萬豪國際 (MAR) 2003 Q1 法說會逐字稿

Good day and welcome to this Marriott International first quarter 2003 earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the executive vice president, Chief Financial Officer, Mr. Arne M. Sorenson.

Please go ahead, sir.

Thank you, Bill.

Good morning, everyone.

Welcome to our first quarter 2003 earnings conference call.

Joining me today is Laura E. Paugh, senior vice president investor relations, and Carl T. Berquist, executive vice president, 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 SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the press release that we issued earlier this morning along with my comments today are effective only today, April 24, 2003, and will not be updated as actual events unfold.

In keeping with new SEC regulations you can find a reconciliation of non-GAAP financial measurements referred to in my remarks at our Website, at www.marriott.com/investor.

In our remarks today we will summarize the results of our first quarter, provide an update on our balance sheet and investment plans, and provide guidance and sensitivity information for the remainder of the year.

We were pleased with our results in the first quarter.

Diluted earnings per share from continuing operations totaled 36 cents, a 13 percent increase over the prior year.

And our strong balance sheet has allowed us to repurchase 5.5 million shares year to date.

Lodging revenues before cost reimbursements totaled $538 million in the quarter, essentially flat to the 2002 first quarter.

Our revenues from base and franchise fees were up six percent, as contributions from new units more than offset the slight decline in system-wide domestic REVPAR.

House profit margins on managed hotels declined just under three percentage points which contributed to a $3 million decline in incentive management fees.

Lodging segment profits declined four percent to $147 million for the first quarter.

Our REVPAR for the quarter was down 1.5 percent on a composite basis.

With the Marriott Hotels and Resorts brand down two percent, Renaissance up 0.1 percent, Courtyard down 0.3 percent, and Residence Inn down 2.8 percent.

While all segments of lodging demand are weak, the most pronounced weakness is with the individual business transient traveler, particularly the intercontinental traveler.

This has caused considerable variability in REVPAR from market to market, and from product type to product type which makes the average REVPAR figures a bit too superficial.

In any event when comparing averages please keep in mind that our quarter began January 4 and ended March 28.

Our REVPAR would have been roughly minus four percent on a composite basis if calculated on a full three-month calendar quarter.

Now let's get under the averages a bit.

We remain highly focused on group business.

For many meeting planners small regional gatherings have taken the place of large meetings.

A regional meeting saves time and money for both meeting planners and attendees.

Pricing remains highly competitive for all business segments, but particularly for short-term group business.

But we are pleased to report that in general, we have not seen evidence of irrational pricing decisions by significant competitors in the industry.

As the war began, cancellations were modest.

In the first two weeks, following the start of the Iraqi conflict we lost only $14 million in cancelled group business.

In comparison, we lost over $122 million in cancellations in the two weeks following September 11.

While few meetings were cancelled when hostilities began in Iraq, few meetings also were arranged, as meeting planners avoided making new commitments.

This lack of new commitments exacerbated an already very short group meeting booking cycle.

In fact in February, one small group agreed to finalize their group meeting contract only after they had checked into the hotel.

The good news is that group meeting inquiries have picked up as the situation in Iraq that has calmed.

Our weekly net reservations declined seven percent year over year when the Iraq war began.

The following week reservations were down five percent, then down two percent.

And last week reservations declined only one percent.

Courtyard and Residence Inn continued to feel the impact of poor business transient demand.

Without group space to sell they are competing for a smaller transient-only customer base.

Our warm weather resorts did well during the quarter, as leisure business was motivated by this winter's unusually cold weather.

But overall leisure business remains very short-term, price-sensitive and highly competitive.

Our Internet bookings, totaling nearly $325 million were up 25 percent over the prior year quarter.

Over 80 percent of these bookings continue to come from Marriott.com.

Nearly five percent came from Priceline, which generated more room nights for us than any other Internet channel.

In March, Marriott and Priceline announced a three-year extension of a marketing agreement.

Under the agreement Priceline will act as Marriott's preferred distribution channel for opaque online sales.

We saw significant variation among markets this quarter as the business environment affected some hotels more than others.

Performance was strong in San Diego, as it benefitted from the Superbowl.

Business is likely to remain strong in that city for the rest of the year due to the city's new convention center.

Our new hotel in Phoenix, Arizona, called Desert Ridge is doing very well.

Occupancy in the first quarter totaled 77 percent and bookings are strong for the remainder of the year.

The golf courses and spa are busy.

Hotels in U.S. gateway cities were hurt by declining international arrivals including Orlando, Miami, Atlanta and New York in the East, and Los Angeles, San Francisco, and Seattle in the West.

The SARS problem in Asia which became significant as our quarter ended has reduced air lift to the U.S.

And tourism from Latin America has also declined.

It has become increasingly difficult for visitors to the U.S. to get visas.

For visitors from Argentina or Venezuela, only small amounts of currency can be converted when travelling overseas.

As a result the U.S. has become a less attractive shopping destination for Latin American leisure travelers.

Some markets such as suburban Boston and Orlando suffer from new supply although supply growth is declining as new projects are completed.

Washington, D.C. was one of our strongest markets in the first quarter as its depends customers involved in one of the strongest sectors of the American economy.

Nationwide government traveler room nights our hotels were up eight percent during the quarter.

And both Tampa and Washington benefited from defense contractor and government travel associated with the war.

Outside the U.S., we began the quarter with very strong performance.

REVPAR at company-operated comparable hotels increased seven percent in constant U.S. dollar terms.

In South America most business remained regional rather than international as that region continued to deal with the difficult economic climate.

But the Caribbean benefited from strong leisure business.

Overall REVPAR in the region increased 15 percent.

In the Mid-East REVPAR improved substantially from the very low levels experienced in the year-ago quarter.

Like so many other markets, interregional business was stronger than international arrivals.

