萬豪國際 (MAR) 2002 Q3 法說會逐字稿

Good day and welcome to this Marriott International third quarter 2002 earnings conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Executive Vice President and Chief Financial Officer, Arne Sorenson.

Please go ahead sir.

Thank you, David (ph).

Good morning everyone.

Welcome to our third-quarter 2002 earnings conference call.

Joining me today used Laura Paugh, Senior Vice President, Investor Relations and Linda Bartlett (ph), Senior Vice President, Finance and Corporate Controller.

Before I get into the discussion of our results, let me first remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws.

These statements are subject to numerous risks and uncertainties, as described in our SEC filings, which could cause future results to defer materially from those expressed in or implied by our comments.

Our eagerness to host this conference call has increased with the increase in the chatter in the investment community about Marriott over the past few weeks.

In fact, if it wasn't already obvious enough, it became clear to me on Monday, when half a dozen friends called and offered me condolences, that it was imperative that we get more information into the marketplace, so that you can better understand our financial performance and prospects.

In the limited time available today, we're going to try to cover a lot of ground.

First, we will summarize the results of our third-quarter, including the description of key business trends.

Second, we will give you an update on the status of the litigation pending against us, with details about our procurement practices, which appear to be of particular interest.

Third, we will comment briefly on the quality of our cash flow and earnings.

And, finally, we will update our guidance for the fourth-quarter in 2003.

This morning, Marriott reported diluted earnings per share of 41 cents for the third-quarter, a five percent increase over 2001 levels.

Our earnings included three cents resulting from the just completed sale of our moderate priced assisted living business and a loss of eight cents from activities surrounding the sale of and exit from our distribution business.

Excluding these factors, our earnings per share would have been 46 cents per share.

Nine cents of these earnings was contributed buy our synthetic fuel investment.

Our third quarter ended on Sept 6, in 2002, and September 7 in 2001.

During the quarter, profits from our lodging segments totaled $160 million, an 8 percent decline from the prior year, consistent with our previous guidance.

Across all our brands, U.S comparable RevPAR declined 6.8 percent.

Our brands continue to extend their lead in customer and owner preference and have increased market share this year.

Over the past 12 months we added a net total of approximately 28,000 hotel rooms, a 7 percent unit growth rate.

Lodging revenues, before cost reimbursements, totaled $587 million during the quarter, a 6 percent decline from 2001.

Our revenues from base fees totaled $82 million, a decline of 4 percent.

Franchise fees totaled $55 million, flat with the prior year.

And incentive management fees were $25 million, a decline of 36 percent.

A decline in RevPAR reflected continued soft corporate transient business, offset by stronger government business and slightly improving group business.

For the Marriott Hotel's Resorts and Suites brand, the room rate for our premium corporate and special corporate business declined 12 percent during the third quarter.

Some Fortune 500 companies continue to maintain travel restrictions.

International tourism to the U.S remains low and airline traffic is still down at major airports.

All in all, there are fewer business transient guests, and those who arrive tend to be price sensitive.

We are seeing steady demand from professional services and pharmaceutical companies, but demand from most other corporate segments remain soft.

Marriott Hotel's Resorts and Suites group business is holding up better, as RevPAR for this segment was down only three percent during the quarter.

We continue to see a short booking cycle, but turnout at medians has improved considerably.

We are increasing our resources devoted to group sales both at property and above the property level.

We've placed particular emphasis on booking special segment customers, including government travelers, fraternal and religious organizations, Triple A travelers, seniors and the entertainment industry.

We put additional training programs in place to assist our properties in going after these customers.

Competition, particularly for short-term group business is intense.

With powerful brands, though, our properties are significantly outperforming the competition.

Looking across the regions, the Northeast was ours softest market during the quarter, with RevPAR down nearly 10 percent compared to last year.

Pricing is highly competitive in the Manhattan market.

Despite the decline in overall rates, the RevPAR premium at the New York Marquee continues to expand.

Our Boston properties suffer from both soft rates and low occupancies, particularly technology driven suburban properties.

The mid-Atlantic region has been the strongest market all year, with RevPAR down only five percent during the third quarter.

Baltimore & Washington were the best markets within the region, with strong government, leisure and special groups.

In other markets, Orlando occupancies were impacted by the lack of international visitors and by new supply.

San Francisco continues to suffer along with the technology industry, and Hawaii is showing improvement in occupancies from westbound travel.

Despite the slower than anticipated recovery for the industry, our RevPAR premium index in the U.S continues to increase.

The RevPAR premium index reflects revenues per room in a given market, compared to the performance of competing hotels.

An index 100 is is considered the market average.

For the August year-to-date period Smith (ph) Travel measured the RevPAR premium for Residents Inn (ph) at 132 percent, Courtyard (ph) at 128, Marriott Hotel's Resorts and Suites at 117 and Renaissance at 105.

On average, across all our brands, Marriott International's U.S RevPAR premium increased 2 points year to date through August.

Outside the U.S, company operated comparable hotel RevPAR increased 2.5%, using actual exchange rates, and declined .2% in constant U.S dollar terms.

House profit margins increased nearly two percentage points.

Lodging demand in continental Europe remain soft, particularly Germany, Poland, France and the Netherlands.

Hotels in these markets are filling with regional guests rather than international travelers.

The middle east showed improving RevPAR, despite less European and American travel than normal.

The growth in regional business more than made up for the international travel shortfall.

The Caribbean showed improved RevPAR but still suffers from inadequate airlift.

Latin America continues to experience difficult economic conditions.

Asia continues to improve, particularly Korea.

Other strengthening markets include Russia, Lisbon and Copenhagen.

While house profit margins outside the U.S were up slightly during the quarter, in the U.S, house profit margins declined approximately three percentage points, largely due to lower average room rates.

Around the world, margins are now facing difficult comparisons.

