萬豪國際 (MAR) 2003 Q3 法說會逐字稿

Good day and welcome to this Marriott international third-quarter 2003 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, Chief Financial Officer and President of Continental European Lodging.

Mr. Arne Sorenson.

Good morning, everyone.

Welcome to our third-quarter 2003 earnings conference call.

Joining me today is Laura Paugh, Senior Vice President of Investor Relations;

Leenie Oberg (ph), Vice President of Investor Relations and Carl 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, October 9, 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 measures referred to in our remarks at our website at www.Marriott.com\investor.

In our remarks today, we will summarize the results of our third quarter and provide our outlook for the fourth quarter and 2004.

We were encouraged to see some signs of economic recovery in our business in the third quarter.

We witnessed an improvement in occupancy across our comparable domestic full-service managed hotels, largely due to strength in summer leisure business.

While occupancy at Marriott Hotels and Resorts increased slightly, Renaissance occupancy rose (ph) nearly 2.5 points and Ritz-Carlton soared nearly 5 points.

Our third quarter began on June 21 and ended on September 12, so it excluded much of the typically stronger business travel month of September.

Diluted earnings per share from continuing operations totaled 38 cents during the quarter, a 16 percent decrease from the prior year largely as a result of the absence of a time-share note sale and corresponding gain which contributed roughly 5 cents of earnings in the year-ago third quarter.

As you probably recall, we planned on selling time-share notes in the second and fourth quarters only, rather than smaller sales in all four quarters as we did last year.

Our strong balance sheet allowed us to repurchase 9 million shares of Marriott stock year-to-date, including 3 million shares in the third quarter alone.

Our base management and franchise fees increased 7 percent from 2002 third quarter levels, largely due to the 7 percent rooms growth since last year.

We achieved significant productivity improvements during the quarter, which enabled us to somewhat offset wages, benefits and insurance cost increases.

House profit margins were also affected by a shift to lower-margin food outlets associated with strong leisure demand.

For the quarter, house profit margins declined 2.3 percentage points in North America and .4 percentage points in international markets.

Incentive management fees declined by $7 million from a year ago, with one-half of the decline attributed to lower incentive fees from the Marriott Hotels and Resorts brand.

Approximately 22 percent of our managed hotels booked incentive fees in the third quarter, compared to 32 percent in the prior year's quarter and 22 percent in the second quarter of 2003.

You may recall that the percentage was nearly 70 percent in 2000.

We continue to retain considerable incentive fee upside when operating fundamentals improve.

We are pleased to report higher year-over-year revenue per available room for our full-service brands.

Strong leisure business was the primary reason for the improved performance in the quarter, but the impact of leisure travel varied from brand to brand.

Marriott Hotels and Resorts has made considerable headway in increasing its focus on leisure travel over the past two years in both sales and marketing and in hotel development.

Nevertheless, its largest customer segments still remain business travels and group meetings, in large part due to the locations of our hotels.

Compared to the overall Smith Travel (ph) upper upscale market, Marriott's portfolio is heavily concentrated in downtown convention and airport hotels.

These hotels are located in about 60 markets with a heavy concentration in New York and a few properties in Las Vegas.

Smith Travel reports results from upper upscale hotels by contrasting about 150 markets with relatively less presence in New York and a much greater presence in Las Vegas.

If we adjust for these different market distributions by excluding Las Vegas and New York, the Marriott Hotels and Resorts brand outperformed the upper upscale industry in the third quarter in Marriott's markets.

This is exactly what our data on market share premiums show.

On the other hand, Ritz-Carlton benefited from very strong American demand for luxury holidays in its Florida and Caribbean resorts.

REVPAR increased 5.6 percent in the quarter ending in August, but would have increased 8.4 percent on a more traditional July-to-September quarter.

We believe part of this demand represented Americans choosing to vacation closer to home, rather than taking a European holiday.

The Ritz-Carlton brand is on a roll.

In August, Ritz-Carlton received top honors for the first-time from J.D.

Powers in its North American Guest Satisfaction Index Study.

The brand has grown 50 percent in the last five years, opening some unique and very stylish properties that have enhanced the brand.

One of these new hotels in the Ritz-Carlton, Central Park South, opened just last year in a challenging market.

This hotel recorded the highest hotel REVPAR in the company in September at nearly $400 and is ramping up nicely.

Renaissance also reported strong REVPAR, up 4.1 percent during the quarter.

With only 32 North American comparable hotels, strong performance at the Hollywood Renaissance and easy comparisons in Chicago and at the Stanford court in San Francisco drove higher REVPAR and earnings.

The third quarter international REVPAR statistics include the months of June, July and August, a period that still reflected some impact from the war and SARS.

Over this period, REVPAR at international managed comp hotels declined 3.1 percent in constant U.S. dollar terms and increased 1.7 percent using actual exchange rates.

The Caribbean benefited from the strong leisure business during the quarter.

