five million at year-end 2001. Although that sound like a significant change, during the quarter, we contributed our two hundred million dollar investment in Ramada International's licensing fees to a joint venture with

. So really the increase is primarily a reclassification of an asset on the balance sheet rather than a new investment.

Our loan portfolio was unchanged from year-end at one point one five billion. Our outstanding guarantees were also flat with year-end 2001 levels. At quarter-end, loan commitments declined to six hundred and nineteen million dollars compared to six hundred and sixty nine million dollars at year-end 2001. We expect to fund approximately one hundred and seventy one million dollars of these loans in 2002 and only one hundred and forty seven million after 2002. These loan commitment and guarantee balances do not include commitment that are not yet effective. For example, in some instances where property is not open yet. Overtime, new commitments will come into place and existing ones will burn off. In the near term, expect moderate increases in the loan commitments and guarantee balances as properties and development open. Changes in accounting standards for goodwill amortization increased the earnings in first quarter by three cents per share. Lodging profits rose six million dollars from lower amortization and senior living services benefited by one million dollars.

Our first quarter base fees and franchise fee revenues were down slightly with REVPAR declines largely offsetting the benefits of higher room distribution. Incentive fees, the more volatile part of our revenues, declines forty five percent year over year, and improvement over the sixty five percent decline reported in forth quarter.

Now, turning to our outlook. We believe the estimated REVPAR trends we presented in our last conference call in February remains in the

. House profit margins on the other hand, have been better than expectations. With many hotels out of the money for the time being, where incentive fees are concerned, our owners are likely to capture much of the offside as profitability initially improves. The percentage of managed hotels earning incentive fees in first quarter declined from sixty-three percentage in 2001 to thirty two percentage in 2002. These factors cause us to estimate lodging, including

, and about seven hundred fifty to seven hundred sixty million dollars for the full year. As we mentioned, senior living services will be impacted by a higher casualty insurance expense in 2002. As a result, the estimate profits are still likely to be flat for the year at about fifteen to twenty million dollars in 2002. MDS is currently losing about one to one point five million dollars per period. So, you can estimate about a twenty million dollar loss for that segment. Our capital spending is expected to be lower than in 2001. We continue to estimate that our investment spending before dispositions will total about eight hundred fifty million dollars, including three hundred million dollars for new unit CAPEX, fifty million dollars for maintenance CAPEX, three hundred million dollars for loans and equity investments and two hundred million dollars for timeshare developments.

Based upon modest asset sales assumptions, we continue to expect cash flow after all investing activities in taxes to be mildly positive in 2002. As a result of continued low rates and slower investment spending, we expect interest expense, net of interest income, to remain flat to 2001 levels at approximately fifteen million dollars. Corporate expenses will lower in first quarter and we would guide you to expect them to remain flat with 2001 levels for about a hundred and twenty million dollars.

Our tax rate in 2002 is likely to be lower. In fact we projected a seventeen to twenty percent book tax rate. Our synthetic fuel investment operating loses are expected to total approximately eighty million dollars in 2002. Tax benefits are expected to approximate one hundred and twelve million and contribute roughly twelve to fourteen cents per shared EPS. Over all the more synthetic fuel produced, the greater the book losses, the greater the tax savings and better the EPS impact.

Summing up, we expect our 2002 EPS could range from a dollar sixty-five to a dollar seventy per share even after losing roughly a nickel per share on our distribution business. This is roughly ten cents higher than last forecast. While our performance from quarter-to-quarter will be highly dependent on the economy, we would guide you to expect earnings in second and third quarters, some place between forty-one and forty three cents and in our forth quarter, a fifty one to fifty three cents. As I mentioned earlier, short booking windows have made it more difficult to be confident about our forecast for the latter part of the year. For 2003, we expect REVPAR growth to resume, assuming the economy begins to grow modestly.

If REVPAR increases between five and ten percent in 2003, our new units begin to mature, margins improve, and the synthetic fuel program kicks in, EPS should be two dollars and five cents to two dollars and fifteen cents.