Our hotels are operating extremely efficiently and additional cost cutting is challenging as long as occupancies remain at current levels.

Labor productivity has been excellent.

Hours per occupied room have improved all year, yet hourly wage increases and higher occupancy have increased labor expense.

The cost of casualty insurance is up over 40 percent over the last year's quarter.

Insurance cost is also higher for terrorism insurance, for properties they wish to participate.

We have lowered the cost by spreading the risk among a large portfolio of hotels.

To sum up, we made significant improvements in cost in the last 12 months and while we expect to hang on much of the improvement, house profit margins are likely to face continued pressure.

As a result, our efforts today are focused on maintaining our cost savings and driving the top line.

Marriott's sensitivity to the revenue line has lessened considerably over the past two years.

While two years ago a one point drop in RevPAR would have resulted in an estimated $16 million decline in annual EBIT.

Today, a one-point drop in RevPAR yields only an estimated 7% - excuse me, $7 million decline in EBIT on an annual basis.

Similarly, on the house profit side, a one-point drop in-house profit margin formerly reduced Marriott's incentive management fees by 20 to $25 million.

Today, a one point decline in house profit margins cuts our incentive fees by 9 to $10 million, again, on an annual basis.

Clearly, with only one-third of our managed hotels earning incentive fees, the downside risk is quite limited, while the upside opportunity is significant.

Turning to development, we added about 7100 rooms to our portfolio during the quarter, with conversion accounting for about 20 percent of the rooms added.

Conversion requests are increasing.

As we've stated before, our brands and RevPAR premiums become even more attractive to hotel owners in tough times.

And we are beginning to see this in our deal activity.

For 2002, we expect the number of applications and approvals for hotel conversions to our brands to be about double the levels of 2001.

In the lodging industry, hotel developers are finding that debt financing typically only covers about 55 percent of the project costs.

Therefore, even though debt is cheap, be significant equity requirement presents a very high hurdle for many deals.

In addition, soft lodging demand has encouraged some owners and franchisees to hold back a bit while they wait for a better operating environment to start new projects.

PWC's (ph) latest supply forecast indicates US supply growth of 1.8 percent in 2002 and 1 percent in 2003.

Based on what we're seeing in the markets, those numbers make sense to us.

Although our conversion numbers have increased, we have been a bit surprised at the dearth of hotel assets changing hands in recent months.

There is still considerable spread between bid and ask prices, but we expect more deals will get done in 2003.

This will further encourage brand conversions and renovations, as new owners seek to maximize their return on investment.

Compared to a year ago, construction costs are somewhat lower for owners and franchisees, and while we have recently described our capital contributions as slivers, today we are putting even less capital into new deals.

Interestingly, we haven't seen much of a decline in our pipeline.

At quarter end, our pipeline stood at more than 50,000 new rooms.

One quarter of these rooms are outside the US, 43 percent of the rooms are full-service properties and less than five percent are company developed.

We expect our new unit pipeline to decline somewhat during the next several quarters, as newly constructed hotels are opened out of our pipeline faster than new deals are added to the pipeline.

While new deals are more difficult to get done, we are finding that they are larger on average and generate more value to us.

In addition, our market share of new development and conversions is very high.

While Lodging Econometrics (ph) hasn't yet updated their market share data from the third quarter, in the second quarter, our share of hotels in the pipeline in the U.S was 19 percent, and fully 41 percent of the upper upscale segment.

In a large part, this is because our systems deliver better RevPAR in a difficult environment.

So whether a new build or conversion, our brands are worth more.

Globally, we expect to open 25,000 to 30,000 rooms in each of 2002, 2003 and 2004.

In our time-share business, profits increased five percent on a 4 percent increase in division revenues.

Orlando and Aspen remain difficult markets, but strong sales in Hawaii and at Bachelor Gulchinbeal (ph) added to our results during the quarter.

We sold $78 million in time-share paper during the quarter for a gain of $18 million, compared to $70 million in paper for a $13 million gain in the 2001 third quarter.

The higher gain was largely due to a more favorable interest rate environment.

The average interest rate on time-share paper is currently about 13 percent.

Financing is an integral part of our time-share business and we do not recommended valuing these profits any differently from development profits.

More on that in a minute.

The profit margin on time-share development declined year over year, largely due to higher sales and marketing expenses, as well as higher land cost associated with sequel projects.

Marketing and sales costs were higher, due to lower than normal closing efficiency.

For the third quarter, 15.3 percent of potential customers, who actually tour our MDCI (ph) resort, bought a time-share interval, compared to 16.1 percent in the last quarter.

In healthier economic environments, our closing efficiency is closer to 20 percent.

Turning to senior living services, third-quarter profits for our senior living services business include an $11 million adjustment to the fair value of Village Oaks, our moderate priced assisted living business.

Village Oaks was sold earlier this week for total proceeds of $62 million.

As you may recall, in the fourth quarter of 2001, we made the decision to exit the Village Oaks business.

We estimated the net realizable value of the business at that time and recorded a pre-tax charge of $60 million.

Although the sale of Village Oaks closed after our September 6 quarter end, Gap (ph) required us to recognize a gain in the third quarter when it became clear that our reserve was too high.

Occupancy rates in our Brighton Gardens community has improved, reaching 81 percent during the third quarter.

Additional promotions during quarter drove occupancy higher, as newer communities continued to fill.

The business reduced overhead by cutting the number of regional offices, but casualty and health insurance premiums increased significantly.

We continue to explore the potential for separating our senior living services business from the rest of our company.

We are working on a number of alternatives and expect to have more details for you by the year.

Given the size of senior living, we do not anticipate that any of the alternatives would have a significant impact on Marriott's ongoing cash flow or balance sheet.

Last quarter, we announced the decision to exit the distribution business.

We recently signed a binding definitive agreement for the transfer of two of our 13 distribution centers to Performance Food Group.