Overall managed REVPAR in the Caribbean increased 8 percent in constant dollar terms.

In the Middle East region, REVPAR jumped 21 percent in the third quarter as regional travel increased significantly after the conclusion of the conflict in Iraq.

The Cairo Marriott reported over 95 percent occupancy in August.

Mideast vacationers returned to London during the quarter and UK REVPAR, while still down from the prior year, nevertheless improved over first and second quarter.

REVPAR in continental Europe declined 5.1 percent during the quarter, reflecting a soft economy across much of the region.

However, REVPAR increased 10.4 percent using actual exchange rates due to the strong euro.

During the second quarter, concern about the SARS virus produced profound declines in Asia occupancies, including Hong Kong, China, Singapore, Thailand and Vietnam.

REVPAR in Asia started to improve in our third quarter and ultimately recovered very quickly.

The Shanghai Ritz-Carlton, for example, reported an 82 percent occupancy in September, compared to 39 percent in the second quarter.

We expect to open our fifth and sixth hotel in that city in November.

With this economic powerhouse back on track, we expect our 26 China hotels to report 5-10 percent REVPAR growth in the fourth quarter.

Looking for the future, we're so bullish about China that we're adding resources to our hotel development efforts in Beijing.

In the third quarter, we opened 8578 new rooms under our flags around the world, including 1581 rooms with the Ramada International brand.

At quarter end, our worldwide pipeline of rooms awaited opening totaled more than 300 hotels and 47,000 rooms.

One-third of these rooms are high-value, full-service rooms and nearly half of those are outside the U.S.

Eighty percent of our full-service pipeline is already under construction, or is pending conversion.

Twenty-one percent of our global room additions during the quarter were conversions from other brands, including 583 of the Ramada rooms.

We expect to continue to benefit from a heightened level of conversion activity, especially in light of the ongoing weakness in the industry as owners and investors seek to reposition hotels and improve hotels.

Our pipeline of signed, but not yet opened, conversions is roughly 60 hotels, compared to 46 hotels in June and 28 hotels just nine months ago.

Largely as a result of these successful conversions, we now expect our 2003 openings to exceed 30,000 rooms.

Turning to our time-share business, contract sales increased 23 percent during the quarter and reported profits totaled $23 million.

In the year-ago quarter, we reported an $18 million pretax gain on the sale of time-share notes.

But as I mentioned earlier, we had no such gains this year.

Marriott Vacation Club contract sales were strong at Aruba, Hawaii and South Carolina, but remained relatively weak in Lake Tahoe and Orlando.

Ritz-Carlton Club showed a spectacular performance as contract sales at our four Ritz-Carlton Club properties more than doubled year-over-year.

Book losses from our lodging joint ventures totaled $4 million, including the $4.2 million loss from the Courtyard joint ventures and an almost $6 million profit from the Ramada Cendant (ph) joint venture.

Our lodging results also included the impact of gain and gain amortization from asset sales completed over the past several years.

We recognized $15 million in gains and gain amortization during the third quarter, including the $9 million gain from the sale of a 10 percent equity interest that we held in a European hotel.

This gain was included in the guidance we disclosed on our last earnings calls.

Gains and gain amortization totaled $10 million in the third quarter of 2002.

Corporate expenses during the quarter increased from 25 million to 35 million, largely due to $10 million in legal fees associated with ongoing litigation and a charge of $4 million taken in connection with excess office space, partially offset by $10 million received from an insurance claim.

Speaking of legal matters, we expect to begin the arbitration hearing in the CTF HBI case in April of 2004 and this strategic case should go to trial sometime in late 2004 or in 2005.

We remain optimistic about both of these cases.

We're pleased that four other owner suits have been resolved without any material impact to us, and we continue to operate those hotels under long-term management contracts.

Interest expense increased by $7 million during the quarter as capitalized interest continued to decline along with our investment spending.

Total debt was 1.7 billion at the end of the third quarter, similar to the end of the second quarter and down from 1.8 billion at year end.

Asset sales totaled $233 million in the third quarter, including 14 senior living communities sold for 184 million and the Surfers Paradise Marriott in Sydney, Australia sold for 44 million, the latter being subject to a long-term management contract.

In addition to managing this beautiful resort, we will also own a portion of the joint venture which will lease the property from the new owner for a term of 20 years.

Early in the third quarter, we completed the sale of an approximately 50 percent interest in our synthetic fuel business to a major U.S. financial institution.

We received approximately $25 million in cash and notes at closing and are receiving substantial contingent profits over time, the size of which will depend on the volume of synthetic fuel produced.

The purchaser has a one-time right to return its interest in the venture to us in the event that the IRS does not issue a satisfactory private letter ruling by December 15 of this year.

If they decide to return their interest, they will pay us a $10 million exit fee, but our 2003 earnings would not be affected.

In recent public comments, the IRS indicated that they will soon make a decision regarding resuming issuances of private letter rulings pertaining to synthetic fuel operations.

