萬豪國際 (MAR) 2002 Q4 法說會逐字稿

Good day, everyone. Welcome to this Marriott International fourth 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, Mr. Arne Sorenson. Please go ahead, sir.

Thank you, Abe. Good morning, everyone. Welcome to our fourth quarter 2002 earnings conference call. Joining me today is Laura Paugh, Senior Vice President, Investor Relations, and Carl Berquist ,who just joined Marriott as Executive Vice President of Financial Information and Enterprise Risk Management.

Before I get into 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 risks and uncertainties as described in our S.E.C. filings, which could cause future results to differ materially from those expressed in or implied by our comments.

Prior to discussing the details of our 2002 results, we would like to comment on some of the high points of the year just ended. While the year was extraordinarily difficult because of weak demand for lodging, we had some notable success. First, we completed our exit from Marriott Distributions Services and signed binding agreements to sell our Senior Living Services business to further focus on Marriott as a lodging company.

Second, through strong asset sales and operating cash flow, we enjoyed over $800 million in net cash flow or more than $3 per share. We have employed this cash flow to reduce our debt and we've repurchased nearly 11 million shares of Marriott common stock over the last 13 months.

Third, as a result of our significant and growing RevPar premiums, we were able to add 31,000 new hotel rooms to our system, continuing to expand our distribution in the U.S. and abroad. While we experienced the weakest lodging environment since the Great Depression these accomplishments position us well for the future. In our remarks today, we'll summarize the results of our fourth quarter and full year including a description of key business trends. Second, we will provide an update on our balance sheet and investment plans and finally, we'll update our guidance for 2003.

So, let's focus on the numbers. Marriott reported diluted earnings per share from continuing operations of $1.74 compared to our previously forecasted guidance, our synthetic fuel investment generated 29 cents per share for the full year, about 2 cents ahead of our expectation. Excluding synthetic fuel, a higher, effective tax rate, separately lowered earnings by 3 cents per share. We also booked an 11 cent per share after tax gain from our sale of interval International and a $50 million noncash charge or 19 cents per share after tax to write down the acquisition good will associated with our investment in our corporate apartment business, ExecuStay. Adjusting for these charges, our earnings were $1.83 for the full year and 56 cents for the quarter, 2 cents above the consensus estimates.

Looking backwards in the first quarter of 2002, our discontinued operations had no impact on earnings per share. In the second quarter, discontinued operations contributed 1 cent to diluted earnings per share and in the third quarter, the impact of discontinued operations was a negative 4 cents.

Lodging revenues before cost reimbursements totaled $2.5 billion in 2002 a decline of 1.6% compared to 2001. Our revenues from base and franchise fees were up 3%. Contributions from new units more than offset the 2002 decline in RevPar. Incentive management fees declined 20%.

Looking at lodging profits on a comparable basis, excluding the interval international gain, the ExecuStay charge, and restructuring and other charges, lodging profits declined 6% to $713 million for the full year. In the fourth quarter, lodging revenues before cost reimbursements totaled $743 million an increase of 12%. Base and franchise fee revenue increased 18% and incentive fees increased a whopping 43% over the prior year. Again, excluding the interval international gain, the ExecuStay charge and restructuring and other charges last year, fourth quarter lodging profits rose 63% to $208 million in the fourth quarter.

Our RevPar statistics understated our performance in the fourth quarter. Since the extra week added to the quarter was a seasonally very slow time, it significantly depressed our reported RevPar. While reported North American full-service hotel RevPar increased 10.7%, if we exclude the impact of the 53rd week, fourth quarter full-service RevPar increased 13.8%.

At the Marriott Hotels Resorts and Suites brand, comparable group business revenue was up more than 10% during the fourth quarter as meeting planners continued to hold small regional gatherings in place of large resort gatherings. Attendance was soft at citywide conventions. Pricing was highly competitive particularly for short-term group business. We continue to place particular emphasis on small groups, weddings, religious and fraternal organizations and government travelers. The booking cycle remained very short as meeting planners are increasingly concerned about making contract commitments for the future.

For our transient business, we saw steady fourth quarter demand from professional services, pharmaceutical companies and government travelers, but demand from most other corporate segments remained soft. Marriott Hotel Resorts and Suites comparable transient revenue increased about 10% entirely occupancy driven. Our revenue management tools have been very useful as they ensure we sell our rooms at the appropriate price to maximize revenue. Unfortunately, we are not likely to see significant upward movement in average daily rate until demand strengthens.

Fourth quarter leisure business was helped by this winter's unusually cold weather but leisure business remains very short term and price sensitive. As you can see in our statistics, full-service hotels are showing better RevPar comparisons than select service or extended stay properties partly because downtown and resort full-service properties suffered more acutely in last year's fourth quarter, but also because smaller hotels have not been able to benefit from the relatively stronger group business.

The weakest markets in the U.S. were impacted by both disappointing demand and new competition during the fourth quarter. Lodging demand in San Francisco continues to bump along the bottom and we don't expect conditions to improve there any time soon. The market expects fewer citywide conventions in 2003 and the Marriott Masconi Center has taken advantage of the lull to start an eight-month renovation project.

Results in our Palm Springs Resorts were soft in the fourth quarter. Their East Coast meeting business is competing with Florida resorts and West Coast group business has been drawn to new resorts in destinations like Las Vegas. Boston was soft in the quarter but we expect business to improve in 2003. Boston Copley has a good book of business for the coming year. That should help other hotels in the region as overflow pushes out to our other properties and they could use the help.