Additional centers are likely to be transferred in the fourth quarter, and we anticipate being out of the business by year-end.

The third-quarter loss from MDS (ph) included a $4 million loss from operations, similar to the loss in the third quarter, and a $30 million charge for the anticipated loss on the two centers, as well as other costs associated with the exit from MDS (ph) as a whole.

Additional charges are likely in the fourth quarter, although they cannot be quantified at this time.

Since the bulk of the MDS (ph) assets are receivables and inventories, we expect the exit to generate over $50 million into positive cash flow from declining working capital, despite a significant book loss.

Corporate expenses were $25 million in the third quarter and included the impact of a $3 million foreign exchange loss as well as the unfavorable comparison to a $4 million tax investment gain in the prior year.

Interest expense declined due to lower borrowings and rate, and interest income reflected a $4 million benefit when a loan we had outstanding on a hotel was repaid in full.

Long-term debt, net of cash reserves, was $1.6 billion, compare to $2.3 billion at year-end 2001.

Debt balances were impacted by our strong cash flow, significant asset sales and slowing capital spending.

We completed several asset sales totaling $233 million during the third quarter, including our interest in the 30-acre Laguna Beach Colony project for $190 million.

The sales price for this property was $55 million over our book value, 5 million of the gain was recognized in the third quarter, with the remainder to be recognized in income over ten years, as certain contingencies in the sales contract expire.

After quarter end, we completed the sale of 24 Village Oaks assisted living communities for approximately 62 million and the sale of our interest in Interval International for proceeds to Marriott of roughly $63 million.

Our Synthetic Fuel segment produced 1.8 million tons of treated fuel in the third quarter.

Our Synthetic Fuel operating loss totaled $32 million during the quarter, and the impact on taxes was $54 million, for a net contribution of nine cents per share.

Based on our current production schedule, we expect Synthetic Fuel to add approximately 27 cents in EPS in the full year 2002.

Excluding the impact of Synthetic Fuel and our Executive Preferred Comp Program during the quarter, our tax rate would have been roughly 35 percent.

We continue to carefully monitor our hotel investments and contingence liabilities.

Our Sliver Hotel (ph) equity investments declined slightly to approximately $503 million, compared to $512 million at the end of the second quarter.

Our loan portfolio was flat with quarter two levels at approximately 1.1 billion.

Our outstanding loan commitments were roughly flat verses the end of Q2.

Our outstanding guarantees were 589 million at quarter end, compared to 577 million at the end of Q2.

These loan commitments and guarantee balances do not include commitments that are not yet effective.

The status of litigations pending between us and five owners of hotels we manage, continues to command significant attention from the press and the investment community.

Although each of these lawsuits raise somewhat different issues, the primary focus is on our procurement practices, including specifically the procurement done for managed hotels by Avendra (ph), a company formed by Marriott, Hyatt, Fairmont, Six Continents, and Club Corp.

Before describing our approach to procurement and the use of rebates, which are common in many procurement areas, let me first give you the status of the lawsuits.

Our dispute with CTF and HPI, two entities controlled by Henry Chang, is proceeding towards resolution in an arbitration proceeding.

As the courts in Delaware granted our motion to stay (ph) the litigation pending the resolution of the arbitration we have started.

We expect that arbitration to be resolved some time in 2003.

The lawsuit involving the Ritz Carlton Hotel in San Juan, Puerto Rico, is pending in bankruptcy court and we are hopeful that suit will be resolved in the next few months.

The other lawsuits, one by Strategic Hotels and the other by owners of individual hotels, have just been commenced and are likely to take some time before the issues in those cases are resolved with finality.

Now let me describe for you our approach to procurement.

We have tried in every respect to make sure our procurement practices comply with the terms of our management contracts.

Since these contracts are not identical, the details of our approach vary to some extent across the portfolio.

For example, some of our management contracts require us to provide procurement services at cost.

Some call for procurement at market rates, and some specify a profit markup we are entitled and expected to keep.

Our franchise contracts generally leave procurement to the franchisee, and although many of our franchisees have independently chosen Avendra (ph) to provide their procurement services, the procurement area is generally not as significant an issue in the franchise system.

For the managed system, the majority of the procurement activity is done through Avendra (ph).

Together with the other founders, we created Avendra (ph) so that our hotels could benefit from increased buying power by combining with others in the industry, resulting in lower costs for our hotels.

The early results confirm that the decision to start Avendra (ph) made sense.

We conducted a market basket analysis in Atlanta, comparing the price of goods under Avendra (ph) negotiated contracts to prices paid for the same goods by non participating hotels.

And it showed a 14 percent average savings.

We will continue to monitor the effectiveness of Avendra (ph).

And its ability to provide meaningful savings to our hotels.

Marriott currently owns less than 50 percent of Avendra (ph).

And our balance sheet investment in Avendra (ph) is about $5 million.

In 2001, we took a loss form our ownership interest of approximately $1 million.

In 2001, our total procurement through Avendra (ph) contracts was between 700 and $800 million.

In 2002, we expect that the total of goods and services purchased through Avendra (ph) negotiated contracts will total about $1 billion, not the $10 billion figure reported in recent stories.

Avendra (ph) is compensated for providing procurement services according to the terms of our management contracts with owners.

We wrote to every owner before Avendra (ph) was launched and explained how Avendra (ph) would work under the terms of their contract.

Avendra (ph) is paid a percentage of the value of the goods and services purchased under contracts it negotiates on our behalf.

For the vast majority of our contracts Avendra (ph)'s (ph) fee is paid by retaining rebates that come in from vendors.

In 2001, Avendra (ph) booked revenue of $13.5 million from service fees and rebates on Marriott procurement including rebates from purchasing from our hotels, retirement communities and corporate headquarters.

To the extent rebate exceed the specified procurement fee, Avendra (ph) like it's predecessor Marketplace (ph) by Marriott returns rebates to Marriott.