We are encouraged by their comments and remain confident that these tax credits are valid.

We remind you that, in any event, this tax credit program will expire at the end of 2007.

During the quarter, our synthetic fuel segment produced 2 million tons of treated fuel.

Results this quarter have been presented on a consolidated basis.

The vast majority of the tax credits produced by the business in the quarter were allocated to our joint venture partner.

The profits from the sale of these credits dramatically reduced our pretax operating loss from the business.

Our operating loss was $3 million in the third quarter, compared to $32 million in the prior year's quarter.

The minority interest line on our income statement reflects the allocation to our partner of operating losses, tax benefits and tax credits totaling 29 million.

Bottom line, the impact on net income was a favorable $21 million, or 9 cents per share, flat with the prior year's quarter.

We expect our profits from the synthetic fuel business to increase in the fourth quarter over third quarter levels.

We stepped up fourth quarter production when one major customer decided to exercise an option to take additional deliveries in the fourth quarter, and we also added a small contract with another power company.

As in the third quarter, most of the tax credits produced by the business in the fourth quarter will be allocated to our joint venture partner.

We now expect Marriott's fourth quarter earnings per share from synthetic fuel to total roughly 12 cents per share.

For 2003, excluding the synthetic fuel investment, we expect our tax rate to be 35 percent.

During the third quarter, interest income, interest expense and provision for loan losses netted to a positive $4 million.

Approximately half of our interest income was non-cash, including primarily the cash deferral of our interest income from the Courtyard joint venture.

We purchased 3 million shares of Marriott stock during the third quarter and 9.1 million shares year-to-date through the third quarter of 2003.

Now let's turn to our outlook.

We are clearly seeing some signs of economic recovery in our business.

We know that lodging demand is highly correlated with corporate earnings, GDP and even the S&P 500, although a two-quarter lag is likely, particularly for business travel.

Over the past two years, solid group and strong leader demand have replaced a meaningful portion of business occupancy at many hotels.

But as the economy continues to improve, we expect individual business travel to also improve.

We expect leisure demand will remain strong in the fourth quarter and in 2004, but as we look to our near-term outlook, the seasonality of leisure demand means that it will be a much less meaningful contributor to our business mix in the fourth quarter.

In addition, as business travel resumes, it will likely replace some leisure occupancy in our hotels.

Group business is very important to us in the fourth quarter.

In fact, compared to the typical U.S. hotel, our hotels derive a greater portion of their revenues from groups, particularly in the spring and fall.

The news in this customer segment is mixed.

Bookings for fourth quarter groups are weak.

On the other hand, we've seen a meaningful pickup in group bookings for meetings to take place in the first quarter of 2004, both in terms of the number of groups and the number of room nights.

In fact, Ritz-Carlton reported a record month in August for new group bookings, most of which will take place in the first part of 2004.

Some convention hotels are effectively sold out for group meeting space in the first quarter.

The outlook for transient business is, by its nature, more difficult to predict.

Over the past six or seven weeks, transient reservations have picked up a bit.

But before we declare victory, we should note that recent performance has been impacted by an East coast hurricane and non-comparable Jewish holidays.

All of this means the near-term trends are difficult to predict.

Negotiations on 2004's special corporate rates are about half done.

This segment represents 10-15 percent of our transient room nights.

The good news is that travel managers are no longer cutting travel, but are now focused on controlling travel expenses.

Overall, we anticipate U.S. pricing in this segment is likely to be roughly flat in 2004.

With weakness in group business offsetting the few signs of strengthening demand, we are maintaining our forecast for REVPAR in the fourth quarter at minus 2 to plus 2 percent.

However, given the strong first quarter group bookings and encouraging economic trends, we believe REVPAR in the first quarter of 2004 is likely to increase 2-4 percent.

So how does this translate into profits and earnings for Marriott for the fourth quarter and for 2004?

Overall, we estimate lodging, including time-share, should earn between $225 and $235 million in the fourth quarter of 2003, compared to $202 million earned in the fourth quarter of 2002.

This estimate is a bit lower than our previous guidance due to reduced expectations from our Courtyard joint venture and from Execustay Corporate Apartments, which is part of our extended stay segment.

Our time-share business is expected to contribute approximately $60-$62 million of lodging earnings, including roughly $30 million from a gain on a time-share mortgage note sale in the fourth quarter.

We estimate corporate expenses should total approximately $12 million per period, or $46-$48 million in the fourth quarter, consistent with the third quarter run rate.

We expect interest income, net of interest expense, to contribute approximately $4-$6 million to our fourth quarter pretax profit.

Turning to synthetic fuels, while we have sold half of that business, the purchaser retains the right to return the investment to us as we mentioned.

As a result, we expect to continue to consolidate the results of the joint venture in the fourth quarter.

Pre-tax losses in the fourth quarter should total $0-$3 million and tax credits should total $75-$85 million.