This is obviously still an early forecast, and there is not much visibility in the market. Our expectation is that lodging operating profit should grow in the twenty percent range from 2002 to 2003 and perhaps for a few years there after.

Marriott remains an industry leader and the industry is clearly getting better. Supply trends are favorable, demand will return with the economy and our cost structure is in great shape. Forecast the future has never been more difficult, but we remain very bullish about the long-term and we would be happy to take your questions now. Chester ....

Today's question and answer session will be conducted electronically. If you like to ask a question for today's conference call, you may do so by pressing the star key followed by the digit 1, and if find that your question has already been asked, you may press the

key to remove yourself from queue. Once again, that's star 1 to ask a question.

We will take our first question from Steven Kent from Goldman, Sachs & Co.

Hi, good morning.

Good morning, Steve.

Hey Arne, I guess I still do not understand some of the trends you are seeing out there and why you are, why you are somewhat bullish, er, barrish, for this for this 2Q, the biggest one being that, if group business is so strong and that tends, that is often business, through business with eh, and its' corporate travel coming in, why are not we seeing that on the transient side?

I don't know that we have a wonderful answer to that. I think part of it may be association business and other group business, which our company's has been nearly obligatory and they may have cancelled some of that business in the forth quarter, for example, given the tremendous uncertainties of time. But they believe that conditions are improving enough or are likely to improve enough. So they still want to have that meeting, which is a very important to their annual strategy or maybe their only annual event, for example, and so those meanings are coming back better, than the day to day business transient travel, which is still being driven by the fact that corporate profits have not yet shown the increase year-over-year.

Okay, let me just on a follow up. You said that you want to maintain your pricing flexibility in 2003 and 2004 in particular on your group side. What kind of

declines are you

people, you know down ten percent, down five percent from 2001 or sort of, what's the range there?

You know, I do not have the rates we are talking maybe we can find them up. Our 2003 and 2004 bookings obviously, the further along you get, the harder it is to get much sense from those. We can tell you that our 2003 bookings at this stage are ahead of where our 2002 bookings were at this time last year, by sort of mid-single digits. That's not a rate answer though Steve, that's a total volume answer.

Steve in part the rate issue, in some contracts we are trying to link future group meeting rates to whatever the transient rates are at the time. So, in terms of booking rooms for 2004 and 2005, we are trying not to reflect the rates for those years based on the current kind of rate environment. On your group question, we are also seeing a lot of Government business, that is, group business and the groups tend to be much smaller than the typical business transient groups. In addition, the group attendance still off from last year, the good news is that the attendance is, you know we are kind of accounting for the fact that we anticipate attendance to be lower when we are booking the rooms. So, we have a lot more flexibility than we had in the forth quarter when the no-shows were all a big surprise to everyone.

Okay. Thanks very much.

You are welcome.

Our next question comes from Perri Cardine - J P Morgan

Eh, good morning.

Hai Perri.

A couple of quick questions. First on the unit expansion, after we backed out the conversions and the international development, is your domestic unit growth likely to be in the neighborhood of fifteen to twenty thousand new units annually?

Eh, let us see here. I would say roughly a quarter of the twenty five to thirty thousand rooms are going to be outside the US. So, the remainder ought to be domestic.

Okay, and then we back out the conversions from there?

Eh well, it depends. If you want new hotels openings as opposed to new units in the system, you could back out the conversions as well.

Second, this is related to the note sales. If we are to believe that interest rates are likely to go up in the second half of the this year, do you think your note sales are likely to slow down in the second half of 2002 and then into 2003? And what is likely to happen to that profit margin?

Eh, we would not expect it to be meaningfully different this year than it was last year for the full year and have those spreads hopefully maintain themselves reasonably well as we go forward. That does not mean that we have got to forecast the

for next year, for note sale profits. We do not. I suspect that we have gotten a bit of a disproportionate benefit in this dramatically low interest rate environment, which will not be repeated, at exactly at these levels, you know, two or three years out.