Marriott in turn returns those rebates to the hotels.

In 2001, rebates totaling $8 million were returned to the managed hotels and did not impact Marriott's income statement.

Apart from Avendra (ph) and before it Marketplace (ph), Marriott itself managers certain procurement functions that involve critical relationships for us such as telecommunications.

These contracts permit hotels to earn various credits based on volume and other measures.

We net the cost of managing those contracts against the rebates and return the difference to the hotels.

For example, in 2001, we returned to participating hotels approximately $20 million in net telecommunications supplier credits.

In addition to procurement rebates, there are two other aspects of our supplier relationships that are of interest to owners of our managed hotels.

We receive marketing allowances from some companies that we do business with, joint marketing programs promote Marriott hotels as well as the vendors product or service.

The allowances that pay for such marketing are a common industry practice.

We are required to spend this money in accordance with our contracts with vendors.

Examples include joint advertising campaigns for Marriott hotels that promote American Express or Visa as a method of payment.

In 2001, we received and spent in accordance with vendor requirements approximately $20 million in marketing allowances.

None of these marketing allowances were income to us.

Similarly, we sometimes receive what are commonly called sponsorship funds.

At times, vendors choose to underwrite a portion of a conferences cost in order to participate at the conference.

These funds are all used to defray the costs of the events that would otherwise be paid for by participants.

In 2001, the total amount we received from sponsorship funds was under $3 million.

None of these sponsorship funds impacted our income statement and generally they served only to reduce the cost of conferences that otherwise would have been paid for by the conference participants, often conferences for owners and franchisees.

Even when you put all of these items together the $200 million figure published in a recent story based on the statements of a short seller is obviously revealed as fantasy.

Notwithstanding the allegations from some of these lawsuits, we believe we have handled all of the procurement arrangements fairly, and in a manner consistent with the contracts.

We are well advanced in the process of explaining the details of these arrangements to our other owners and franchises.

And can report that most of our owners believe these arrangements are entirely proper.

In addition to reviewing procurement in detail, we are communicating with our owners more detail about how the cost of centralized programs such as sales and marketing are collected and allocated to participating hotels.

Our owners have a right to this information.

And we are committed to providing the information they need to have.

This process is going well.

And generally our practices are understood by and acceptable to our hotel owners.

Finally, we are working with Smith Travel (ph) and other participants in the logging industry to increase the focus of industry performance on profit measures, not just RevPAR.

We are optimistic that the industry can agree on a uniform method of reporting operating profit per available room or GOP PAR.

We relish the opportunity to show that we deliver not only industry leading RevPAR by industry leading GOP PAR, a fact we think is all ready demonstrated by our continuing expanding market share.

But greater industry transparency and focus on this measure, should help clear up some of the fog.

Before proceeding to our outlook for the fourth of 2003, net fourth quarter and for 2003 I want to address two areas where we have had some discussion about the quality of our earnings, timeshare note sales and synthetic fuels.

With respect to time share note sales as I mentioned earlier, we believe this is an integral part of our timeshare business.

We have provided financing to timeshare purchasers for over a decade.

Our underwriting standards are well-developed.

Our default statistics are predictable.

And our ability to sell the notes has been well proven.

Now only have we regularly disclosed the amount of profit we earn from these financing activities, but these profits are inversely correlated to our development profits in a way that shows their predictability.

In weak economic times, like the present, our financing profits tend to rise as interest rates fall.

But our development profits tend to decline as more sales and marketing is required to maintain sales.

In stronger times, while our financing profits should fall, development profits will rise with higher closing efficiencies.

Taken together, our development profits and financing profits are both core profit making aspects of our time share business and they deserve to be valued together.

Synthetic fuels by contrast, we have repeatedly said does not produce results that should be valued like other earnings from our business.

These profits will last only through the end of 2007 and they need to be valued with that in mind.

But to say they should not be valued in the same way as other earnings is not to say they have no value.

Over the life of the program, this investment will save us hundreds of millions of dollars of cash taxes.

We made a commitment to you when we announced this transaction that we will provide full disclosure of exactly how much we make from this investment, so that you can value it independently from other aspects of our financial performance.

We will continue to do so.

And since that disclosure has been and will continue to be fulsome you will see that our earnings from this investment are not in any way calibrated to mask other aspects of our financial performance.

Now let's turn to our outlook.

We've just begun negotiations for 2003 corporate preferred rates.

These are rates that are made available to organizations responsible for considerable volume of trends and sales.

This business accounts for about 12 percent of our full service room nights or about one-third of total corporate rate of business.

Based on early indications, we expect modest declines in corporate negotiated rates in 2003.

But I should also add that negotiations are not yet completed.

In addition to the special corporate business, approximately 20 percent of our full service room nights are at full corporate rates even today.

When corporate demand returns, we are well positioned to drive rates on this large segment and maximize overall RevPAR.

Given this economic climate, we are a bit more bearish on our RevPAR outlook than last quarter.

We estimate RevPAR will increase eight to 10 percent in the fourth quarter.

We also believe house profit margins should increase one to two percent points during the fourth quarter.

Assuming a small upturn in the economy in 2003 and recognizing it is impossible to forecast the impact of a Mid East war, we anticipate RevPar in 2003 to increase zero to four percent due to higher labor costs including healthcare.

And increasing insurance premiums, house profit margins are likely to decline modestly, depending, of course, on where RevPAR ultimately comes in in this range.

We expect our Execu Stay (ph) business to continue to lose money through the rest of this year, but we expect to turn a modest profit in 2003.

MBCI expects fourth quarter profits to include a note sale gain of approximately 13 to $17 million versus no note sale gain in the 2001 fourth quarter.

However, higher product cost and higher depreciation from recently added customer service focused systems are likely to reduce profits somewhat excluding the note sale gain.

All combined, we are estimating logging including MBCI at about 200 to $210 million of profits for the fourth quarter 2002.