The minority interest in the synthetic fuel business is expected to reduce after-tax income by approximately $45-55 million in the fourth quarter, yielding a net synthetic fuel EPS impact of roughly 12 cents per share for the quarter.

In total, we expect fourth quarter earnings per share from continuing operations will total 60-62 cents and full year 2003 EPS from continuing operations should total $1.86-$1.88.

For the full year 2003, investment spending is likely to total approximately $550-$600 million.

We expect to spend roughly $100-$125 million for new unit capital expenditures, roughly 75 million from maintenance capital expenditures, $200 million for loans and equity investment and $175-$200 million for time-share development.

As we look ahead to 2004, our forecast assumes a gradual and prolonged recovery of demand.

We anticipate U.S. supply growth will continue to be depressed, growing at only 1.5 percent in 2004.

While domestic business transient demand should increase in 2004, corporate and group rates are likely to be flat.

As our hotels achieve higher occupancy, particularly weekday occupancy, we should begin to see some rate improvement; first from shifting our customer mix to more business travel and later through rate increases.

We will also be helped by the continuing maturation of properties added over the past three years.

Outside the U.S., we expect our hotels in Asia to experience a sharp increase in REVPAR as the region recovers from the impact of SARS.

We believe continental Europe is likely to remain sluggish and strengthen appreciably only as the European economy is strengthened.

Growth in the UK market, particularly in London, will depend on a return of U.S. travelers and an increase in airport traffic.

In the Mideast, performance will depend on political stability and improvement in regional security, although the war in Iraq will provide some easy first-half comparisons.

While we are forecasting U.S.

REVPAR growth of 3-4 percent in 2004, we expect relatively stronger performance from our international operations.

Since much of the REVPAR improvement will likely be in occupancy rather than rate, at first we're likely to see only a small increase in house profits and incentive fees.

Wages, benefits and insurance costs are likely to rise faster than inflation.

At 3-4 percent REVPAR growth, we would expect house profit dollars to increase at roughly the same rate as REVPAR as margins should remain essentially flat to 2003 levels.

While cost increases are unavoidable, we continue to keep a firm handle on costs throughout our business.

We have made enhancements, such as labor scheduling, that will provide still greater upside when demand increases.

In the near-term, however, 2004 base and franchisees, which today make up the bulk of our earnings, are likely to grow significantly with the increase in REVPAR for comp units, the ramp-up of non-comp unit hotels added in the last three years and continued new unit openings.

With our strong pipeline of hotels under development or pending conversion, we're quite confident in our ability to add between 25,000 and 30,000 rooms in 2004.

Over a quarter of those rooms are likely to be in international markets and 20-30 percent are likely to be conversions.

We expect to see roughly 12,000 newly constructed rooms for our brands opening in the U.S. in 2004.

Our time-share business has been reluctantly stronger than our other lodging operations over the past three years.

As we look ahead, we expect further upside as we improve inventory turnover and return on invested capital.

Development revenue is likely to approach $1 billion in 2004, and closing rate margins and operating profits are likely to improve.

Over time, we intend to invest less of our capital in this business and a growing portion of time share's profits are likely to come from joint ventures, rather than pure company development.

In total, we expect time-share to generate $165-$175 million in operating earnings in 2004.

Overall, including time-share operations, we believe lodging could generate 770-790 million in 2004 operating income.

Next year, we expect earnings per share from our synthetic fuel business to decline to roughly 33-36 cents.

This forecast assumes that our joint venture partner continues participating in the venture.

In the event that the purchaser returns its interest to Marriott, 2004 earnings per share from synthetic fuels would be expected to total 25-28 cents.

Excluding synthetic fuel, we expect our tax rate next year to be roughly 35 percent.

Investment spending in 2004 is expected to total roughly $500 million.

We expect to invest less than 100 million in new capital expenditures, including conversion opportunities and $50 million from maintenance CapX.

We also expect to invest 150 million for loans and equity investments, some of which will be loans to our owners and franchisees for property improvements.

Finally, we expect to invest approximately $150 million for new time-share development and less than $50 million in corporate initiatives.

Debt service and operating profit guarantees in 2004 are likely to remain flat with 2003 levels as new deals replace expired obligations.

At the end of the third quarter, we had a $60 million guarantee associated with our synthetic fuel business.

In the event the purchaser returns its interest to Marriott, this guarantee could total $85-$170 million at year-end.

If on the other hand the purchaser decides to keep its investment, no guarantee would be in effect at year-end.

Debt maturities total about $200 million in the four quarter of this year and $60 million in 2004.

Dispositions are difficult to predict, but we will continue to focus on recycling capital by selling hotels and mortgage notes as conditions warrant.

Of course, since we do not own many assets, I would not expect asset sales in 2004 to be as meaningful as it has been the last few years.

Given these assumptions, we believe earnings per share for the full of 2004 year will likely total between $2.06 and $2.16.