The suburbs continue to be hurt by the tech recession and the route 128 corridor has seen considerable new limited service supply. Orlando suffers from new supply and low demand including weak international arrivals. We are not assuming a rapid recovery in Orlando and continue to maintain vigilance on our costs. Orlando will have significantly fewer citywide conventions in 2003.

The strongest markets are in the Mid-Atlantic region. Washington is benefiting from considerable Pentagon activity and a higher government rate than a year ago. In New York, midtown business transient travel is picking up, demand from the financial services industry remains tepid as they take a "wait and see" approach. On the other hand, leisure travelers remain strong, it is a bit premature to call this a recovery but we're encouraged by the improvement.

On the West Coast, San Diego is looking great. First quarter RevPar is expected to increase 15% to 16% and the new convention center is doing well. Our new Desert Ridge Hotel in Phoenix is also doing great. The hotel first opened in December yet ran over 80% occupancy in January. Group booking pace is he very strong.

Outside the U.S., fourth quarter company operated comparable hotel RevPar increased 17% using actual exchange rates and increased 14% in constant dollars. Asia continues to improve particularly China due to robust economic growth driving both domestic and international business travel. In addition, Marriott has a strong presence in Shanghai and is benefiting from that city's evolution as a key financial center.

Hong Kong, while not at pre-1997 business levels, is experiencing solid occupancies evolution as a key financial center. Hong Kong, while not at pre1997 business levels, is experiencing solid occupancies resulting from intraAsian travel.

The Caribbean has improved considerably during the quarter. Largely due to leisure travelers escaping the frigid weather in the Northeast but easy comparisons have helped as well. Latin America continues to experience difficult economic conditions. In Germany, like most of Europe, the economy continues to weaken, in contrast, the United Kingdom benefits from a more favorable economic climate. In the Middle East, room rates are low but occupancy has rebounded from the very soft conditions last year.

Of course, RevPar is only part of the story particularly in the U.S., profits have been under tremendous pressure. Fourth quarter comparisons of house profit margins are not meaningful due to heroic cost savings achieved in the fourth quarter of 2001. But even looking at the full year 2002, U.S. comparable house profit margins declined by less than 2 percentage points. Casualty insurance and medical benefit costs increased significantly in 2002 and are likely to continue to be problems for our properties in 2003.

Average hourly wage increased 3% to 4% during the year. On the other hand, productivity improvements and a new labor scheduling system reduced man hours per occupied rooms by about 3%. U.S. management wages at comparable hotels declined 2% during the year despite the extra week. Property level cost increases impact Marriott through pressure on our incentive fee revenue. In 2002, 38% of our managed hotels earned incentive fees compared to 52% in 2001 and nearly 70% in 2000. For the full year, our incentive fees were down 20% from 2001, as a result, we are significantly less exposed to cost increases than in the past, yet we retain considerable upside when operating fundamentals improve.

Our lodging distribution continues to grow despite the difficult business environment. In 2002, we opened over 31,000 new rooms under our brands which was a bit higher than our expectation of 25,000 to 30,000 rooms. We opened the new 950 room JW Marriott Desert Ridge Resort and Spa in Phoenix, Arizona, in December, primarily completed, at our urging, totaled about 4700 rooms.

Industry supply growth continues to slow. hotel developers are finding that available debt financing covers only 50% to 55% of the project costs and often has a significant recourse component. Thus, even though debt is cheap, the significant equity and recourse requirements present a very high hurdle for many new construction deals. In addition, owners and franchisees are reluctant to start new projects without a sign that demand is strengthening. Even when projects are started, it will be some time before the new units add to industry supply. Lodging econometrics are forecasting supply growth of 1.7% in the U.S. in 2003.

We are very pleased with our share of those supply additions. In 2002, our U.S. market share was only 8% yet Marriott brands ask the accounted for 20% of the industry rooms added in the U.S. and at year end, we represented 18% of the U.S. industry pipeline also according to lodging econometrics. At year end, our worldwide pipeline remained at more than 50,000 rooms. 26% of these rooms are outside the U.S. 43% are full-service properties and only 4% are company developed.

Our pace of hotel conversions was also excellent in 2002. 21% of our room additions during the year were conversions from other brands. After having converted nearly 7,000 rooms in 2002, we started this year with over 6,000 conversion rooms in our pipeline already approved and ready to open. We expect to continue to convert hotels to our brands especially in light of the ongoing weakness in the industry as owners and investors seek to reposition hotels and improve returns. We are particularly delighted to welcome two Outrigger Resorts in Hawaii which converted to the Marriott portfolio this January. Globally, we continue to expect to open 25,000 to 30,000 rooms in both 2003 and 2004.

In our time share business, fourth quarter profits increased substantially due to the 44 million dollar pretax interval international gain as well as a $13 million pretax note sale gain. We did not have a note sale in 2001's fourth quarter. Contract sales are soft our Orlando and European time share resorts but are strong in Hawaii, Aruba and at Bachelor's Gulch in Vail, to name a few. Excluding the impact of the interval international sale and the gain on note sales, the profit margin on the time share business declined year over year largely due to higher land and construction costs associated with sequel projects and higher depreciation from recently-added systems for customer support. These impacts were partially offset by reduced marketing and sales costs which reflected stronger sales closing efficiencies than the quarter following the events of September 11th.