And 770 million to 800 million for the full year 2003.

This is a slight reduction in guidance reflecting the lower RevPAR outlook.

For 2002, we estimate senior living services is likely to earn $20 million excluding the $11 million in income related to the sale of Village Oaks (ph) and we forecast about the same for 2003.

MBS lost $4 million during the third quarter, excluding the charges related to the sale and exit.

But operating losses are likely to worsen as we wind up operations and clients move on.

We would estimate about a five to $10 million loss in the fourth quarter, excluding charges associated with exiting the business.

MDS should not be part of your models for 2003.

We expect that 2002 investment spending before dispositions and share repurchases will total about $850 million including $300 million for new unit cap ex, $50 million for maintenance cap ex, $300 million for loans and equity investments and $200 million for time share development.

Based on the asset sales all ready announced, we continue to expect free cash flow after all investing activities and cash taxes to be approximately $700 million in 2002 or almost $3 per common share.

In 2003 investment spending is likely to total $650 million.

We expect to spend approximately $200 million for new unit cap ex, $50 million for maintenance cap ex, $200 million for loans and equity investments and $200 million for timeshare development.

As a result of continued low interest rates, significant asset sales and slower investment spending we expect interest expense net or interest income to add to our earnings in the fourth quarter.

Interest income, net of interest expense should also generate 15 to $20 million pre tax in 2003.

Corporate expenses were low year-to-date.

And we would guide you to expect them to run roughly 40 to 45 million in the fourth quarter.

In 2003, we estimate corporate expenses should be flat with 2002 levels at approximately 120 million.

Regarding our tax rate.

Taxes are treed (ph) up quarter-by-quarter to reflect the volume of synthetic fuel produced and forecasted levels of other taxable income.

Currently, we project an overall five to 10 percent tax rate for 2002.

Our synthetic fuel investment operating losses are expected to total approximately 120 million to 130 million in 2002.

Combined with tax benefits, we expect this business to contribute roughly 12 cents per share to EPS in the fourth quarter.

At the current time, we expect 2003 syn (ph) fuels contributions to earnings to be roughly 30 to 35 cents a share.

Our core tax rate will continue to be about 35 percent.

Summing up, we expect our 2002 EPS could range from $1.88 to $1.92 per share including 27 cents from synthetic fuel, but excluding any charges for our distribution business, or gains in villages or interval international.

While particularly difficult to forecast 2003 EPS could range from 205 to 215 per share assuming about 30 cents of synthetic fuels earned.

We have been very disappointed in the performance of our stock in recent weeks.

We continue to strongly believe that our company will do well in these difficult times.

And will clearly differentiate itself among its competitors.

We look forward to tremendous growth opportunities as the economy recovers.

To back up that view, we've purchased 3.1 million shares of our stock during the quarter, and 2.2 million shares since the quarter end for a total year-to-date of six million shares.

We currently have 7.5 million shares in share repurchase authorization from our Board of Directors.

This is a time of insecurity and concern in the hotel business as well as the equity markets overall.

Now, as always, we are absolutely committed to operating our business and building value for our owners, franchises and shareholders in a manner consistent with the highest standards.

By exiting the distribution and senior living industries we are making great progress in making our company a more focused lodging company.

Recognizing the importance of greater transparency we will increase disclosure as we go forward.

We would be pleased to answer your questions at this time.

We would ask you to limit yourself to one question so that as many as possible can participate.

Thank you, Mr. Sorenson.

The question-and-answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone.

If you're on a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment.

And we'll proceed in the order you signal us and we'll take as many questions as time permits.

Once again, please press star one on your touch-tone telephone to ask a question.

Today's first question will come from Michael Rietbrock, Salomon Smith Barney.

Hi, guys.

Good morning, Mike.

Tough to choose just one.

But maybe to focus on the incentive management fees for a second.

Can you give us a sense of sort of on a run rate basis where the incentive management fees are running as a percent of the lodging operating income compared to where they were at their peak?

Or looked at another way, what percentage of the hotels are paying the fees?

And try to give us a feel, at least, for where the break points are going forward.

The - a couple of points I'll note for you.

About a third of the hotels are today paying incentive fees, a little bit less, I think 32 percent.

We have as we mentioned, a point of margin impacts on a full year basis.

Our operating profits by nine to $10 million.

It used to impact it by 20 to 25.

The reason that has declined is we have given back so much of our incentive fee earnings stream that we used to have in 2000.

You can see with the numbers we gave you this morning what percentage of operating profits are coming in effect from incentive fees.

We noted that our base management fees were 82 million, franchise fees 55 million and incentive management fees only 25 million during the quarter.

Our sense generally is that the contracts that are still producing incentive management fees to us have no or very low owners priority.

And that's the reason they have not clicked off and we think are not likely to click off.

OK.

Thanks.

And we'll take our next question from Joyce Minor at Lehman Brothers.

Hey, Arne Sorenson: Can you just talk to your fourth quarter RevPAR items.

It looks like it's come down maybe a little more than I would have expected particularly since you were so close to your target for the third quarter.

Yes, the - our RevPAR forecast now is minus eight to 10 for our Q3.

I'll make a couple of observations for you.

Plus eight to 10.

I'm sorry.

Excuse me, big difference.

Plus eight to 10 percent for the fourth quarter.

A couple of things to keep in mind.

That is obviously down from our last advice which I think was plus 13 to 18.

There are a couple of things going on there.

I think if we look at it across the segments, we would say that that eight to 10 probably is more like plus 11 or 12 on the full service and plus six to eight on the limited service.

So that's one thing to keep in mind.

Another thing to keep in mind is that our fourth quarter this year has 17 weeks instead of 16 weeks.

Now as you all recall we - because of our restaurant history have 13 four week periods in most years.

Since that doesn't quite give us 365 days, every now and then we have a year that has 53 weeks.

That is this year for us.