Okay. Very good. Thank you.

Our next question comes from Keith Mills with UBS Warburg

Good morning.

Hi, Keith.

Hi. Arne. Two questions for you.

The first is, I was hoping you could just review for us, where are you as related to reducing cost at:

1) The managed properties and

2) At the corporate level, and how far along are you and what should we expect maybe as you move to the end of the year?

I think most of our cost savings initiatives have been implemented. So, I think the bigger risk is that we see cost creeping

further cost decline. Having said that, our main focus is how to avoid cost creeping and make sure that the cost saving measures that we have implemented remain in place and are sticky, if you will. And we think most of that will do pretty well. As I have said in the prepared remarks, our wages per occupied room were down in the mid-single digit year-over-year, not withstanding the fact that hourly wages themselves are up three to five percentage, when stated in hourly terms, and that is driven by productivity, in other words, the hours worked per occupied room down in the high single-digits year-over-year. Significant savings in management wages both in the property level and all the way up through the corporate ranks. I think those are the most significant things. Now, we have also got a lot of other things underway in terms of automation of routinized transactions put in payables and receivables work, which is done in the hotels including continued automation and focus on

savings and all those things out

as well.

And in what percentage of the cost production that Marriott is going to place there with past 12 months? Do you think that will be permanent going forward as corporate transience at some point will start to come back?

Permanent for long time. I guess we would say the substantial majority, well over half, seventy to eighty percent, that is kind of instinctive answer Keith, we will be quite sticky and we will last for, you know, well in to our recovery.

Okay. And then this

, I was hoping you could provide for us what the capitalized interest expense was for the first quarter? What is your expectation as for second quarter and the second half of the year?

Capitalized interest was down in the quarter. During the quarter, it was twelve million dollars versus sixteen million dollars in the first quarter last year. I do not have a forecast for you, but I think you can size it against those capital spending number that we gave.

Okay. Thank you very much.

You have got it.

Our next question comes from Joyce Minor with Lehman Brothers

Hi, Arne. I just wanted to see if we can get these EPS numbers straight, but it looks like you had couple of charges in

and the senior living that offset each other but then you also had that, I guess, non-recurring five million reserve in your corporate expense line. So would we have been at thirty-three cents without that?

A. Yes.

Okay, and then in terms I guess, that puts us at, you did a five cents surprise, that

six cents if you did that, you are up in guidance by ten cents. In terms of the remaining piece of the upside there, it sounds like you are only taking your synthetic field assumptions up by two pennies for the year, a penny came in this first quarter. It is only a penny more. So, I guess I am wondering if you could you characterize the balance of that upside? You talked about it being both from the lodging margins, corporate expense, and interest expense. Would it have been similar to kind of where we saw the surprise in the first quarter?

Yes. I think so. And you will notice that when you look at quarterly guidance that we are more bullish on the second quarter, relative to what our estimates were a quarter ago at this stage than third and forth quarter for the reasons we talked about.

Thank you.

Thank you.

Once again for question, it is star one.

Our next question comes from Brian Egger with Credit Suisse First Boston.

Our next question comes from Michael Rietbrock with Salomon Smith Barney.

Hai Guys,

Just few questions, first follow up to Joyce's question. You have not changed your quarterly REVPAR guidance going forward, right?

Correct.

And then the second question, could you just spend a couple of minutes discussing the changes in the relationships with Host particularly as it relates to incentive

? Could that be financially significant overtime? What have you guys got in return for those changes?