Our lodging results also include the impact of our joint venture investments. The P&L impact from our lodging joint ventures totaled a $5 million loss in 2002 compared to a $7 million loss in the prior year. Our Courtyard joint venture with Host Marriott generated a book equity loss of $8 million in 2002. In 2003, we expect EBITDA from the joint venture to be roughly stable with 2002 levels. We expect all senior debt service to be paid including $30 million of principal amortization. However, given the uncertain economic climate, it is likely the joint venture will retain excess cash in 2003 and defer payment of some of our mezzanine interest. This action is permitted under our existing loan agreement and will not change our P&L recognition of interest income from the venture.

When business conditions improve, we expect the joint venture will release the trapped cash and repay our deferred interest, at year end 2002, the joint venture cash position totaled $18 million. Keep in mind also that joint venture leverage continues to decline through principal amortization of the senior debt. These hotels are terrific properties in irreplaceable locations and they'll do very well once the economy recovers.

Turning to our ExecuStay business, during our review for goodwill impairment at year end, we concluded that it was appropriate to reduce our ExecuStay acquisition goodwill by $50 million pretax due to soft operating fundamentals. Because this goodwill has limited tax basis, the effect on earnings from continuing operations was 19 cents per share after tax.

Our ExecuStay business has been severely impacted by the economy and the difficulties in New York following the events of September 11th. The business added an apartment building lease in Manhattan in early 2000 which significantly increased its business exposure it to downtown. We have taken steps to turn the business around. We have reduced our supply of New York apartments by more than half and initiated a franchise program to reduce our financial exposure in other markets. In fact, we announced three franchise agreements just last week. We expect that the business will break even or perhaps show a slight loss in 2003.

Turning to discontinued operations, in late December, we announced a definitive agreement to sell the stock of our Senior Living Services business to Sunrise Assisted Living for $89 million and nine communities to a C& L REIT for $170 million. We expect both deals to close late in March of this year. We also purchased 14 retirement communities in December and expect to restructure the debt and sell the communities prior to year end 2003.

Our distribution business ceased operations at the end of the fourth quarter. Nine distribution centers were transferred to five different buyers and four others were closed. We are still collecting a few receivables, disposing of some excess inventory and settling equipment and building leases. While there were not significant proceeds from the sales of the distribution centers, we were successful in obtaining cash for receivables and inventories and generated approximately $50 million in positive cash flow from our exit from this business in 2002.

Corporate expenses increased 9% to $49 million in the fourth quarter largely due to several noncomparable items in 2001, higher litigation expenses and the impact of the extra week in the 2002 quarter. Interest expense declined due to lower borrowings and rate and the increase in interest income reflected the recognition of amounts previously deemed uncollectible. Total debt including debt from discontinued operations was $1.8 billion at year end 2002 compared to $2.7 billion at year end 2001. Debt balances declined as a result of our strong cash flow significant asset sales and slowing capital spending.

Real estate asset sales were strong in 2002 totaling $763 million for the year and $223 million for the fourth quarter. If you add $387 million of time share note sales and $63 million for interval international, our total asset sales in 2002 were $1.2 billion. As I mentioned earlier, we also expect to close on the sale of our Senior Living Services business and nine retirement communities for an additional $259 million which we expect to complete in march.

Our synthetic fuel segment produced 2.6 million tons of treated fuel in the fourth quarter. The operating loss from this investment totaled $53 million and the impact on book taxes was a favorable $88 million for a net contribution of 14 cents per share. We expect to carry over some tax credits produced in 2002 into 2003, given that these credits are costly to produce, we prefer to keep production in line with our ability to use such credits. As a result, we just signed an agreement to sell a 50% interest in our synthetic fuel investment to a major U.S. investment bank. The sale is expected to close later in 2003 contingent upon the buyer receiving a satisfactory private letter ruling from the I.R.S.. We expect to receive approximately $25 million at closing plus a substantial earn out over time. The size of which will depend on the amount of synthetic fuel produced.

Assuming the transaction closes, earnings per share from the company's synthetic fuel investment is expected to be approximately 30 to 32 cents after tax in 2003. If the transaction does not close, we will likely need to limit fuel production as we may not be in a position to use all of the tax credits that would be generated at full capacity. In that event, the EPS benefit from the operation would approximate 20 cents per share. For 2003, excluding synthetic fuel, we expect our tax rate to be roughly 36%.

In our year-end call a year ago, we discussed in detail our loan portfolio and our contingent obligations, both loan commitments and guarantees. We would like to take a few minutes to update you on the status of the balance sheet items as of year end 2002. Let's start with contingent liabilities. A year ago, we had 669 million dollars of loan commitments and $620 million of guarantees. On an apples to apples basis as of year end 2002, our loan commitments are down dramatically to $217 million, roughly $155 million of which we expect to fund and our guarantees were down modestly to $569 million.

The largest categories of our guarantees include $290 million of senior debt guarantees which are relatively low risk as they are effectively senior to equity and mezzanine debt in the deals, $194 million of operating profit guarantees, most of which relate to limited service hotel portfolios and $57 million of project completion guarantees. The majority of which relate to construction projects which have been largely completed. As of year-end, we had reserve and deferred gains of roughly $45 million on these guarantee exposures or approximately 8% of the exposure.

There are two significant changes that will impact our reported guarantees going forward. First, in order to comply with new accounting standards for the reporting of guarantees, our 10K will include not just the effective guarantees we just outlined but $270 million of guarantees which are not yet in effect. Typically, these guarantees will not become effective unless and until hotels are completed and delivered to us for management. In this environment, it is quite possible that some of these guarantees will never become effective but the rules now require us to report today the maximum future potential exposure on every project.