That 53 - 53rd week essentially gives us two weeks during our fourth quarter which are in effect holiday weeks which are obviously not peak times for business travel and therefore our weaker RevPAR weeks.

Our guess is that that factor alone probably has an impact on our RevPAR in the fourth quarter by two to three percentage points.

Now having said all of that, the forecast we have given you fundamentally reflects the fact that business trends in travel is still weak.

We have, you know, we're obviously all looking at the same RevPAR data by week.

We're finally to the point now where the Smith Travel data which is out there by week gives you enough information so that you can compare not only to 2001 which is really in many respects irrelevant, but to 1999 or 2002.

And our numbers for - really, our third quarter, for example, looking at 2002 results versus 1999, are down in the low teens.

That's a pretty soft business environment.

It has been getting, in a sense, a little bit worse over the last six or seven months versus 1999 or 2000 even though the comparisons for 2001 seem to suggest that it's getting a bit better.

And all of those factors sort of combine to bring us to that eight to 10-percent RevPAR guidance for the fourth quarter.

If I can also add, Joyce, if you compare this to what the competitors might record, or even Smith Travel for the quarter, our quarter includes most of September.

So the numbers you've already seen out of Smith Travel in early September will be falling in our Q4 where, for most in the industry, they'll be falling into Q3.

And we'll take our next question from Scott Davis at Jenison (ph) Associates.

Hi.

Good morning.

Good morning, Scott.

Following up on Mike's (ph) question about the incentive season, I mean, I think you touched accurately upon the fact that you know, there's a tremendous opportunity as RevPAR increases and the incentive fees come back.

And I guess the thing I'm curious about is: since your disclosure on the incentive fees is probably better than you're given credit for and you could look at 2000 and see that it was over 300 million and this year's probably only 150, as we think about modeling it going forward, it seems like unless the step function is different going up than it is going down, an outsider can take their RevPAR projections and layer on what they think the incentive fees will be.

And I guess I'm curious; is there any reason why one can't do that?

In other words, is the step function different in better times as compared to what it's been going down?

No.

I think that's a perfectly fair assumption.

We will - for example, as we go back up - remember, that you use the one percent margin figure that we've talked about because that's fundamentally an incentive fee measure.

A point today of margin is nine to $10 million on a full-year basis.

In 2000, a point of margin was 20 to 25.

As we go back up the RevPAR ladder, we will not only get back to that 20 to $25 million per point of margin, but it will become more valuable in terms of dollars because our system is today - I'm guessing here a little bit - 20 percent bigger in terms of rooms than it was in the year 2000.

Certainly, by the time -if you're modeling it for 2003 or 2004, our unit system is going to be a lot bigger than it was in 2000.

And so we'll get not only the 20 to $25 million that - from the units we had in our system in 2000, but we'll get additional contribution from that margin expansion and RevPAR expansion from the new hotels that came into the system.

Does that answer your question?

I guess the way I was thinking about it was I was forgetting about the additional units so I was just looking at very strong growth as things come back, just assuming RevPAR is that (ph) or even less than GDP but I guess I was forgetting about the extra units.

Yes.

Thank you.

Thank you (inaudible).

Thank you.

And we'll take our next question from Jay Cogan at Bank of America Securities.

Hi.

Good morning.

Hi, Jay.

I'm just wondering; you were talking about providing greater detail - a little bit better transparency in the business.

Can you give us some sense, Arne Sorenson, of some of the things that you're looking at changing from a disclosure standpoint and are you looking for any suggestions?

We are absolutely all ears for any suggestions you or other participants on the call may have and you ought to let Laura Paugh or Minnie O'Berg (ph) kind of have your thoughts.

One of the things we've obviously done in this quarter is break out the dollar figures of incentive management fees, base management fees, and franchise fees.

I think that's one likely area.

We have - you know, a lot of the chatter in our stock has been about things like synthetic fuels or timeshare note sell gains, which we already think we're providing accurate disclosure on.

If any of your disagree, you ought to let us know that.

And we're happy to kind of talk it through with you.

We've obviously made the changes towards segments with full service, limited service, extended stay, and timeshare.

I suspect we will provide specific disclosure on the earnings we pick up from our equity investments in hotels starting in Q3 and continuing thereafter so you can see that separately.

But we want very much to make sure we are in a dialogue with you and we provide the information you need to have.

And could you give us - because I think you gave us (inaudible) - could you give us what the other gains on sales were, not timeshare, but anything related to lodging, for example, in the quarter?

Absolutely.

The - I mentioned that on the sale of Laguna Beach, we recognized $5 million of gain roughly in the third quarter.

Gain amortization on all other lodging transactions was a bit less than five million in the quarter.

OK.

Thanks.

And our next question today comes from David Anders at Merrill Lynch.

Hey, Arne Sorenson, could you give us - maybe you did.

I missed it - conversions in the quarter, what percent of your room base was that?

I think it was 20 percent of the rooms we had I think in the quarter.

Our next question comes from Ashley Craig at Morgan Stanley.

Hi.

I was wondering if you could talk a little bit more about leisure business and what your assumptions are for the consumer and the RevPAR guidance that you've given and if you're allowing for a decline in consumer demand?

That's a good question.

I'm not sure I have a very good answer for you, in truth.

I think our view is that the consumer remains relatively strong and we expect the consumer to continue to travel.

Airline prices have continued to fall.

That has always been the most expensive part of travel, not the hotel stay, particularly for leisure business where families are traveling together and sharing a room or two or a timeshare unit.

And so most of the trends there look quite positive.

We do see, and you can see it in our timeshare business, which is really much more the consumer part of our business than the lodging business is, that we've had a fairly substantial impact on the closing efficiencies for the tours that visit our timeshare sites offset to some extent by the financing profits, obviously.

But I think we expect that to continue into next year.