To start with the bottom line, we don't think any of the changes that we are discussing with Host will be financially significant to us, near term or long term. We disclosed a few weeks ago that the two companies were negotiating certain contractual modifications to the relationships. And we also disclosed, I think each company disclosed in their proxies that the interlocking directors on the respective boards of director would be undone. There are a bunch of different reasons that are driving these changes. First it has been almost 10 years since the two companies separated. And it is certainly clear to us and I suspect that it is clear to everybody else that the companies are in fact independent and to the extent we had historical measures in place, that tied the companies together in a way that suggest that they were independent those have become outdated and outmoded. In a number of instances, Host had management contracts that were really very old fashioned. They gave Host very few rights as a hotel owner and in fact they gave them only fewer rights than what most of owners have in our system most of the agreements provide for today. But they gave Host fewer rights than in fact we were acknowledging they had in the way we conducted business on a day-to-day basis. I think this is broadly so, both has Marriott. Marriott International had changes that they wanted to make. Each wanted to make some revisions to our agreements to account for the fact that business has been done to some extent differently today than it was done a decade ago when these documents were put in place. So we swapped some things. We negotiated them to sure in our discussions. The incentive fee change is really a part of that. But there are also changes that are quite a bit to our benefit. We think ultimately that taking together those changes were a fair swap. They don't really amount to

financially for either one of the companies. And we are quite optimistic and hopeful that these changes not only will the relationship with Host continue to be great, but they will find opportunities that we can pursue together to our mutual benefit. And in nowhere these changes about the two companies drifting further apart in terms of their desire to get struck with each other. At least not from Marriott International perspective.

Have you learned anything more about the new World Fast

as the week progressed?

Obviously if some of you have seen maybe all of you have seen that some of the newspapers have reported that we were sued by Henry

in Delver on Monday or Tuesday. It is tempting to us to get into some discussion about the details of our dispute with them, but we will really not go in to. There is no real advantage of doing that and obviously instead we think the better thing to do is to submit the issues to the right decision makers and get them resolved as quickly as possible. We can't say that roughly a week before we were sued. We started in arbitration with Mr.

organization about some issues that are unique contractual issues with

. We have been discussing with them over the last few months. We think our contracts provide the resolution in arbitration. Their response apparently was they are to file a federal case, which seems calculated more to attract journalist attention than it does to resolve the issues. Over time, it is clear that these issues will get resolved. Ultimately, when they are resolved, I should say we think the results are in our favor. We are quite confident that the positions we have taken on the issues we talked about with them were exactly right.

Our next question comes from David Anders with Merrill Lynch & Co.

Hai David,

On the housekeeping, could you repeat you went to a kind of

percent increase in some of the expense line percentage items for managed hotels, like insurance and what not?

Yes. Absolutely. We had hours per occupied room declined approximately 9% during the quarter. When you view that in dollar terms, the decline was about 5% or 6%. Property level management wages overall declined at 11%. Utility cost declined 18%. Casualty insurance cost up 29%.

Our next questions comes from

- Morgan Stanley)

I was wondering if you guys could you talk a little bit more about your rate decrease and this may be on there was a little bit of feedback on what is causing it? Is it a shift in the types of people you are seeing at the properties, or are they group shifting your properties like maybe more airline business, or is that really those rates are really down that much? So, if I as a consumer were to call a hotel, could I really get an 8% lower rate than would have got in March?

I was wondering if you guys could you talk a little bit more about your rate decrease and this may be on there was a little bit of feedback on what is causing it? Is it a shift in the types of people you are seeing at the properties, or are they group shifting your properties like maybe more airline business, or is that really those rates are really down that much? So, if I as a consumer were to call a hotel, could I really get an 8% lower rate than would have got in March?

I am not sure, you get necessarily every point of that reduction, but both things are really at work as is competition among the group segment. Let us just breakdown for a second, you have right to point out that mix that we have talked about on the call such as AAA, airline crews, government travelers by opening some more business to those channels even without moving any rates. We end up with some impact decline in our average rate. So that is a part of driver in this. Also when you run in a shop, which was a little last fall, their occupancies have come back really quite well. We do not have enough demand to be aggressive on rate. There is some impact that comes even on the stated rates for the same kind of business. And then thirdly, I think it is important to keep in mind that on the group side, this is business that again is being booked often, quite close to when it shows up to hotel. We see in many circumstances that the market is out there; number of our competitors are out there, quoting wildly different rates from week to week. So there is still a fair amount of volatility in that rate competition and that does have some impact on those group rates. We do our best with a whole lot of data, which is coming out of system including the data that looks at how many customers decline taking a room at one of our hotels and we looked very much at our yielded rate as opposed to our stated rate in order to make sure that we are price fairly in the market. But ultimately, we can do that only with respect to our hotels and if other hotels in given market are moving rate up or down dramatically, we can operate the way that is immune to them.