As the Iraqi conflict escalated later in the quarter hotel occupancies could be characterized as feast or famine, with some hotels filling to capacity and others not.

Business travel has not yet returned to normal levels in that region but calls to our reservations center are picking up.

The Mid-East conflict also restricted occupancies at hotels in international gateway cities in Europe such as Paris and London.

Germany which typically contributes considerable regional travel to other markets remains mired in recession.

Even group meeting business in Germany is off as fewer trade fairs are scheduled this year.

In total, continental Europe REVPAR declined four percent during the quarter.

For almost all the quarter strong economic growth in Asia spurred occupancies and rates across the region.

But as the quarter ended the growing concern about the SARS virus produced profound declines in occupancy at properties in Hong Kong, Singapore, Bangkok and Vietnam.

Travel warnings and restrictions have significantly reduced international travel to Asia.

Last week occupancies in Hong Kong were fighting to reach 10 percent.

Interestingly we have seen relatively less impact to our hotels in China as they tend to rely more on local and regional travelers rather than international guests.

Asia typically contributes roughly two to three percent of our lodging segment profits.

Advance preparation allows us to act quickly and decisively in these difficult situations.

Each hotel, both inside and outside the U.S., has contingency plans to deal with sudden reductions in demand.

And at most properties those plans already have been implemented.

Like REVPAR house profit margins varied considerably from market to market during the first quarter.

House profit margins increased one percentage point in our international markets, but declined nearly three points at U.S. managed hotels.

Cost cutting helped, but could not wholly compensate for low demand in the U.S.

U.S. casualty insurance and medical benefit costs increased significantly.

Energy costs rose 10 percent during the quarter, largely due to higher prices and lower temperatures.

And maintenance expenses increased due to the cost for such things as removing drifts of snow from walkways and parking lots.

When thinking about hotel level margins, it is important to look not only at the year-over-year comparisons, but also at what has happened to margins relative to revenues over a longer period of time.

By our calculation, REVPAR in our 2003 first quarter was roughly 15 percent down, from the levels of the year 2000.

This statistic is a fair estimate for our Marriott, Renaissance, Courtyard and Residence Inn brands.

House profit margins for these hotels also are down, but by a comparatively mild five percent versus 2000.

The biggest factors driving the decline in margins are rate weakness, reduced telephone profits and big increases in benefits and insurance expenses.

The single biggest reason the margin decline has not been more severe is that through new programs and renewed focus, we have achieved significantly greater levels of productivity in hotel hourly and management staffing.

Back to our year-over-year comparisons.

Property level cost increases reduced hotel house profits and with it our incentive fee revenue.

In the first quarter of 2003, 23 percent of our managed hotels earned incentive fees compared to 38 percent in the full year 2002 and nearly 70 percent in 2000.

As a result, down side is limited, yet we retain considerable upside when operating fundamentals improve.

Our lodging distribution continues to grow despite the difficult business environment.

In the first quarter we opened 8,000 new rooms under our flags.

And we remain on track to open 25 to 30,000 rooms in each of 2003 and 2004.

De-flaggings totaled less than 200 rooms in the first quarter.

Our pace of hotel conversions was excellent during the quarter.

Thirty-five percent of our room additions during the quarter were conversions from other brands.

Of the seven Marriott branded hotels opened during the quarter, four were conversions from other brands.

We expect continued strength in conversion activity in our brands, especially in light of the ongoing weakness in the industry, as owners and investors seek to reposition hotels and improve returns.

At quarter-end, our worldwide pipeline remained at more than 50,000 rooms.

Twenty-four percent of these rooms are outside the U.S.

Forty-one percent are full-service properties.

And less than two percent are company-owned development.

Thirteen percent -- or nearly 7,000 rooms -- are conversions from other brands.

After the quarter ended, we signed an agreement to convert approximately 4,000 rooms in Sweden to the Ramada International brand.

These rooms are not included in our first quarter 50,000 room pipeline.

Turning to our time-share business.

You may recall last quarter that we disclosed our intention to sell our time-share notes twice a year rather than every quarter, as had been our previous practice.

As a result, we completed no time-share note transactions in the first quarter, and therefore, booked no gains.

In the year-ago quarter we sold $89 million in notes for a gain of $14 million.

Reflecting strong leisure demand, time-share contract sales increased more than 15 percent during the quarter.

Sales were strong at resorts in Hawaii, Aruba and Desert Ridge but somewhat soft in Orlando.

Today we have 33 resorts in active sales.

Our lodging segment results include the impact of gain recognition from asset sales completed over the past several years.

We recognized $3 million in gains during the first quarter from these transactions, flat with the prior year.

Our lodging profits reflect better results from our joint venture investments.

Booked losses from our lodging joint ventures totaled own $1 million including a $3 million loss from the Courtyard joint venture and a $6 million profit from the Ramada Cendant (ph) joint venture.

Lodging joint venture losses in the 2002 quarter were $7 million.

In 2003 we expect the Courtyard joint venture to continue to pay all senior debt service, including approximately $30 million of principal amortization.

In fact the joint venture's total indebtedness has declined every quarter since our investment in the partnerships three years ago.

Still, given the uncertain economic climate as well as seasonal variations in cash flow we expect that the joint venture will retain excess cash in 2003 and defer payment of our mezzanine interest and a small portion of our ground rent.

This action is permitted under our existing loan agreement and will not change our recognition of interest income or ground rent from the venture.

When business conditions improve, we expect the joint venture will release any unpaid fees, interest and rent.

At the end of the first quarter the joint venture's cash position totaled $39 million.

Corporate expenses increased modestly from $29 million to $30 million.

Interest expense increased by $7 million during the quarter as capitalized interest dropped by half.

Investment spending continues to decline, while share repurchases continue.