Second, upon completion of our exit from the Senior Living Services businesses, we will add roughly $400 million of additional guarantees to our footnotes. The buyers of our Senior Living Services businesses, we will add roughly $400 million of additional guarantees to our footnotes. The buyers of our senior living services business will be obligated to protect us from any funding under these guarantees and they have plenty of value a nd cash flow to protect themselves from any significant exposure. But as the guarantees will be technically effective with the closing of the senior living services transaction, we anticipate adding those figures to our guarantee disclosure in the first or second quarter of 2003.

Our loan portfolio a year ago was 1billion148 million dollars, as of year end, our portfolio was down modestly to $1billion 113 million. This portfolio is obviously providing significant interest income for us today. The balance of these loans should continue to decline as the loans are repaid from operational cash flow or refinancing proceeds. In fact, at least $80 million of this portfolio has been repaid already in 2003. As we've explained in the past, we review this portfolio every quarter to determine whether any of the loans are impaired and if so, we post any necessary reserves. We posted $12 million of additional reserves in the fourth quarter results.

In other accounting news, the FASB just issued new guidelines pertaining to variable purpose entities. Other than the possibility of increased disclosure requirements, we anticipate no impact on Marriott's financial statements as a result of these new rules.

We have made considerable progress on litigation matters during the last quarter in six owner lawsuits. One was dismissed by the court. One was settled with no money changing hands and no material change in our management agreement and one owner's request for an injunction to stop the sale of Senior Living Services was soundly and repeatedly rejected by the courts. We expect our contract disputes with CTF to begin arbitration later this year while the strategic hotels case and the Charleston, West Virginia, matter are still in the early stages and far from trial. Although it will likely take some time before the issues in these cases are resolved with finality, we feel confident in our position and expect to prevail ultimately.

Over the past year, we've spent considerable effort explaining to our owners, the details of our approach to procurement as well as our methodology for cost allocations and centralized programs such as sales and marketing. We have met with owners representing approximately 75% of our managed full-service properties. I can report that most of our owners believe these meetings have been extremely positive and are supportive of our recent disclosure initiatives.

2002 investment spending totaled about $850 million including $300 million for new unit capital expenditures, $50 million for maintenance capital expenditures, $300 million for loans and equity investments and $200 million for time share development. Cash flow, after all investing activities, was approximately $800 million in 2002 or almost $3 per common share. We repurchased four million shares during the quarter nearly eight million for the full year in 2002 and 3.1 million shares to date in 2003. Our board increased the share repurchase authorization last week giving us an authorization for a total of an additional 20 million shares. We are likely to invest at least $400 million in share repurchases in 2003.

Perhaps as important as our aggressive share repurchase, we also recently changed our stock option program to minimize dilution from employee compensation plans. We have replaced option awards in 2003 with restricted stock awards for most of the participating management staff. Unlike options, restricted stock awards will be expensed as they vest and our earnings guidance for 2003 includes the impact of these expenses. Changing to a restricted stock plan for these participants should reduce our dilution from stock plans to roughly 2% per year.

Now, let's turn to our outlook. We've never seen a business environment that is more difficult to forecast. Macrostatistics imply business recovery, yet the lodging industry typically trails by one to two quarters, and we see little sign of improvement yet. For our full-service hotels, the key to improving RevPar is the business transient guests. Today, our average daily rate is soft, largely because we have temporarily replaced our business guests, who are traveling less, with more price-sensitive leisure and group business. When the recovery comes, rates should move up as we reverse the process and replace leisure and group business with business transient guests.

For the full year 2003, we believe RevPar will likely be flattish which is the bottom of our guidance range discussed last quarter. Of course, that means RevPar is likely to decline early in the year and improve somewhat in the latter part of the year. This expectation does not assume any material impact from any military action in the Middle East. At zero RevPar growth, higher labor costs, healthcare costs, and insurance premiums will likely pressure house profit margins to decline by with one to two percentage points.

For the first quarter on a comparable basis, we are estimating a RevPar decline of 3% and a house profit decline of approximately 2 percentage points. However, due to the shift in our calendar, reported RevPar is likely to be flat. We anticipate that MBCI revenues will increase 10% to 15% in 2003.

In looking at profit growth versus 2002, there are two primary factors to consider. First, we sold 387 million dollars in mortgage notes in 2002 including roughly 66 million of notes carried over from 2001. In 2003, we expect to sell roughly $300 million in notes in various financial markets in order to capitalize on current market conditions. As a result, financing profit is likely to be roughly $15 to $20 million lower in 2003 than in 2002. Also, our present expectation is to complete time share note sales in the second and fourth quarters only, as the new variable interest accounting rules will likely cause us to complete term financing deals at larger sizes than the transactions we have done in the past.

Second, the $44 million gain from the sale of interval international won't be replicated in 2003. Adjusting for these factors and assuming flat margins, bottom line, we expect time share profits to total in the range of $15 to $20 million if the first quarter and $135 to $140 million for the full year. All combined, we are estimating lodging including MBCI at about $150 to $160 million of operating profit for the first quarter of 2003, or roughly flat with last year and $710 million to $740 million for the full year 2003.

In 2003, investment spending is likely to total approximately $500 to $550 million. We expect to spend approximately $100 million for new unit capital expenditures, roughly $40 million for maintenance capital expenditures, $200 million for loans and equity investments and $150 to $200 million for time share development. As a result of continued low interest rates, significant asset sales and slower investment spending, we expect interest income net of interest expense to add to our earnings in the first quarter by less than $5 million and in 2003 by $15 to $20 million pretax. In 2003, we estimate corporate expenses should increase modestly to $130 to $135 million.