So would you say that the rates are down pretty much across all the business segment including?

I would say that they are not positive, I think in any category with the exception of some hotels taken by the MHRS brand contract. Some contract business is probably out. But business transient travel is the rate that is weakest as opposed to the mix that we talked about before. The group business is relatively much stronger even on the rate side.

Our next question comes from Jay Cogan with Banc of America Securities.

Good morning.

Couple of questions for you out of them you already answered. You mentioned some REVPAR index levels for some of the major brands, and I think you said they were through February. I guess that you (indiscernible) to-date to February, just want to clarify that and could you tell us how much they are up relative to their prior year and then on second quarter guidance, just to make sure on clear on this, you answered a couple of questions, but considering that, that seems to be the quarter you have the most hesitation with REVPAR standpoints ever since it was talked about. Why was that again in the quarter that you raised your guidance the most? Is it primarily on the cost side relative to the future comps or is there something there maybe you are missing there?

I think the reason for the upside in the second quarter as somebody else's question suggested and that they were right, is going to track roughly the kind of things that drove our upside here in 1Q02. So some of that will be from operating profit that is margin-driven and not REVPAR-driven. To some extent that may be REVPAR-driven, because of the fact that we like to results of MHRS which are more valuable for us. So though our averages have not changed very much, MHRS has done significantly better and that is more valuable for us even though the average does not change. So a part of it is operating profit. Within the remainder of it will be, you know may be if any

fuels had probably between them a couple of cents for interest and corporate expenses.

We are talking about the limited service brands, a flattish kind of REVPAR premium YoverY and for the MHRS brand is up a couple of points, less than five.

Okay.

Maybe I can one follow up question on the timeshare in the fourth quarter of 2000 you guys deferred the asset back deal, and I am not sure what was done in the first quarter of 2001 and in last quarter you deferred an asset back deal and I am just wondering, again just a word clear on them on the operating profit flat YonY, was there

deals done in each of the first quarters over the past couple of years?

Yes. Basically we have done a timeshare note sale deal in every quarter for the last three or four years with the exception of last year's fourth quarter. In the fourth quarter of the year before we did a small note sale, but it was relatively insignificant. So if you look at the gains, which are reported in our financial statement, it was roughly $3m in that quarter versus as we reported $13m in this quarter's deal.

Were there any gains on the sale of the hotels of $100m with the assets that you saw in the first quarter, is that in the income statement?

Gains recognized on asset sales in the first quarter were almost not measurable.

Our next question comes from Mike Happel with Morgan Stanley Dean Witter.

Hai

Hai Mike

You have been talked about the good results in terms of house profit margins, which are very important to Marriott and to the owners of the hotels. I am looking at lodging operating profits off of your income statement and it looks to me that lodging operating profits in the quarter were about 28% compared to 37% in 1Q01, and by the way, I am not counting the other revenues to reimbursed expenses. So, that is about a 900 basis point decrease in your lodging operating profits. Can you comment on what you expected and what you expect your lodging operating profits to be for your margins to be for the year?

The biggest single driver of that decline in margins is the impact of the general management fees and as we mentioned our general management fees were down 45% over last years first quarter. That is a bigger decline than the decline that is reflected in the house profit margin kinds of figures that we talked about including the 1.1 time flow through. The second significant driver in margins is MVCI, where you have got sales growth but significant profit decline. I think the next thing would be the contribution we picked up from

venture, which has been significantly impacted.

Can you give us your estimate on what the lodging operating profit margins will be for the year?

I don't have that. We did give the operating profit figure for the full-year and I guess we will need not to give that margin figure with these

some question about the sales figure. I think probably what we will see is that margin will improve as the year goes on. But, I don't have right in front of us. Sorry about that.