Excluding synthetic fuels earnings from both years, this forecast reflects a high-teens year-over-year EPS growth rate.

For the first quarter, I would estimate REVPAR is likely to grow 2-4 percent, lodging income should total $155-$165 million and earnings per share should increase to 38-42 percent, with approximately 6 cents coming from synthetic fuel -- excuse me -- 38-42 cents.

Excluding synthetic fuel from both years, this reflects a year-over-year EPS growth rate for the first quarter of roughly 20 percent.

Now, we have covered a significant amount of material today, and before we take your questions, I want to be sure to offer you an invitation to our November 11 analyst conference in New York.

We would like to spend a bit more time talking not only about our 2004 outlook, but also focusing on our brand strength and some exciting new business strategies that position us for even greater long-term success.

Nancy, we would be happy to take any questions at this time.

(Operator Instructions).

Steve Kent, Goldman, Sachs & Co.

Good morning, Arne.

Barney.

I guess I'm still struggling with this 2004 rebound, but Q4 not really forecasting much more than what you were forecasting even a couple of months ago.

So, maybe you could go through just a little bit about how much -- what percentage of the bookings are booked this far in advance that gives you the confidence that '04 is going to be better than what most of us were predicting, and maybe even what you all were thinking.

And maybe just give us some comment on the booking window, both for group and for individual or transient, whether that is shortening, that gives you some of that confidence?

I will pick the last point first.

I don't think we're seeing yet any appreciable lengthening of the booking windows.

That will follow an increase in occupancies and a greater and broader sense among buyers of hotel rooms that they need to book early in order to ensure that they have room.

And while there may be some discussion starting about that in customer shops, I don't think that's significant, and it certainly has not appeared in our data yet.

The reason for the forecast in 2003 and 2004 -- and I hear you, Steve, saying a little bit, you think maybe we are disappointedly (ph) in the four quarter of 2003 and maybe higher than you would have expected in 2000.

Start by -- we all ought to acknowledge there's plenty of uncertainty around providing a forecast for 2004.

So we're giving you our best of judgments.

But before we get there, for the fourth quarter of 2003, really what is guiding us here is that the group business on the books for the four quarter is quite weak.

And while there is still strong leisure business and there is, we think, strengthening transient demand, which we see popping up in our daily reservations volume, which is really which we score the transient business; that group weakness is roughly offsetting, maybe a bit more than offsetting the stronger areas.

And so it leaves us with the REVPAR forecast we've provided for the four quarter, I think for the last couple quarters.

Certainly the last one quarter.

For 2004, we look at the group business.

And as I mentioned in the prepared remarks, group business for the first quarter particularly is strong.

For the full year basis, it is quite a bit better by comparison to what we're seeing for the four quarter.

And when we take that with an assumption that there should be nothing really that causes leisure travel to weaken, and further the increasing signs that transient demand is improving and what we know from our historical data, which is with the strengthening in economic performance, we will get better transient demand -- all of those things cause us to provide the plus-3 to plus-4 percent REVPAR forecast for next year.

It is our best guess at the moment.

How much is booked this far in advance on?

Is it 10 percent of bookings get booked four or five months in advance, or is it 5 percent or 30 percent?

It will vary dramatically by hotel and by brand.

Courtyard brand, for example, which is almost entirely business transient travel during the week and leisure travel during the weekend, they will have very little business on the books today for next year.

Where the bigger group shops, the Marquis, the 1500-2000 room hotels which are going to be -- depending on the market, 50-80 percent group on an annual basis; they may have half of their business on the books for next year.

I think on average for the Marriott brand, roughly 40 percent of MHRS business is group business.

And it is a bit of a guess, but we probably have half of that business on the books for next year.

Okay, thanks.

Joyce Minor, Lehman Brothers.

Hi, guys.

Can you provide us with any of those specific data points that you might have around what you have been seeing, in terms of transient demand?

And maybe could you to speak to your outlook for margins for next year?

I thought that we had been talking about a general rule of thumb of needing plus-2 to plus-3 percent REVPAR growth to get flat margins.

Now you're looking for plus-3 to plus-4 and not quite getting flat margins.

So is there anything changing, in terms of your cost outlook, or is that just kind of putting a finer pencil to that?

And then one more, if you could just maybe speak to the incentive management fee decline that you saw in the quarter, if you could expand on it.

I know you said you saw about have of that come from the Marriott brand, but any additional lots there would be helpful.

Let me make a note of all three of these, Joyce, so I make sure I don't forget any of them.

First on the booking data, we obviously have specific group booking data which we look at, and that gives us the ability to sort of make predictions about group business for the four quarter and for the first quarter of next year.

Booking window still is a bit short, so we can't know four certain what the bookings will be in the four quarter for the four quarter, for example.

But as we looked at the end of our third quarter for the balance of the year, group bookings were down roughly 10 percent versus the bookings for the fourth quarter of 2002 at the same point in 2002.