Total debt including debt from discontinued operations was $2.2 billion at the end of the first quarter compared to $2 billion at year end 2002.

However our cash balance was $525 million at the end of the first quarter compared to $198 million at year end, as we decided to increase our cash reserves at the commencement of the war in Iraq.

Dispositions totaled $266 million in the first quarter, including the sale of our Senior Living Services business, nine retirement communities and a parcel of land.

Our synthetic fuel segment produced 2.2 million tons of treated fuel in the first quarter.

The operating loss from this investment totaled $59 million during the quarter.

And the impact on net income was a favorable $19 million or eight cents per share.

Late in 2002, we signed an agreement to sell a 50 percent interest in our synthetic fuel investment to a major U.S. investment bank.

We expect the sale to close later this year, contingent upon receiving a satisfactory private letter ruling from the IRS regarding the new ownership structure.

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, we anticipate that earnings per share from the company's investment will be approximately 32 to 34 cents after tax in 2003.

Because the transaction is somewhat dependent on the ultimate dividend policy adopted by Congress, we will likely achieve lower tax gains in our third quarter in 2003.

For this reason the earnings guidance we'll describe in a few moments includes only five cents per share in the third quarter and 13 cents per share in the fourth quarter from this investment.

In the unlikely event that the transaction does not close, the full year tax benefit will approximate 22 to 24 cents per share, and the fourth quarter contribution will be nearly zero.

For 2003, excluding synthetic fuel we expect our tax rate to be roughly 36 percent.

We typically spend a few minutes on our call discussing our balance sheet and contingent liabilities.

Let's start with our guarantees.

At quarter end we had $803 million in outstanding guarantees not including our $460 million in guarantees from our Senior Living business.

Our non SLS (ph) guarantees are roughly $40 million lower than at year end.

And at the end of the quarter our guarantees include $235 million of exposure that is not yet effective and $568 million of effective guarantees.

The effective guarantees include $307 million of debt service guarantees and $178 million of operating profit guarantees.

For these two categories of exposure, we have roughly $40 million in reserves.

Project completion and other guarantees make up the remaining balance, the majority of which relates to construction projects which are nearly completed.

Our loan portfolio at both year end 2002 and at the end of the first quarter was approximately $1.1 billion.

However, due to the absence of a time-share note sale in the first quarter, our portfolio included $50 million more in time-share notes than at year end.

On an apples to apples basis therefore, our loan portfolio declined about $40 million in the quarter.

At the same time, our loan commitments declined by roughly $25 million during the quarter, and now stand at $194 million.

Our loan portfolio should continue to decline as the loans are repaid from operational cash flow or refinancing proceeds.

In fact we completed the sale of a $75 million mortgage note during the first quarter.

Similar to real estate, we do not intend to be long-term investors in our loans.

But we will sell or refinance transactions only at appropriate economic terms.

During the first quarter, approximately two-thirds of our interest income was non-cash, largely due to the cash deferral of our interest income from the Courtyard joint venture.

As we've explained in the past, we review our entire loan portfolio every quarter to determine whether any of the loans are impaired.

And if so, we post any necessary reserves.

In fact, in the first quarter we established reserves of $5 million on two hotel loans.

First quarter investment spending totaled about $119 million, including $48 million for new unit capital expenditures, $3 million for maintenance CapEx, $34 million for loans and equity in investments, and $34 million for time-share spending.

We repurchased five million shares during the quarter and 600,000 shares to date in the second quarter of 2003.

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 vested.

And our earnings guidance for 2003 includes the impact of these expenses.

We believe this will reduce the future number of shares that might be issued under these plans.

Now, let's turn to our outlook.

There has never been 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 few concrete signs of improvement yet.

In fact travel demand in Asia has meaningfully deteriorated in recent weeks.

The weak economic climate is likely to persist for a time.

Based on recent occupancy and rate performance, we estimate that domestic managed REVPAR will decline four to five percent in the second quarter, and higher labor costs, health care costs and insurance premiums combined with the lower REVPAR will likely reduce house profit margins.

In the third quarter, we are assuming that REVPAR will range from a decline of two percent to an increase of two percent compared to the prior year.

With that REVPAR assumption and higher costs house profit margins are again expected to decline.

In the fourth quarter we anticipate slight improvement as comparisons get easier.

We are estimating REVPAR growth of zero to four percent and lower house profit margins compared to the prior year.

For the full year, this outlook implies minus one to minus two percent REVPAR and minus 1.5 to minus 2.5 percentage point decline in house profit margins.

Time-share has proven to be more resilient than our hotel operations in the current economic climate.

Despite strong contract sales in the 2003 first quarter we anticipate that time-share reported revenues will decrease slightly in the second quarter.

In part due to the absence of a note sale transaction in the first quarter we expect to sell a larger portfolio of loans in the second quarter than were sold in the prior year second quarter.

We expect to sell roughly $130 to $140million in mortgage notes during the quarter, compared to $85 million in the 2002 second quarter.

In total we expect to earn $42 to $45 million from our time-share business in the second quarter and $135 to $145 million for the full year, which includes development profit as well as financing income.

Combined with our hotel operations we estimate lodging, including time-share, should earn about $180 to $190 million in the second quarter, which is a slight decline from the $192 million earned in the year-ago quarter.

We anticipate full year profits from lodging will total $690 million to $735 million.

To complete our outlook we estimate corporate expenses should total 25 million to 30 million in the second quarter and $125 to $135 million for the full year.

With declining capitalized interest from slower investment spending, and with spending on share repurchases, we expect interest expense net of interest income to reduce our pretax earnings in the second quarter by approximately $5 million, and $20 to $25 million for the full year.

In total, we expect second quarter earnings per share from continuing operations will total 45 to 49 cents per share and 2003 EPS will total $1.76 to $1.87.