And so our models assume maybe some improvement in development profits but hardly the return to sort of normal time, strong economic environments for two (ph) levels.

But those timeshare trends are weakening.

Is that - is that correct?

Do I understand that correctly?

They've actually been about stable the last three or four months.

But weakening versus where they were like a year or two ago.

You said, I think . . .

(inaudible)

... 20 percent is what it used to be and now it's in the teens?

Absolutely.

Yes.

OK.

So if we - if someone is more of a bear on the consumer, then it would make sense to probably assume RevPAR is more like flat next year?

I think - remember, the leisure business for us - it varies a little bit by brand.

Let me (ph) use the Marriott Hotel resorts and suites brand for a second - leisure business is really no more than 20 percent of the business of that chain.

So some weakness in leisure business obviously will have some impact on the RevPAR but it's not going to be a significant driver.

I think the biggest driver of whether (ph) we fall in that zero - at the bottom or top end of that range or some place else - obviously we don't know for sure where we're going to end up, is going to be what happens with business transient travel and the mix that that impacts the hotel with.

If I can add, also, for the Marriott Brand, which is the full service brands rather, which is where the bulk of our incentive fees come from, we still drive - derive probably 30 percent plus of our business from corporate rates, so we are by far - we suppose a higher percentage of group business even today in this environment, than what the average industry hotel would have.

In addition, we are grouping up.

We've added an awful lot of groups over the past year, particularly special small groups, fraternal organizations.

You name it, we've been going after that business, and we've - we're doing very well on that side of the score.

We'll take our next question from Jeff Randall at GMP (ph) securities.

Good morning.

Good morning.

I was wondering if you would comment on maybe the effects that some of these law suits may have on sort of the - Marriott's remaining owners to push for renegotiated contracts.

You know, that seems to me to be somewhat of a big downside, or maybe a perceived downside.

Jeff, it is clearly the question that has been asked a number of times.

We are, as I mentioned in the prepared remarks - we are very active in communicated with our owners and franchises.

We want very much to anticipate their questions.

They though, like we, have investors in their business and they are monitoring closely the developments of these law suits in order to make sure that they protect their interests as best they can.

Since we believe what we have been doing is consistent with the contract, and it has been confirmed really by most of the owners that we have met with that they believe it is quite reasonable.

We don't think that there's a risk of sort of a wholesale move of our system towards a different form of management contract, even with reduced fees.

We also have - given that we've reupped our agreements with host Marriott, much of the managed system in the United States is in a sense already put to bed, as it relates to these issues.

Something like 70 percent of our managed system we think by and large these issues have been aired and accepted and resolved, and so the remaining risk we think is quite modest, and we actually feel that the - though it's frustrating that we can't predict that these law suits will end quickly, and we can't tell you with certainty what the outcome of these lawsuits are.

We're just eager to get them resolved as quickly as we can.

We think that decisions are gong to generally confirm what we've decided.

We obviously hope that that's the case, but these things take time.

Thank you.

And our next question comes from Jim Kamos (ph) at Kinekuss Associates (ph).

Chuck Hobbs (ph): Hi, this is Chuck Hobbs (ph).

One quick follow up I guess on disclosure on various issues.

Do you guys have any plans to, I guess in helping to put some of these affiliated joint venture issues to rest.

Planning to file an AK or some amendments to your filing for both Avendra (ph) and Courtyard?

Because there has been questions as to what the real numbers are in both of those joint ventures.

No, we don't have any intention to do that, and I - I have seen a story talking about the Courtyard joint venture which from an accounting perspective kind of boggles my mind.

These are both quite simple.

As we said when we announced the deal with Host Marriott two or three years ago, whenever it was on the Courtyard joint venture.

The Courtyard joint venture is a fifty fifty partnership between Marriott and Host Marriott.

We are obviously the manager of those hotels, we also have a mezzanine loan of $200 million to that joint venture, and we have our equity stake in that joint venture.

That joint venture continues to pay us management fees, it continues to pay interest on the mezzanine debt.

Obviously the equity earnings have been substantially impacted by the weak operating environment that we are in, and those earnings will be reflected in the equity disclosure that we talked about a moment ago, where we talked about equity pickup.

We don't control this joint venture.

This is one that we don't have the ability to decide to sell the joint venture of to do anything else of the sort.

This is very much a partnership with Host Marriott.

Chuck Hobbs (ph): They don't consolidate it either, right?

That's correct.

It's a fifty fifty deal where we are mutually dependent on each other for the decision.

Chuck Hobbs (ph): So when we get, I guess, the disclosure you've promised about aggregate equity income from all of your affiliates, and what that is in the quarter, this will be within that number is what you're saying?

Absolutely.

Chuck Hobbs (ph): Your 50 percent share, that will be in there?

Absolutely.

Chuck Hobbs (ph): But that won't be broken out separately.

No, but I mean if it's a significant driver of those results, we'll be happy to talk about it.

Chuck Hobbs (ph): Where are those earnings right now?

Are they just within the various lodging line items?

Correct, yes.

So Courtyard would be in the select service segment.

Chuck Hobbs (ph): OK, thank you.

Now, just to be clear, on the mezzanine debt for example, though, where we're getting interest income?

That is in the interest income light (ph).

Chuck Hobbs (ph): Right.

OK, thank you.

And today's next question will come from Harry Curtis with JP Morgan.

Good morning.

Quick question on - or additional question on supply.

Could you give us some detail on the domestic units versus the international units, and give us a sense of where these units domestically are acquired, given that in today's environment it's not as if it looks like there's an undersupplied situation in the industry.

Yes, as I mentioned, the international mix on our pipeline is about 25percent of the 50, 000 rooms.

We don't spend time independently trying to monitor industry wide supply growth because that's - obviously we look at things on a market by market basis, we know what our supply growth looks like.