As we look into next year, both number of groups and room nights are up as of the end of the third quarter of 2003 for 2004, versus the end of the third quarter of 2002 for 2003.

So that is a good positive sign.

On the transient business, really what we look at is weekday and weekend occupancy, and we look at our reservations volume essentially on essentially a daily and weekly basis.

We adjust that reservations volume for the unit growth we have had.

And we have been pleased to see that over the last couple of months, in three-quarters of the weeks thereabout, maybe even 80 percent of the weeks, we have reservations volume which exceeds the volume we need based on rooms growth alone, to essentially be flat on a same-store basis.

On average, that reservations volume is probably 2 percent better than what you would expect to see if you had only enough more in reservations to offset the rooms growth.

So those are the data points for that.

On margins, we talked in the prepared remarks about that plus 3-4 percent REVPAR for next year -- margins should be roughly flat.

I think if we are at the 3 percent side of that, flat is very, very likely.

If we're at the 4 percent of that and things line up right, maybe we could get a point of margin improvement.

But I think that is kind of where the range is.

Why it is a mix of things -- medical benefits, all forms of insurance will continue to see double-digit increases on a year-over-year basis.

We will obviously see wage growth.

We're watching the telephone profits piece to see what happens there.

And given that we suspect most of the REVPAR growth we get next year will be driven by occupancy, not by rate.

It is going to be a bit harder to drive margin improvement than it would be if it was all rate-driven.

And that is what as gone into our calculus to sort of assume roughly flat at 3-4 percent, maybe a little bit of upside as we get closer to 4 than 3.

That is helpful.

Thank you.

Harry Curtis, J.P. Morgan.

Good morning.

Just following up on incentive management fees, could you give us a general sense of how much REVPAR growth us needed to begin seeing a meaningful uptick in incentive management fees?

It's a good guess -- actually, that's one question Joyce asked that I didn't answer in terms of IMF generally.

The -- if profit margins are flat at 3 percent REVPAR growth, that will tend on a same-store basis to also cause incentive management fees to rise by the same amount REVPAR has risen, right?

If you get 3 percent REVPAR growth and flat margins, we're going to have 3 percent house profit growth in dollars.

And generally, that will cause incentive management fees to increase by the same amount.

There is a point south of 3 percent REVPAR growth where, with some margin deterioration, notwithstanding a little bit of positive REVPAR growth, you get no growth in dollars, in terms of house profits or incentive fees.

I cannot do that formula live here, but it is probably -- that cutoff point is probably around 2 points, maybe 1.5-2.0 points of REVPAR growth.

Also keep in mind, Harry, that incentive fees are calculated on an annual basis.

So it may not be necessarily true that one quarter of strong REVPAR would be enough to bring hotels up over their owner's priority.

It was the owner's priority that I was getting to and kind of the gap between where we are today and where we need to get from a REVPAR basis.

The easy way to think about small changes in REVPAR is to just look at the 180 or so hotels that are earning incentive fees today and realize that improvement in margin and improvement in cash flow from those hotels would automatically increase incentive fees.

And then there is additional upside as you go on and you get additional improvement from -- additional improvement in REVPAR, as well as improvement from stabilizing hotels that have opened in the last three years.

Okay.

Thanks a lot.

Michael Rietbrock, Smith Barney.

Not to beat this one to death, but going back to the incentive fees, based on your answer to Harry's question, I presume it is safe to say then that your 2004 lodging operating profit outlook implies only a very modest improvement in incentive management fees?

Yes I think that was there, yes.

How do we think about the lease-up of all of the hotels that have been at it over the last three years, and to the extent that they're (ph) new builds?

Would those be expected to contribute anything materially just as they mature going forward, or is that incidental?

It varies dramatically from hotel to hotel and market to market.

The standard outside the U.S. is often that incentive fees are paid from the first dollar of profits, and there is no owner stand aside (ph).

And (indiscernible), for example, we opened a number of new hotels in China this year; we're already earning some incentive fees.

Those incentive fees are not huge in the first years of operations, but they will grow relatively faster because those hotels, as they stabilize, will see greater profit growth in a year-over-year basis than they would if they were stabilized hotels.

In the U.S. markets, it's going to vary dramatically.

We're obviously adding hotels today.

If those hotels are set based on current market values, and what that implies in terms of owner's priority and we get decent recovery, they could cross over an incentive fee land (ph) relatively quickly a year or two.

Where by contrast, the hotel which opened in Silicon Valley in 2000, that on an owner's priority set on the basis of the investment that was put in in 2000, it may be a decade before we get incentive fees on that hotel.

So I think we would say it is fairly modest incentive fee growth that we would forecast for 2004.

It is probably at least consistent with the REVPAR growth, in terms of percentages, from the hotels which are already in the incentive fee paid (ph) land today, plus some incremental growth from there as some of the units start contributing fees.