Summing up, including 30 to 32 cents from synthetic fuel, we expect our 2003 EPS could range from $1.85 to $1.95 given that we anticipate investment spending of only $500 to $550 million, the sale of Senior Living Services, cash flow available for share repurchases or acquisitions should total no less than $500 million or $2 per share. We're in a great position long-term, compared to the beginning of 2000 which turned out to be a record earnings year, as we entered 2003, we have 36% more hotel rooms and 40% more loyal travelers in Marriott Rewards and we have stronger relationships with our owners and our franchisees.

All of this improvement incurred in the worst period the hotel industry has ever seen. RevPar remains problematic. Industry conditions have not yet shown meaningful improvement toward recovery, but at the same time, we do not see signs of retrenchment in recent performance. We believe that 2003 will be a year of transition for us and for the lodging industry overall.

Over 25 years ago, Marriott wrote its first hotel management agreement. Since then, we've gradually withdrawn from slow-growing and capital-intensive businesses including restaurants, contract food service, senior living services and hotel ownership. In their place, we built the finest portfolio of lodging brands in the world and strong relationships with our partners who share our commitment to customer service and quality.

For the first time in our history, we're focused solely on that lodging business, and the long term looks very bright. We would be pleased to take your questions at this time. Abe?

Thank you Mr. Sorenson. Our question and answer session is conducted electronically. If you would like to ask a question, press the star key then the digit one to ask a question. We'll pause a moment to give everyone a chance to signal. If you're using a speakerphone, please make sure you're not muted. That will block your signal. First question will come from Harry Curtis at JP Morgan.

Good morning, Arne. You mentioned you haven't seen any signs of recent retrenchment. The projection of operating lodging profit back in October during your third quarter call was 770 to 800 and now we've come down with the projection by about 7% to 8% to 710 to 740. I'm wondering if there are any segments that have changed. Is it more margin? If you could give me a sense of the primary elements of that change, please?

Yeah. That's a fair question. Let me start by the difference in process. At the third quarter call, we provided guidance based upon our sort of sense for the sensitivities and our model of appointed RevPar and margin. We obviously do it for regular forecasting. Since that time, we've done a very thorough bottoms up approach to the budget and really, the guidance we're giving you today comes as a result of that budgeting process. It is not so much that we took the assumptions we made a quarter ago and fiddled with those assumptions on the top line basis to come out with new guidance, as it is, just much more thorough sort of forecast.

Having said that, I think as we think through what's come up from the field and through that budgeting process, we would say the impact on lodging is probably a couple of points of RevPar, roughly a point of margin, and probably some -- maybe $10 million or so pretax diminished expectations on a full year business for ExecuStay. Those are the things that are going to drive the lodging operating profit number. I'll note just as an aside on RevPar, part of the decline in RevPar is, obviously, a quarter ago, we talked about 0% to 4% growth for 2003. We're now talking about roughly flattish.

But the other thing to keep in mind is the year-end RevPar number, the base on which we're forecasting at 2000 growth is probably a couple of points beneath where we would have forecasted a quarter or certainly a couple of quarters ago that we would end up at 2002. So, even with comparable growth rates on a year over year basis, the RevPar and dollar terms would be lower than we would have anticipated a bit before.

Harry, you didn't ask specifically but let me continue because I'm sure others will anticipate the same question. The other changes as we look versus the guidance we gave a quarter ago versus what we're giving today, besides the lodging impact that I just talked about, would be an increase in corporate expenses of probably something like 4% based on the assumptions we had a quarter ago. Probably an increase in a reduction in earnings of about 3% because of the shift away from options toward restricted stock of the bulk of that program.

Then of course, the SLS operating profit figures are no longer in our guidance as they were a quarter ago. That was probably about a nickel, clearly some of that would be offset by the earnings decrease from incremental stock purchases.

Specifically, can you give us a sense of your group business, other lodging companies have commented recently that that's grown sequentially weaker. What are you guys seeing?

We see -- sequentially weaker, I don't know. I mean I guess we have a sense that people are right now at this moment a little bit more on the sidelines than they've been because of geopolitical uncertainties. So, maybe we've got a little more weakness than we've had but it has obviously been weak for the recent months. We are not certainly seeing any signs of improvement.

Our revenues -- group revenues for 2003 on the books as of the end of 2002 were down a few points from the revenues that were on the books for 2002 at the end of 2003. That comparison probably means less today than it would in normal times given how bizarre the fourth quarter of 2001 was, and it is not really clear to us whether we had less business on the books at the end of 2001 because of that weak business or maybe a little bit more because we had a bunch of meetings cancel in the fourth quarter which had been rebooked into the first part of 2002. But clearly, group business, as most other forms of business is weak, today as we speak.

Thanks a lot.

You bet.

Our next question will come from Michael Rietbrock at Salomon Smith Barney.

Hey, Arne. Just a couple of questions. You discussed the meetings that you've had with owners and the positive feedback you've received. Where does the project of providing them with ongoing billing disclosures stand today?

We're giving them regular disclosure. I think in the annual budgeting process with which we go through with all managed hotels. We've beefed up the kinds of disclosure that's included in that budgeting package. We have also rolled out right at the end of the year, a new web-based tool which we call internally, MarStar, which basically gives the property level staff at every hotel the ability to know in advance in detail, and therefore be able to explain in detail to the owners the way that all of the allocation formulas work for various central and regionally provided services. And those are the kinds of things that we have talked about in the meetings that we have had with the owners and a good 75% or more of the management team across the United States, and I think the disclosure has been dramatically improved from the past and very well received.