But we don't have the resources, and it's not really worthwhile for us to go to building permit offices and explore all the rest of that. most of the domestic supply growth - a significant amount of it, is still coming from projects which were started before the onset of this really weak operating environment, and that's why as those properties open we will add new deals to our pipeline slower and we will see our pipeline numbers decline.

So, Harry, it's not really that folks are making decisions today based on the need for a new hotel, it's that they made the decision a year ago or a year and a half ago in stronger times, and say they need a hotel.

That is not to say that there aren't some new projects starting today - there are.

Generally those projects are starting in - tend to be more suburban markets than urban markets.

Usually I suppose that if we could use an example, it would be a suburban market where there is a new office park or a new residential community, a new sort of ex-urban development in which it makes perfect sense to have a hotel or a few hotels in that market, and even in a weak economic environment, that's going to happen.

Obviously there is economic growth in many markets across the United States, and that economic growth will cause some supply growth in this weak time.

Very good, thank you.

Our next question comes from Michael McCromick at Gilder Gagnon.

The question's been asked and answered.

Thank you.

OK.

You bet.

And our next question comes from Keith Mills at UBS Warburg.

Hi.

Good morning.

Hi, Keith.

Arne Sorenson, in the fourth quarter of last year, when you reported that in February, you took some charges restructuring charges related to loan guarantee reserves, loan impairments, and notes receivables from franchise and incentive fees.

What's the likelihood or the probability that we see Marriott making or taking restructuring charges related to those three areas at some point in the near future?

You mean additional round of charges?

Yes.

Well, we hope it's very low.

We continue to monitor it obviously on a quarter-by- quarter basis.

We're looking at the quality of our loan portfolio and the risks in our guarantees.

The weaker the operating environment, the more pressure it'll put on that, but our view is we're essentially at trough levels, and we're quite optimistic that we will not have any sort of significant issues there.

Obviously at any time, you know, could you have a hotel where you need a reserve, obviously, you could.

Right.

And on the receivables, how do you look at those in terms of past due?

Do you look at them, you know, up to 30 days, and they're making their payments on either franchise fees or incentive fees or base fees, and do you look at 30 to 60 days, 90-plus days, etc.?

We ...

Where are you there?

We've got receivables across different aspects of our business, and we've got folks who track them.

They look at total balances, and they look at the aging of those portfolios.

It's not a significant issue to us.

In the managed portfolio, usually we are distributing cash on behalf of the owner, and ultimately, we are paying the fees that are due.

In the franchise system, our franchise partners are great partners, and they get substantial customer contribution from our reservation system, and by and large, paying the franchise fees is the way to make sure that pipeline of customers remains available.

And so we don't we don't have not seen any significant deterioration in receivables in that business or in other aspects of our businesses where there'd be SLS or time share.

OK.

Thank you.

Appreciate it, Arne Sorenson.

Yes (ph).

And we'll go next to Bill Crow with Raymond James.

Good morning, guys.

Morning, Bill ...

... question and then one new question.

Excuse my voice, here.

First of all, you talked about the pipeline of new units expected to decline over the next few years.

Is it fair to suggest that the quality of the pipeline will also be declining?

And in that, I mean that you'll switch from full service to more suburban, limited service properties, and the impact to Marriott thus will decline over the next several years from a financial point of view?

Well, that depends on the time frame I think you're looking at.

I think as it declines, as we've seen already over the last year or so, you'll see that the percentage of the remaining pipeline which is full service grows rather than the other way around.

But ultimately, when stronger economic times return and people start new projects, it will be the limited service projects and extended stay projects that come on first because they take much less time to get entitled, and they're much easier to finance.

And to some extent, those projects are more queued up as a sort of regular project.

We're still quite optimistic though that even as our pipeline declines, depending on what happens in the transactions market for existing hotels, we'll see a real good, high quality, high value, full service conversion opportunities expand from here, rather than the reverse.

OK.

And then, Arne Sorenson, on the share repurchase program, could you talk about what the trigger is when you're out there in the market?

What gets you into the market?

The pace has quickened here over the past three or four months.

Do you anticipate going back to the board for an increased authorization?

We monitor this very regularly.

Obviously, we look at a lot of different things.

We look at the price of the stock in the market, and it shouldn't surprise any of you that based on where we're trading today, we believe our stock is a screaming buy.

And we'd like to buy all we can sensibly buy of it.

At the same time, we are operating in fairly uncertain times, and we've got to look at the cash we generate from asset sales.

We've got to look at our debt levels.

We want to make sure that no matter what happens in this industry and in the world today, we've got the financial resources to not just survive, but to seize opportunities that are available.

We're balancing all of those things.

I think the cheaper the price of our stock is, the more we're going to buy.

And at these levels, I suspect we'll continue to be active.

We have not made any decisions yet obviously, that will happen over time about going back to the board.

I think we've got another seven-and-a-half million shares of remaining authorization.

So at present pace, we've got some time before we would we would exhaust that.

Thanks.

You bet.

We're now an hour and five minutes into it.

I think I'm going to close this off.

Very much appreciate your time this morning.

We are here obviously to answer follow-up questions you guys may have.

Laura Paugh and Lenie Obert (ph) being probably your the two folks you're most likely to call.

We would like to have your feedback, your questions, if there are things that you feel we've not answered, and your advice about what we can do to continue to make sure we're providing the information you need to have.

Notwithstanding all the hullabaloo in the market and to some extent the love fest going on between short salers and some of the folks who filed lawsuits against us, we think our model is working.

We think we're making we know we're making a substantial amount of money even in a weak environment, and we're absolutely convinced that in this environment we'll have opportunities that are presented to us that we can seize to continue to create value for our shareholders long term, a task to which we are totally committed.

Thank you for your time, and we'll talk to you next quarter.

Thank you for your participation in the conference today.

You may disconnect at this time.

MARRIOTT INTERNATIONAL

Arne Sorenson 10-03-02/9:00 a.m.

CT Confirmation # 695188 Page 17