And hopefully on some hotels, we click back (ph) over that owner's priority and start to produce incentive fees.

We anticipate talking more about this during the analyst meeting in November.

Good.

And just one last quick question.

Do you have a number for what North American full-service REVPAR would have been on the calendar quarter, like you gave us for Ritz-Carlton?

We gave you Ritz-Carlton, which was about 2.5 points better.

I don't have MHRS --

I don't think it would be a material difference.

Certainly not as different as Ritz-Carlton was on a quarterly basis versus the calendar basis.

Okay, thanks.

Joel Greff, Fulcrum Global Partners.

I just have one follow-up question -- good morning, guys -- (Multiple Speakers) question on incentive fees.

Of the guidance for the fourth quarter of the lodging operating profit, what is the range for incentive fees in the fourth quarter?

35-40 million, ballpark.

Okay, great.

Those are my questions.

Thank you.

You bet.

Brian Egger, Harris Nesbitt Gerard.

Good morning, Arne.

Just a quick question.

Is the type of this disparity you're seeing between the relatively strong luxury segment comparable hotel REVPAR gains and the weaker performance relatively speaking in the select service and extended stay statement typical of what you usually would expect to see at this point in the cycle with maybe some of the flux (ph) service and Extended Stay brands lagging the REVPAR improvement?

No.

I don't think about it that way at all.

I think the difference in relative performance between Ritz-Carlton and Marriott, for example, is driven entirely by the greater resort mix, and therefore, the greater leisure concentration of the Ritz-Carlton brand.

It is not that luxury is performing better than the Marriott brand, for example; it's that the hotels in those resort markets are performing or did perform much better as Americans went to Florida and the Caribbean, instead of going to Paris during the third quarter than the much more urban-focused Marriott brand.

With respect to the flux (ph) service Extended Stay performance there, same comments or anything different?

There, I think it is less about how much the room is being -- what the rate is.

In other words, it is less difference between upper upscale and upscale than it is the fact that the Courtyard and Residence Inns are much more dramatically dependent on individual business transient travel.

And as we see strengthening in that area, we will see relatively greater strengthening in the REVPAR of those brands, versus other brands which are going to be either more dependent on leisure or group.

Okay, that is helpful.

Thanks.

Jay Cogan, Bank of America Securities.

Good morning, everybody.

I have a question, backing up a few thousand feet.

If I'm an investor looking at the lodging business today, Arne, do you think it's a better business that it was a few years ago or a worse business?

I was wondering if you could comment on that, maybe globally and also specific to you?

Second, I was wondering if you could talk a little bit about what you see as cyclical changes versus permanent changes in the business.

Now that we're starting to see some improvements in regards to business travel trends, etc., things don't look as dire, and I was just wondering if you could maybe talk a little bit about what was cyclical from a permanent standpoint?

As much as we all really had a great time in the year 2000, looking forward today in our business versus looking forward in 2000 is a dramatically better picture.

In 2000, well, none of us could precisely say when we were going to have a downturn.

We all knew it was coming.

And so we provided forecasts here internally, and to some extent externally, which would have suggested that business would keep getting better and better; it was obvious that there was a lot of risk, just based on the frothiness of that kind of market and the long strength in the economic segment.

Today, by comparison, we have been beat upside the head repeatedly by one crisis after another.

And we sit here now finally with good, strong indications that we have economic growth returning in the United States.

And with that, I think there are going to be tremendous dividends in our business going forward.

Marriott gets the benefit not only of the hotels that are in the system or were in 2000, but of the roughly 35 percent new rooms that we have added since the year 2000.

And that will, I think, provide tremendous growth going forward, and it's really going to be -- I think it's going to be a whale of a lot of fun.

In terms of cyclical versus permanent changes, we have talked about this before.

We tend to think that the discussion that corporate America always goes through about -- we are going to back that travel in a recession and we're never going to travel again -- is quite similar to the discussion that has happened in every one of the recent recessions.

And we wouldn't view that as being a permanent change.

We would call that very much a cyclical change.

And we think as economic growth comes back, people will hit the road again.

People like to travel, business people like to travel.

People like to have meetings.

And those things are all going to continue.

There are some permanent changes, we think, that play in our favor; not necessarily Marriott alone, but Marriott among a few other companies.

And that is, we continue to believe that consolidation is underway of the importance of having rewards programs, of having scalable reservation systems, of having salesforces that can sell product in any market in the world, to the big customers.

All of those efficiencies are enormously important to driving superior returns for hotel owners, and that will continue to cause I think consolidation and will cause further growth of our brands outside the U.S..

And I think all of that is very much quite permanent.

There has been a lot of discussion about Internet channels and to what extent those methods of selling rooms will cause some more permanent impact, if you will, to our business.

I think that is still a book that has yet to be completed and it will be very interesting to see what happens there.

Our guess is that the weaker demand environment is the environment in which the channel that is selling cut-rate rooms has the most power over these suppliers of those rooms.