So, functionally most of what you're going to do is already in place?

Yes. Some of it very recently though.

Okay, and just a second question which kind of follows on to Harry's question. When you give your guidance, you say that it doesn't include any impact from Iraq. Having said that, the business as best we can tell, looking out is near to today, as least as March, is probably already being affected to some extent?

How should we think about and maybe it is just a matter of semantics in terms of your guidance in relative to competitors but to what extent does it feel like business is being impacted already by Iraq? And can you give us any sort of rules of thumb or experience from bill looking back to 1991 in terms of what to expect?

I wish we could tell you something that you could bake into a model. We can't. We certainly have the sense, as I think almost every industry does in the United States, that the uncertain today is causing some people to sit on the sidelines and that's going to have an impact to business the uncertain today is causing some people to sit on the sidelines and that's going to have an impact to business investment and other things that give rise to the kind of economic activity that prompts people to travel.

So, I think we're having some impact because of the uncertainty today. To some extent, the worst thing for us would be that that uncertainty lasts a long time. But we don't -- obviously we don't know. We don't have a lot of precedent to look back at and to compare something that would give us a lot of guidance. There is some reason when you look at the economic statistics generally that shows some signs of a recovering economy to believe that over time, if the uncertainty is not resolved, businesses will start to get off the sidelines and get back to work because they can no longer wait. When and how that gets played out in individual decisions, we obviously don't know.

We have said in our prepared remarks that our RevPar forecast assumes no material impact of the war. I think consistent with that, the forecast we've provided forecast assumes no material impact of the war. I think consistent with that, the forecast we've provided would be sort of the optimistic assumption that people have about the war out there.

In other words, that it -- if it's going to happen, it begins reasonably soon. And if it is going to happen, that it be essentially localized in Iraq and be relatively quick and if that's the way events play out, our forecast shouldn't be real far off from where we end up. If, on the other hand, the uncertainty lasts a lot longer, A, or B, the war either takes longer or events occur outside of Iraq, then we don't really have any tools to guide you but obviously we can all see the impacts can be more pronounced.

Thanks.

Our next question will come from Joyce Minor at Lehman Brothers.

Can you walk us through what we should be getting out of the new disclosure you provided which, thank you for providing that, but in terms of the base franchise and management fees? It looks like you're indicating your own hotels lost money slightly in the fourth quarter and you made some money from time share but you're basically illustrating for us, I think, how profitable your fee-based business is but do you want to give me your take on it?

Yeah. As we've talked with you all over the last number of quarters, over the last couple of years, we've been listening to the investment community to try to figure out what more information would be useful in helping people understand our financial statements and had pretty intense conversations about that in 2002. As a result of those conversations, we have made a number of changes in the release we put out today which will also be showing up in the 10K and the 10Qs as we file them going forward.

First, on the one Joyce you refer to most specifically, is we're breaking out base management and franchise fees and incentive fees for our lodging business. Those are the gross fees coming from each one of those categories and we'll continue to report that on a full year and a quarterly basis. It is -- that's a fascinating bit of disclosure because as we said in our prepared remarks, even in this really horrible year, our base management franchise fees were up over 2001, as really new units offset the impact of declining RevPar on the basis so, it is a pretty neat story.

You can also see the impact on the incentive management fee piece which was down 20% on a full year basis up 43% on the fourth quarter and sort of see where those dollars are. We haven't talked about incentive fees in the past and that down 20% versus the peak of 2000 is down a little bit more than 50% in terms of our incentive fees. I'm not sure that's a great story as it relates to the decline, but it is probably a pretty positive story as it relates to the possibility that's going to come marching right back up as business conditions return.

In addition to that part, we're breaking out separately, the performance of owned and leased hotels. We'll be disclosing separately the losses or profits picked up from our equity stakes in the joint ventures. And all of those things should help folks be able to look at our financial statements and see the performance of the various parts of our lodging business, as well as the margins implicit in those businesses and you can see that margins we have in the management and franchise business are very, very substantial. Time share, we have disclosed as a separate segment for some time. We obviously continue to do that.

On the balance sheet, you'll see that we are breaking out in the investments in affiliates line loans and equity separated from each other which should help people understand how we get to the total notes receivable numbers that we talked about in that figure and there are some other modest changes but those are the biggest.

I appreciate that. Will you be providing this detail for the remaining quarters of '02 as well?

I think we can do that supplementally. Yep.

Okay, and can you speak to your '03 guidance, what you're looking for in the way of incentive management fees in terms of a percentage change?

You know, I don't know that I have that on my fingertips. Sort of thinking it through together. As we talked about flattish RevPar with a decline in margins of one to two points says that incentive fees will be down a bit, not up. I wouldn't expect them to be down massively given the level they've already fallen but I don't have a precise percentage for you, Joyce.

Okay. Thank you.

If your question has already been asked and answered, you can remove yourself from the queue by pressing the pound key. We'll now go to Jay Cogan at Banc of America Securities.

Good morning, Arne and Laura. Got a few questions for you. Couple of numbers questions and then a -- an outlook question. With respect to the fourth quarter, you reported I'm looking at the adjusted number correctly trying to reconcile. It seems as though you guys excluded the $12 million loan loss provision? Is that correct?