The booking pace is shorter than we have ever experienced.

And the range of possible outcomes is quite wide.

We would suggest, however, that investors remember a general rule of thumb.

That one point of REVPAR is worth roughly about$8 to $10 million in pretax lodging operating profits annually.

Additionally, one point of house profit margin typically impacts incentive management fees by $9 to $11 million annually.

Clearly, this methodology is only a rule of thumb and should work for small changes in REVPAR, but is less useful for REVPAR changes of five points or more.

For the full year 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.

Winston Churchill, a man who understood adversely, once said if you are going through hell, keep going.

That is excellent advice in this particular industry at this particular time.

It's important to keep going and keep our eye on the other side.

To be well-positioned when conditions change.

And you know the only thing we can count on is change.

We'd be happy to take your questions at this time.

Bill, will you please open the line?

Thank you, Mr. Sorenson.

The question and answer session will be conducted electronically.

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

If you are on a speaker phone, we ask that you please make sure you turn your mute function off to allow your signal to reach our equipment.

We will proceed in the order that you signal.

And we'll take as many questions as time permits.

Once again that is star-one to ask a question.

We'll pause just a moment to assemble our roster.

And we'll take our first question from Brian Eager (ph) with Gerard Klauer Mattison.

Good morning.

Hi, Brian.

Hi.

Arne, can you maybe tell us a little bit about your conversion activity which was a little high in the first quarter?

Maybe some generalizations about reflagging types of brands coming from independents?

Just a little bit of color as to where those conversions were coming from, and generalizations you can make either gee geographically or across brand flags or something to that effect?

It's actually a little hard to give you one common denominator on this.

We've looked closely at the conversion.

Requests for conversions are dramatically up.

And we are taking many, many fewer candidates than are offered to us.

The biggest reason for our relatively low hit rate has to do with (A), product quality and the cost of converting existing hotels sometimes to our brand standards, and (B), to some extent in a low demand environment in some markets we simply don't need additional hotel product.

So those two things combined cause that conversion number to be lower than it might be otherwise.

When we've looked at the brands that have been converted into our brands, they're all over the map.

We can't sit here and say that we're taking disproportionately one of our competitors' brands and nothing from anybody else.

In fact we've got one or two products from virtually every brand that's out there including some long brands, as well as independents or small brands.

We noted that in Hawaii, for example, we added a couple of Outrigger Hotels during the quarter.

We're please to have them.

Outrigger has been a well established brand in Hawaii, quite successful.

They believe they can be more successful tied to our brands.

And we're thrilled to have them.

But otherwise there are a lot of different brands, Radissons and Sheratons and Hyatts and Hiltons as well as independents that have converted to our system.

OK.

That's all.

Thank you.

You bet.

We'll go next to Joe Greff with Fulcrum Global Partners.

Good morning, Arne.

Good morning, Laura.

Hi, Joe.

Hi.

Can you just comment what some of your property-level people are saying to you about summer leisure booking?

I know visibility's tough, but any kind of commentary there would be helpful.

Summer leisure bookings they feel good about.

It varies obviously a little bit with the market.

I think in Europe there is considerable apprehension about whether the American traveler will show up this summer.

And similarly, in many markets in Europe -- take Paris for example , which has been a strong destination not just for Americans but travelers from the Middle East -- whether Middle East travelers will show up.

That's primarily leisure related.

And so there's a big question mark there.

But when you look in the United States, in the Florida markets, in the Caribbean markets, in Hawaii, there is significant optimism about leisure business in the summer.

Great.

And then another question with regard to I guess group banquet, corporate events that you're putting on the books, that have to take place for next year, can you talk about some of the pricing on that relative to this year, relative to last year?

For 2004?

For 2004.

Joe, I don't have that at my fingertips.

I'm sorry about that.

I would guess that pricing relative to this year is flattish maybe down a point or two but not significantly different as it relates to the rate.

OK.

And then one final question if I may.

Base incentive fees and increment (ph) you recognized, how much of that is -- in the first quarter how much of that was accrued versus being paid?

Accrued interest income in the first quarter included about $6 million from the Courtyard joint venture and about another $6 million from all other loans that were not paid in cash.

Incentive fees ...

So about a total of 12.

Incentive fees we recognized none that are not paid in cash.

Great.

Thank you very much.

Our next question from Joyce Minor, Lehman Brothers.

Hi, Arne.

Can you talk about the cost side of the equation and what you are seeing there?

It sounds like it's not necessarily all that bad.

When you maybe try to look out further to '04, I think you've made the bold statement that you expect REVPAR to be up in '04.

Would you similarly expect house margins to be up in '04?

Or are some of the cost savings going to continue into next year?

I don't know if you can break it down category by category at all into what you expect to be one time cost increases this year versus what might continue to be significantly higher cost for next year at all?

Yes.

Yes.

They're all good questions, obviously an area that's getting a lot of focus today throughout the industry and in our sort of hotel level operating teams.

A few comments I guess I'd say.

One, the quarter one, 2003 comparisons our instinct is will be the toughest.

And if you, you know, go back a year in time think about it, the first quarter of 2002, was really the first full quarter after the September 11 tragedy.

There was huge uncertainty about lodging demand.

And in our hotels, the costs were absolutely nailed down as tight as we could get them nailed down.

And across the board, staffing was very thin.

We still had some hotels where you had restaurants closed or where you had services that were much less than sort of typical normal operating service levels.

And I think we, and probably many of our competitors, were deferring discretionary repair and maintenance kinds of expenses and that sort of thing.

And that's going to make the first quarter the one we've just reported I think the toughest.

Having said that, there are some trends here.

And we talked about health care benefit costs.

We talked about insurance expenses.

I mentioned in the comment about the comparison to 2000, the impact on telephone profits which has not been talked about quite as much.