That is okay.

One last follow if I can on this, I mean, I think the kind of conventional wisdom out there is that there is more operating leverage in a recovery scenario for an owner as compared to an operator like Marriott. But if we just use a sort of margins as one measure that, you have got dramatic bounce-back possibilities in terms of your margins?

Yes, I think as incentive fees come back, that is what's going to drive the 20% plus operating profit growth till 2003 and for the first three years there after and that is very similar to the trend that we saw in 1993, 1994, and 1995. We are coming out of that weakness. Not only did we have hotels that did not

incentive fees enter into incentive fee stage. But we had deferred fees, which we really were not able to book during the weaker times, which will come in back. I think all of those things are going to drive us as well. Clearly, to be fair on this, I think our model is more stable, which means it declines less in the weak environment and if you look at relatively short steep upward ramp, it is going to increase less. Then the folks will get benefits from the most leverage. For us, I think you need to look when you are comparing the strengths and weaknesses of the respective models at not just other ramps coming back up but what happened on the way down and how deep etc.

Okay. Thank you.

Our next question comes from Bill Crow with Raymond James.

Following up on Mike's question there could you talk a little bit about sensitivity? If PWC proves to be correct and REVPAR is actually up a couple of percent this year. What does that do to your bottom line here? Where do incentive management fees go for example, you indicated how few properties with the

roughly are paying the incentive management area? What happens to the number?

I think, obviously, incentive fee performance depends a lot on hotels. Lets back up and say with the most basic question, what happens if PWC is right and REVPAR comes up 2-3% as opposed to our forecast with minus 2-3%? As we said in prepared remarks, I don't think the delta is really quite as large as it seems, because I think PWC is talking about REVPAR for the industry as a whole, which includes lot of hotels in segments lower than the ones that we are participating, which at least thus far have been less hard hit. But there are still clearly 200 or 300 basis points of difference between their forecast and ours. As we said before on a pre-tax basis, for the full year a point of REVPAR to us is in the high-single digits in terms of number of millions of dollars. And so depending when that hits the exactly will determine how much flow through we get from that.

That accelerate is REVPAR turns positive. Is it possible you get back to kind of the mid-teens area where you were?

Eventually yes. Absolutely, if not higher, I would guess that ultimately we get higher, because our base is bigger and because we will have to catch up. As well as business has come back and as positive as we feel, optimistic as we feel, you got to remember we are running along at down double-digit REVPAR. So, you know, we got some ways to come back before we are going to get that kind of juice, I think from the point of REVPAR.

The second question Arne, is it your guidance for the second quarter obviously increased in good part because of the more optimistic approach toward margins. Is it fair to say its third and fourth quarter, your assumptions had already been more optimistic or are it just outside there?

I think in third and fourth quarter, there was already bit more of a ramp built into those numbers. But I think, you know, with the question what we talked about before, we opened in the line was we are more optimistic and more pessimistic going forward and in truth that

depends on the day. We think we are on an upward ramp and that upward ramp gives us opportunity, including opportunities over the forecast that we have provided today. But it depends on the day, because depending on the day you read the journal and the day you read other company's earnings releases, it looks the recovery is underway or may be it is really not, and we really have got to look and watch very carefully what happens with corporate profits. Because that is what ultimately going drive the upside for us.

Thank you.

It is about a couple of minutes to, so we will take just one more question or may be two if we got time because we are going to close.

We will next go to Taj

My questions have been answered.

Mr. Arne Sorenson, that was our final question, now lets turn it back over to you for any closing or further remarks.

Well. We thank you all very much for your time. We look forward to watching with you as the year develops and we should see the shape of the US economic and global economic recovery as with all of you we hope that comes sooner and faster and more dramatically than not but either way we are certain, we are on the upward path and just thrilled to be on the slope as opposed to what we were last year. Thank you very much for you attention.

This now concludes our conference call. You may disconnect at this time.