No. It is in our numbers.

Okay. Let me talk about that afterwards.

It is separately reported, Jay, on the P&L.

No, no, I see that but when you're talking about adjusted earnings.

No. In none of the calculations that we've given you this morning have we added back that $12 million.

Okay. In that $12 million, is that the same $12 million that last year at this time was treated as a balance sheet item with respect to the off balance sheet guarantees?

Well, last year we took about $85 million of lon and guarantee charges. If you look at our P&L from last year, you'll see them broken out. The guaranteed charges, by and large, hit above the operating profit line and the loan reserves hit in the interest line.

Yeah, but there is $12 million of guarantees that you expected to fund but didn't count as a charge last year. Because you expected to get the cash back. I'm wondering if this is the same $12 million?

No, it is not the same $12 million..

Okay. Then with respect to the write-offs in the quarter it, sounds like the only provision is the one we just discussed and I'm interested that with the business getting weaker, over the year that you didn't have to take any hits to the sliver equity investments or other loans or other guarantees, is that correct? And should we expect anything in '03?

Well, the process we do here has really not changed at all. And that is to every quarter go through our guarantee and loan portfolio. And do the classic impairment analysis. We, obviously we would have loved not to have any loan reserves in the fourth quarter, we did take $12 million and that's really just a function of looking at those individual hotels and the way they're performing and the way we're forecasting to perform to some extent, it is driven by the pressure on a given property at the precise moment. It may be that long-term value, we think is still okay, but that pressure that's being put on it by senior lenders, for example, where maybe we have a mezzanine loan are going to cause the hotel not to be able to survive for some sort of refinancing and if we're deciding not to step up and take out the senior, for example, we concluded on a practical basis that that mezzanine is no longer valuable so we impair it.

Okay. As we go forward, it is all going to depend on performance, obviously.

It is not so much performance on a week to week or month to month basis because that's not going to have that much of a pronounced an impact on the impairment analysis but instead, the impact on the long-term forecast and the performance of the properties.

Okay. Then, with respect to the outlook question, a number of investors that we've talked to recently or I think are looking beyond '03 given the noise we have with respect to Iraq and thinking about '04. I was wondering if maybe you guys could provide -- I know it's early and things have changed considerably in terms of guidance over the last few quarters and all but right now, what's the best guess in terms of the ramp of recovery in the lodging business including your business as we move into next year '04?

How about a really risky and bold statement? We would forecast RevPar to be positive in 2004.

Okay. Thanks a lot.

Thank you.

Next question will go to Bill Crowe of Raymond James.

Good morning Arne and Laura. Couple of questions. The agreement to sell half of the synfuel business, should we assume that economically, you're going to still achieve the 30-year, 31 cent kind of full year number? The -- in the out years?

Yes. We've built the 30 to 32 cent number for 2003 in our forecast because we believe that's the right set of assumptions to have.

Then going forward, that would be true as well?

Absolutely.

Okay. Then second of all with the write down on ExecuStay stay, could you talk about what the future is within Marriott?

I think the future of the business as we talked about in the prepared statements will be to use the franchise model a bit more in most markets in the United States. And to have more of a managed type model in a few key markets.

So, an exodus from the business is not planned?

An exodus is not planned.

Thanks, guys.

By the way, just to make a note on this, the way the accounting rules work on goodwill impairment, we have to look at the value of the business today were it sold rather than sort of the value of the business at some point in the future. And if you -- obviously, it sort of states something that's absurdly simple but in this market, the business is worth less today because of the pressure and operating profits than it was when we bought it.

We're still hopeful that the value will come back and be fine and that this will be a wonderful success over time and in fact, we made enough money from this business two years ago to support the valuation that was on our books before. But since we aren't certain how it's coming back, our accounting rules essentially caused us to take that impairment today.

Thanks.

David Anders at Merrill Lynch.

Hi David

Just for clarification. Hi, how are you doing. Just for clarification, the first quarter then for the synthetic fuels benefits, that should be the current run rate in the fourth but then once it closes, on the sale, it ramps up. Is that correct?

I think we are it -- let's see. Did we give a specific first quarter guidance for synfuels? I think it is in the 7 cent range. Five to seven cent range. I think we'll run along at -- that's a little bit slower pace than we had in the fourth quarter.

Okay.

But we'll run along and step up as the year goes along and as this transaction contingencies get satisfied.

Once those are satisfied, do you continue to account for it as-- how did it get accounted for?

Something we're looking at right now. It may be that it will no longer be consolidated in which case we'll pick up a minority stake contribution from it. Although we'll be separately receiving revenues from our partner the business that who will be paying us for the credits that are produced.

I'll give you this commitment, even though I don't know precisely how the accounting will work out, we'll continue as we have in the past to disclose every quarter precisely the amount of earnings that we're picking up from this synthetic fuel investment whether it's consolidated or not.

Okay. Thank you.

You bet.

Next up, Keith Mills at UBS Warburg.

Good morning.

Good morning, Keith.

Two questions for you. Arne, first, you mentioned that New York City seemed to be stabilizing and not that New York City is the world, have you seen historically that maybe New York City leads in the recovery? I've asked that question to my sources and I get mixed reviews. I'm wondering what Marriott has experienced.

I don't know but I would guess not. I think our sense is that more of New York City's relative strength is because of how compelling a destination it is and it has the advantage when business conditions are weak of continuing to be able to pull in leisure business when rooms become available in New York for people to hold group meetings there, it is obviously an attractive place to do that. Over the last number of years, groups often couldn't get into New York and so given that dynamic, even as business transient travel remains weak, New York continues to perform reasonably well. Those kinds of trends wouldn't necessarily suggest that New York's relative strength to speak of, in other markets which will be much more dependent on transient travel.