But all those behind the things are trends that we think are here to stay.

Now, in saying that hopefully that doesn't mean we'll see insurance costs increase next year at the rate they've increased in the last year or two.

But we are not expecting insurance costs are going to fall significantly from this year's level.

Depending how things work out in the Middle East, and depending obviously on what happens with the weather, we may see the energy cost number decline again which would be obviously comforting.

But other than that we'd expect most of those expense items to remain reasonably high though hopefully not grow as fast as they've been.

Translate all of that rough order of magnitude, you've probably got to get two or three points of REVPAR growth to keep flat margins.

Now, maybe in an extraordinary circumstance can work on a point or two for a period of time.

But I wouldn't anticipate that that's a sort of steady-state environment.

We will continue to see wage costs and benefit costs grow at least with inflation.

We, believe that we've got good upside here on the margins, and still some potential to improve productivity.

We've got some new labor management scheduling tools that are very advanced technologically.

And we're getting good return from that in our hotels.

And we think there is more return that can come from that going forward.

And that's probably the best single tool we can look at to offset some of these increases over time.

That's very helpful.

Thank you.

You bet.

If I could just ask one follow-up.

If you could talk a little more about SARS.

The Asia data was interesting.

Is it fair to say that if it is only two to three percent of your profits the worst it can do is go to zero.

You don't have any exposure to losses on that region.

And then if you have any data points around Canada, Toronto, occupancy data like you gave us for Asia that would be helpful as well.

Thanks.

Yes.

We have very little capital at work in Asia.

So essentially, we have no or nearly no ownership-like exposure whether it be through joint venture, whole ownership, or even loan portfolio.

The same can be said for the guarantee.

Very, very little exposure in Asia.

So I think that roughly the worst that can happen is losing some portion of our fees.

Asia, obviously is a very big place, including as we talk about it Australia which is relatively little impacted, in fact may benefit to some extent from a diversion of Japanese travelers that would have gone to China, to Australia.

And so we haven't seen much impact there.

But obviously includes Hong Kong and Singapore which have been very strong hit.

Japan less so.

In fact the business in Japan has held remarkably well.

In Canada, the impact was not severe until the last week or so.

And particularly in the last couple of days, with the World Health Organization's recommendation on travel to Toronto.

That will hit Toronto hard on occupancies until such time as either that recommendation is lifted or people get more comfortable that there's not a real risk in traveling to that market.

Since that recommendation is so recent we're watching it play out today but the phones are ringing in Toronto.

And usually the question has to do with, for group meetings, you know what are your cancellation policies, or deferral of, you know, sort of discussions about businesses that they were talking about putting on the books before.

We have been fortunate to already see a number of groups that were either already booked in Toronto or contemplating booking in Toronto, book in some of our other hotels in the United States.

And we're doing the best we can to service those customers and make sure we retain as much of that business as we can.

SARS is obviously still a very much evolving issue.

We're watching it very closely.

And there's obviously a lot of things we don't know.

Thanks.

Yep.

We'll take our next question from Harry Curtis of JP Morgan.

Good morning.

Hi Harry.

Good morning.

Could you give us a little more color on your provision for loan losses.

You've now taken them in the last couple of quarters.

And how you get to the number -- is it your sense that it should run at the same rate for the balance of '03 and maybe a little bit of the math as to how you get to the number.

Thanks.

The process has been -- is very basic, although quite intensive in terms of the number of hours that are used.

We look at every loan and every guarantee, every quarter.

And we, in looking at them, look at not just current performance at the hotel -- underlying hotel but we look at usually a 10-year forecast for how that hotel is going to perform.

And we make a decision about whether or not the loan or guarantee recovery is impaired.

If it's impaired, we take a reserve for whatever the impairment am amount is and it's a pretty simple process as described in that way.

In the quarter, we took provisions on two different loans.

One was a loan that was really a sort of pre-opening loan.

We had agreed that some pre-opening dollars wouldn't be repaid, except from cash flow, above a certain level.

And as we looked at it we decided, given the way that market had been hit, that we couldn't reasonably forecast the cash flow would return to those levels in time for us to get that money repaid, so we posted a reserve on that.

And in another market we posted a modest reserve on a slight mezzanine piece.

The $5 million we took was roughly evenly split between those two loans.

As we look forward, I think it's safe to say that what we've experienced over the last couple of quarters, we are more comforted by than worried about.

And the reserves we've posted have been very, very modest.

I think the longer the weak economic environment continues and the more pressure we have on hotel profits the more there is some risk that we'll see additional reserves going forward.

I suspect that at the same time we will hit an inflection point where we start to see REVPAR increase and with it hotel-level profits.

And when we hit that point the risk of additional reserves will be dramatically decreased.

And we'll likely see at that stage in time considerable refinancing activity, and loan sales that will see not only the risk of reserves decline but see our portfolio size decline as well.

So by the fourth quarter, then, given your outlook, it would be reasonable to assume that the reserves would decline from the -- from this level?

Yes.

I -- you know, I think that's fair but it's all going to depend on what happens with REVPAR.

OK.

Very good.

Thank you.

You bet.

We'll go next to David Anders, Merrill Lynch.

Great.

Thank you.

Hi, Dave.

Arne, could you talk about, on the cash flow side have you received everything you're going to receive from is the SLS (ph) business as far as cash in the door?

And as far as asset sales for the remainder of the year, do we have projections there?

We won't give you projection for the balance of the year on asset sales.

It's just too iffy.

I will say that having sold SLS (ph) and what we sold last year, we don't have a lot left to he sell.

We obviously have the time-share note sales, which is a kind of different kettle of fish.

We're looking at selling a few additional loans over the balance of the year.

And there may be a few hotels to sell.

But we don't really have a lot left.