I might add to, that Keith, that New York also is a major tourist destination. So, it probably has more in common with Orlando in that respect as being a -- more dependent on international events and it also has a big exposure to the financial services industry which most of the country does not share.

Sure. Okay. Two additional questions for you. First, you had noted that the maintenance Cap Ex would be $40 million this year versus $50 million last year. Why the decline?

Oh, I think we own a little bit less. We have probably completed a bit more Cap Ex. I'm thinking about our headquarters building here in Bethesda and by in large, we've restacked the whole building in the last year or two. These are modest numbers but as those projects come to an end, they don't necessarily need to be followed with immediate projects behind them.

Sure. Okay. Then just finally, Arne, could you comment on the companies Internet strategy specifically with dealing with some of the independent Internet sites if you anticipate making any changes this year in terms of how the Marriott brand of properties will deal with those sites?

I think we continue to believe that the Internet is a much more powerful source of opportunity for us than it is a threat. We continue to see growth in Internet distribution in 2002 versus prior years but now 88% of, I think, all Internet sales we did ran through Marriott.com in 2002, so, the percentages have gone up significantly.

The others are split you know, between the Pricelines and Travelocitys and Expedias and Hotels.com and Travel Web and all of the rest of it. We continue to like some of those more than others. We view Priceline as being a nice way to sell distressed inventory without in any way undercutting our pricing integrity. In most of the other channels, we're selling rooms through those channels at the same kind of pricing and where we can do that, it is pretty easy and obvious to us that if the customer wants to buy through those channels, we'll sell through those channels.

I think the only place where there's interesting questions here is on sort of the merchant model approach. By in large, we continue to believe that is not offering much to our system and we by in large do not participate and discourage our franchisee partners from participating in those kinds of models. But we'll watch this as we go forward and at this point, again, see more lift and more positive development from this than threat.

Can you just give us an update on Travel Web and where that stands and your participation with it and if you think at some point in the future, it may partner with another site in order to increase its awareness?

Travel Web is up and running. This is the merchant model that was put in place by a number of participants in the lodging business. It has been up for a quarter and a half maybe, if memory serves. Good growth quarter over quarter. It has already developed some linkages with some other sites which is helping to drive business to it and I suspect it will continue to work that way but I think the early returns are very positive.

Thank you. I appreciate it.

You bet.

Our next question will come from Will Marks, he's with JMP securities.

Yes. Good morning, Arne and Laura. Couple of quick questions. On the impairment analysis you do, do you do it every quarter but is it just a coincidence then that two write-downs have been at the end of the year?

Yes. And you know, we may -- I'm not sitting here saying we had no write-downs in earlier quarters, we may have had a million or two or $3 million in some of the quarters but we're doing the write-down every--excuse me-- we're doing the impairment analysis every quarter.

Okay, and just one other clarification on the synfuels. What was the reason behind or what is the reason behind this potential sale?

It is two fold. The synfuels investment has been even a better success than we anticipated when we bought it in the sense that we've seen demand for the fuel and efficiency in the machines that allows us to drive more volume than we anticipated when we got in.

Secondly, not surprisingly in terms of the continuing weak economic environment, we've seen our pretax cash flow grow less substantially than we anticipated and both of those things caused us, about a quarter ago or so, to see a likely need or likely opportunity to sell a stake of this investment to somebody else who had pretax cash flow that could benefit from this. We wouldn't have to sell it in the sense that we can calibrate the production of these machines at will, but by doing that, we really lose the ability to capitalize on value that could be generated from additional credits.

Okay, so, the reason you're able to maintain the same amount of earnings benefit is because of your ability to calibrate the production?

To calibrate and we will make on the sale transaction, we'll make profit both on the credits we use, as well as the credits we're selling to our partner because they're paying us a significant premium over what we effectively paid for.

Got it. Great. Thank you very much.

You bet. It is 5 after 10:00. We'll take two more questions then close it up.

Actually, only one left.

How about that. Good timing.

Todd Voight from Cliffwood Partners.

Good morning. I was just wondering if you could explain the growth and the cost reimbursements on the income statement relative to the growth and the base management fees? It seems like it is growing a little faster. Is that a timing issue and are those cash reimbursements or are they estimated?

Yeah, let me sort of stand back and talk about what the cost reimbursements are. This is simply the cost that we incur in managed hotels which we run for our owners. In most of the managed system, including almost every managed hotel in the United States, for example, the employees are Marriott International employees not owners of the hotels and the expenses we incur on behalf of the hotels we incur on behalf of Marriott International. And so those dollars are what we spend on behalf of those owners and the reimbursements are essentially the hotel's reimbursing us for those expenses.

The growth year over year is simply and purely driven by the -- to some extent, growth in those expenses driven by wage growth and insurance premium growth and the like but more significantly than that is driven by the growth in the managed system. And in an environment in which you've gotten margins decline as we've talked about, you're going to see the cost reimbursements are growing faster than the fee streams would be growing on the other lines and the revenue statement.

Okay, great. Thank you.

Okay. Thank you, all very much. We appreciate your time this morning. And we would like to I guess as we sign off, encourage you to get out there and travel. Bye-bye.

Thank you. That does conclude our conference call. We appreciate your participation. At this time, you may disconnect. Thank you.