We do in the SLS (ph) context have a portfolio of Bright Gardens that we retain on the balance sheet for a little bit shy of a couple hundred million dollars, I believe.

And we are quite optimistic that we will sell that portfolio sometime in the next couple of quarters.

Great.

Thank you.

You bet.

Next question from Michael Rietbrock, Smith Barney.

Hi, guys.

Hi, Mike.

Just a couple of quick follow-up questions to Joyce's earlier questions.

Onthe margins, of the 300-basis point reduction on the house margin, that was for the fiscal quarter, correct?

Correct.

OK.

And then your comparison versus 2000, on the down 15 percent REVPAR, you say the house margins were down five percent, but I presume you meant five percentage points?

I meant five points.

Yes.

Good catch.

Yes.

OK.

And then last point is on SARS, Asia being two to three percent of the business.

Do you have any sense of what the inbound Asian I guess and Canadian business is as a percent?

I would guess it's a little bit more than that?

Remember Asia is an awfully big place.

The Japanese are the biggest travelers in Asia historically.

The Japanese have been down in their travel patterns for the last three or four years at least.

What's been interesting if you look at Japanese travel trends, though, is travel of the Japanese to China has gone up dramatically during that same period of time.

And while we would expect that travel from the Chinese destinations to the United States will decline, if we let our optimism run a little bit we're actually anticipating that we'll see Japanese travel to Hawaii for example increase.

And so we don't -- unless SARS moves more significantly onto the North American continent, we wouldn't see the impact of SARS in Asia to U.S. business as being very calculable.

It is obviously not a positive because there are some Chinese travelers.

But it's just not significant enough to factor into our calculations.

OK.

Thanks.

We'll take our next question from Will Marks, JMP Securities.

Good morning, Arne.

Good morning.

A couple of quick questions.

On depreciation, can you give me a number for the quarter?

Depreciation and amortization for the quarter is $34 million, versus 31 a year ago.

OK.

And you gave, in the press release, a number for the calendar ending March 31 quarter REVPAR down four percent I think.

And what was it a year ago?

I looked at the last press release and didn't see that figure if you happen to have it.

You're saying in the first quarter of 2002 versus 2001?

Yes.

Let's see, as we talk here first ..

If you could give us a call after the call, we can look that up for you.

OK.

And one final question, more qualitatively.

Can you just discuss sales and marketing costs and how they're changing, if they are going up, and you're spending more money on this given the environment?

I think sales and marketing -- I don't have a breakout for you as a percentage of hotel level sales kind of what's happened there.

But it is clearly the case that sales and marketing is one of the areas we are cutting less than others as we compete in a low-demand environment.

And so it varies by hotel.

It varies a little bit by product type.

But we are more inclined today to add sales folks than remove them.

I think other forms of sales and marketing like advertising, like the cost of the Marriott Rewards program, those kinds of things, though are staying essentially flat on percentage terms.

Great, thank you, Arne.

You bet.

We'll take our next question from Eric Orthman, Wachovia Securities.

Good morning, guys.

Did you see any evident that travelers brought forward their travel plans prior to the start any hostilities in March?

No.

Not really.

Not really.

How have operations been since the kind of the end of the war?

Well, we talked about our reservation volume by week, really from when the war began last week.

And you can see a steady improvement there.

That steady improvement kind of continues.

But I don't think we can sit here and say we've seen a switch thrown that would suggest we're back to sort of a rock and roll time of lodging demand.

I think it's fair to say that the fear of the war, and all things associated with it, has declined to the point where that probably is not a significant factor on travel in the United States.

It probably remains relevant to travel in the Mid-East, which again, the war benefits some markets.

We've had some hotels that have been 100 percent occupied with either soldiers or reporters.

And to some extent it's been a benefit.

But I think there is still enough uncertainty in the Mid-East that travel is weaker there.

So as we sit here today, I think it is fair to say that certainly focused on the United States, it's more about the economy.

And as you go west, towards Asia, it's obviously also about SARS.

Thank you.

Yep.

We'll take our next question from Keith Mills, UBS Warburg.

Good morning.

Actually it's William Truelove.

I have three questions for you.

The first question relates to the fiscal comparison of REVPAR relative to the quarterly or annual, is decline -- that four percent decline on the calendar basis is that more weighted because of the first few days of the quarter or because of the last few days of the quarter?

What's the impact there?

It is actually both.

January 1, 2 and 3 obviously include the New Year's holiday which are slow times on an average basis.

Obviously some resort hotels it may be strong, but average across the system those are very slow days.

When you add those days you tend to bring REVPAR down.

This year given the calendar, where Easter fell, the 29, 30 and 31 were huge days on terms of year-over-year comparison, with REVPAR for the industry up probably 20 percent because last year those days were the Easter weekend last year, this year those days were not.

OK.

My second question goes to when you talk about your REVPAR expectations going forward for 2003 on a quarterly basis when you look at 2002 the comparisons get more difficult as the year went on into the fourth quarter of 2002 where we saw a significant gain.

Is that a way of thinking about sequential changes as it gets -- are we looking for sequential improvement to get to those kind of REVPAR expectations given the tougher comparisons?

Or are there other ways to think about that?

We're having a lot of internal discussion about that debate a little bit.

Actually if you look at the quarterly performance versus a baseline year of '99 or 2000, as opposed to simply the comparison to 2002, the comparisons get easier and easier as the year goes along.

And so the debate really is, is the fundamental underlying performance of demand -- are we better off looking at a comparison versus '99 or 2000 where you had less quarter to quarter uncertainty, you didn't have the impact of September 11 that you were comparing to in the fourth quarter of last year, for example.

You also didn't have the fear of war that became increasingly relevant in late 2002.

Are you better looking at '99 or 2000, in which the comparisons get easier, five points easier for example on REVPAR from the beginning of the year to end of the year?

Or by contrast are you going to say that 2002 is a fair reflection of the base of demand, in which case you don't have that ease of comparison?

I tend to think that the truth is someplace in between.

OK.

That's fair enough.

And the third just sort of a broad overview strategic kind of question, is that when you think about your conversion activity versus your new build activity right now with the tight lending market and low demand it doesn't really make sense in a lot of markets to build a new hotel.

Can you sort of give us a sense of where REVPAR needs to go or lodging demand needs to go before you start seeing more inflection to - more demand for new development versus conversions?

It's an interesting way to put the question.

I don't think we think about it that way.

And I'm not sure that the average basis would tell you much.

Even today in some markets it makes sense to build a new hotel in the United States where you've got maybe a new suburban development, office park, residential community, shopping mall, something of the sort.

There may be enough demand drivers in that market where it makes sense.

In some markets -- let's pick on San Francisco, which is obviously a weak market -- it's going to take huge return of business relative to current levels, I think, to get back to a level where, in many areas of the greater Bay Area it makes sense to build a new hotel.

So I think the market -- my market dynamics are going to be dramatically different.

Our view is that as profits come back to hotels, profits increase, not as REVPAR increases but as profits increase you will increasingly see the supply starts come back.

So we should be thinking in terms of house profits that you're discussing, or just overall profit?

House profit dollars.

Dollars.

OK.

Thank you very much.

You bet.

We'll take our next question from Bill Crow, Raymond James.

Good morning, guys.

Hi, Bill.

Two quick questions for you please, Arne.

Could you attempt to translate your second quarter REVPAR expectation to a calendar quarter?

No.

But I don't think there's a big difference.

OK.

So it should be fairly similar?

It should be fairly similar, because let's see, our quarter -- hang on a second.

Last year for the folks who report calendar quarters, their first quarter had Easter, their first quarter this year does not have Easter.

Right.

Our second quarter, as reported, will have Easter.

Right.

Which is both years will have Easter.

Now, you got to figure out what that means.

But I don't think, other than the Easter comparison, there's going to be any notable difference between our fiscal quarter and the calendar quarter.

OK.

And then second, if you could look across your flag spectrum -- and we know you get a significant REVPAR index premiums -- what brands are moving, either for the better or the worst at this point?

The -- I think by and large, the commanding premiums we have across the brand are holding very well, increasing a little bit overall.

I think the dramatic movers in the portfolio include Renaissance which is up very strong in the last 15 or 18 months, something like that.

And those trends continue.

Renaissance, it depends a little bit with seasonality in reporting but is the 106 to 107 range, where it was in the 91 range I think when we acquired that.

And a lot of that lift has come in the last 18 months or so, tremendous movement.

I think the other place where you've got movement is the Ritz-Carlton portfolio.

And remember when we talk about REVPAR, we are talking market-by-market comparisons of Ritz-Carlton to its competing hotels. e're not talking about Ritz-Carlton versus Four Seasons.

So if you go to Cleveland or Deerborne, where we've got Ritz-Carlton hotels, or Tyson's Corner for example, the Ritz is going to be competing with a Mariott or a Hilton or an independent branded hotel.

And in this environment where you got weak economic performance, the Ritz is going to suffer compared to those hotels disproportionately in part simply because executives dot want to submit an expense voucher which has got the obvious luxury hotel in it.

So when that's aggregated I think Ritz-Carlton has given up a bit of ground the way that formula is calculated.

I think those are the significant movers.

The others are up a little bit or down a little bit on a month to month basis depending on the vicissitudes of the market, but are holding very stringly.

If I could add to that?

Ritz-Carlton recently opened two hotels in the New York city market which is on a non-comparable basis is going to increase their reported REVPAR quite dramatically as you look ahead.

You know when you have markets in Cleveland, in St. Louis, they're not going to have the same kind of luchary hotel REVPARs that you would find in a New York.

That's helpful.

Thank you.

We'll go next to J. Cogan, Banc of America.

Good morning, everybody.

Good morning, J.

Amen to your thoughts on San Francisco hotel supply.

I've got a couple of questions for you.

The first is up down flat I guess.

You talked -- Joe asked about summer leisure demand, I think it was more on a volume basis you were talking about.

Can you give us quick thoughts on pricing?

Unknown Speaker* 93

Pricing for leisure you're talking about?

Yes.

Exactly.

There's price pressure on every segment including leisure.

And I suspect that price pressure will continue until you start to see the business transit traveler come back ...

OK.

... and displace a little bit of the room for leisure business.

OK.

Second question has to do with just to play devil's advocate for just a second.

What do you see the chances of corporate America and some of the high rate groups throwing in the towel in on the fourth quarter like they did in 2002 back to the discussion you just had with respect to how the comparisons should be actually getting easier even though the comps are -- you're up against positive comps in the fourth quarter?

I'm not sure I track you exactly.

You're saying what are the chances that corporate America says ...

I think what happened last year basically was you know with the war looming and just the soft economy, there was the expectation on the part of operators that we would see a meaningful or at least a decent improvement in fourth quarter trends relative to what we saw in the second quarter.

Yet the results clearly didn't show that.

And it seemed like you know, some of your higher rated customers just threw in the towel and just decided not to show up.

I was wondering what - you know how are you guys looking at that from a probability?

It sounds like you're saying you expect things will be up but what sort of range of expectations are we looking at here?

Yes.

I think it's all -- not to evade your question entirely -- but I think it's all going to be driven by the economic success of those companies and to some extent what the market is telling them.

As you start to see more companies report profits and get a response in the market valuation of their stocks, I think companies are going to be more inclined to increase their investment spending.

And that probably singularly is going to be the biggest demand driver for hotels.

And unless we're in a depressed stock environment and a depressed profit environment in the fourth quarter, I wouldn't anticipate a repeat of last year.

OK.

That's fair.

And then last question for you just had a has to do with Six Continents or Intercontinental as they're called now.

Can you give us an update on your thoughts about participating?

Obviously you've been talked about quite a bit in the press how a structure would play out, how much land you would be willing to take and for how long on your balance sheet, or much PP&E (ph) generally?

And what kind of pricing we're talking about?

Would is be - would you look at something that would actually be EPS dilutive?

And could you talk about strategic or economic issues there?

As framed, I won't answer the question.

Because as you frame it, it really relates to a specific target which we will not talk about.

I'll back away from that though and talk more generally about sort of our appetite for acquisitions and our view about how we evaluate acquisitions.

We do have meaningful capacity, we think to participate in an acquisition of either individual assets or portfolios of assets or existing companies.

We want to make sure we use that capacity ostensibly to create value for our shareholders.

We do that by using traditional methods of valuing potential deals.

Fundamentally they're based on discounted cash flows, not based on earnings accretion (ph) or dilutions.

On the other hand, where values are strong, typically earnings are strong as well.

So there is not a dramatic disconnect between those two measures.

We are I think most interested in participating, where we can obviously maximize value.

We think that strategically, the best way to do that is probably outside the U.S.

It's probably existing hotels, not new-built hotels.

It's probably hotels that can be converted to our existing brands, not to the addition of new brands.

But again, deals don't necessarily come exactly the way you prefer them to come strategically.

We will take exposure to real estate if it is at pricing that we believe is attractive and value-enhancing which often translates into a corresponding confidence that we'll be able to sell that real estate for what we've invested in it or better, and retain long term essentially for no investment management contracts and fee streams.

And with all of those things, I think you could kind of role play and understand how we would evaluate any particular candidate on the market.

That's very helpful.

Thank you.

You bet.

We're going to take one more question if there is one more question.

Yes, sir.

We'll take our final question from Chris Ngan, George Weiss Associates

Hi.

I'm sorry.

My questions have already been answered.

OK.

No problem.

We still got one out there?

Follow up from Chris Mills, UBS Warburg.

Hi.

It's actually Keith Mills.

Hi, Keith.

A couple of questions for you there.

Arne, can you share with us if Marriott has a plan and what plan that is to keep the Courtyard chain fresh, given the fact that the chain is now, call it about 15- 20 years old and you have competitors like Hilton Garden with new prototypes and newer properties?

Yes.

We have a plan.

We have a reinvention plan that has been implemented in, to date, across the system maybe 30 to 40 Courtyard hotels, including a dozen or so in the Courtyard joint venture, and another 20 - it's maybe more than that, I'm guessing a little bit -- in other the Courtyard portfolios, which including a rooms redo and a lobby redo.

If you haven't seen it, it's worth seeing.

It is a very neat reinvention with a room product that is pretty compelling.

Our early returns on it are that there is an immediate and significant response to the customers.

And with it, we feel very good about the ability to keep that brand, which has today around 130 percent REVPAR premium and is clearly the category killer, we think we can keep it the category killer for a long time to come.

I tell you Keith, in many markets, the first brand an owner of a managed hotel or a franchisee will seek is the Courtyard brand.

And it's only when the Courtyard brand is not available that they're going to go look at the availability of other flags.

Near you there is a refreshed/reinvented Courtyard, I think, in Norwalk which if you haven't seen you ought to go see.

Are there any plans to launch a free high speed Internet access kind of program at the Courtyard hotel?

I believe Hilton Gardens has that type program.

Are you planning that type or program?

Yes.

I think that's under way with Courtyard as well.

It is.

OK.

C&L Hospitality (ph) - you've seen some of you competitors establish relationships with C&L (ph) and I know it's been kind of a key partner for Marriott International in the past.

Any changes there that you envision going forward with your relationship for them to continue to buy assets from you?

No, I don't think so.

I think C&L , they are tremendous partners of ours.

They've got a very strong fundraising system.

And they've got capital that probably all things considered is cheaper capital than much of the other capital that's out there in the market today.

Which is one reason that they are as acquisitive as they are in this environment.

They've obviously done a lot with us over the last few years.

We have, I think, mutually a strong interest in doing things together.

In part because we don't have much to sell, we can't satisfy all of their appetite.

And that causes them to need to look around a little bit to find some other assets to buy.

Two final questions for you.

Club Quarters is a concept that's growing in interest on the corporate travel side particularly by corporate travel managers.

Any plans for Marriott International to launch a brand like Club Quarters?

No.

OK.

And then finally can you give us an update on just some of the recent, I guess not recent but some of the litigation that's against the company by some of the owners?

The only thing new I think since the last call we had, we've had continued victories in the litigation involving the Senior Living Communities.

Some of the issues in those cases are the same.

I think we've won six out of six court hearings on that.

We've got continued discovery really on the cases that have been out there the longest and no new developments.

We were sued in New Orleans by the owner of the Ritz-Carlton complaining about the fact that the former Meridian is becoming -- has become as of Monday -- a J. W. Marriott.

It's obviously a conversion of existing product in the market.

They sought a TRO (ph) to block that.

They lost.

The case is still pending.

I think there will be another effort to kind of continue pursuing it.

But we feel very, very good and strong about that case, and view that really as a case that has to do more with a failed investment by the owner than it does with anything that's really relevant to us.

And other than that, there's nothing knew.

Appreciate that feedback and thank you for the detail on your outlook section.

That's appreciated as well, Arne.

OK.

Thank you.

Take care.

Thank you very much for your time.

Laura E. Paugh and Lenie Elberg as well as the rest of us are here to answer any questions if you've got follow-up questions.

We thank you for your interest and time and ask you as always to get out and travel.

Thanks.

That does conclude this Marriott International 2003 conference call.

We thank you for your participation.

You may disconnect at this time.