And as we get into stronger markets in which occupancy runs higher, we will find that suppliers of those rooms are much more cautious about making rooms available to those low-cost channels.

And whether or not those low-cost channels have established enough market presence in weak times to be a permanent force is something we'll just have to watch.

I guess if I could ask a quick follow-up.

Considering you still have a relatively bullish outlook on the business, as one would expect, combined with the fact that we're looking for a modest uptick in demand as we move into next year; at what point in time should the streak realistically expect to see a meaningful improvement in REVPAR incentive, management fees, etc.?

How long, given what you know today, will that take?

Obviously, a lot of that depends on what the precise shape of the economic recovery is.

If you look back at REVPAR numbers coming out of the last significant recession in the early '90s, you can see that REVPAR growth in 1994 through 1998 was really wonderful, often 5, 6, 7 percent year after year.

We are hopeful that at some point, we hit that kind of ramp again and we get that kind of growth.

And with that growth, we will get tremendous base and franchise fee growth, which is multiplied by the new units we expect to continue to add.

But we will also get great incentive fee growth.

Now, nobody, Marriott included, will tell you you ought to build into your models 6-7 percent REVPAR growth over the next three or four years, because it is very hard to forecast something that is that strong.

But we would say that, over a number of years, we ought to be reclaiming the REVPAR -- dramatic REVPAR that we've given up over the last three years.

And with it, we will see our incentive management fees come back to the levels we had in 98, 99, 2000 and ultimately beyond that because of the new unit growth, which is really almost a trembling of incentive fees from the levels of 2003.

Thanks a lot.

Bill Crow, Raymond James.

Good morning, guys.

A couple of questions.

First of all, we have for a while now seen a bifurcation in REVPAR results between the upper upscale and urban properties and the lower price points and select service.

As you create your model for next year and 3-4 percent REVPAR growth, how do you see that playing out between, say, your full-service properties and your select service properties?

We've spent a lot of time talking about that, and I think in a sense, there are competing factors that are going to push either way.

I would bet that REVPAR numbers across the brands will be fairly comparable.

Obviously, the more business transient demand increases, the more we will see Courtyard and Residence Inn, which are purely business transient shops, post better REVPAR results.

At the same time as I mentioned before, the group business on the books for 2004 already looks good.

So I think those things cause us to believe that you ought to assume 3-4 percent REVPAR growth on a full year basis across the brand lineup.

As we've seen business transients start to come back, and maybe it is too early to really answer this question, but have you seen any change in the distribution of reservations?

In other words, have those business transient travelers opted for the traditional distribution methods of travel agents and phone reservations, or have we've seen them continue the trend into Internet bookings?

There is clearly a trend towards Internet bookings, both through marriott.com and through other channels.

And it is not just leisure that are using the Internet, it's also business travel.

We saw in the quarter 30, 35, 40 percent growth on a year-over-year basis in Internet reservations.

We still though have about 80 percent coming through marriott.com.

And obviously, we like the Internet and many of our customers who are increasingly technologically savvy like the Internet, and we will continue to see growth in that area.

One final question.

The difference in performance between the Renaissance brand and the Marriott brand -- is that simply the small sample size on Renaissance, maybe more leisure-driven business?

Yes.

We're going to take more question, and then we're going to shut off, if there is one more question.

David Anders, Merrill Lynch & Co.

A couple of quick ones.

Arne, could you give us the balance sheet issues debt and cash?

And also, if you could talk a little bit about the other lodging revenue and expense line item?

It looks like the -- all of the earnings came from time-share.

Could you give us a little, give us some more information on Execustay -- is it making money, losing money -- and what the other offsets are in that line item?

Let's see.

Balance sheet is essentially flat with the second quarter, 1.7 billion of debt and a little over $100 million of cash in both quarters.

So not a real significant move there.

And basically the way I think about that is -- we bought $100 million or so worth of our stock, maybe a little bit more, maybe $115 million worth of our stock in the quarter.

That's probably the cash that we generated over and above our investment activities.

And so we essentially kept it flat.

On other lodging, you may want to follow up with Laura and Leenie (ph) on a bit of this.

There is -- we have a decline -- there are a bunch of insurance and outs there.

I don't think any of them are terribly significant.

I will tell you on Execustay, it lost a few million dollars in the quarter.

I will follow-up offline.

But just as a question about the share repurchase policy, is the board thinking about bumping the dividend up?

If you let the share repurchase get kind of soaked up by options and there is not a lot of -- the share price or share decline is not as dramatic as purchase activity.

What about the dividends?

Is there any thought of bumping that up as a trade-off?

Something we're listening to the investment community about and trying to elicit some input, we -- think our instincts are that, unless there is a dramatic sense in the investment world, that dividends are preferable, that stock repurchase activity is an even more efficient way to get capital back to our shareholders.

Obviously gives us a lot of flexibility.

Our stock purchases have, in fact, been reducing our share count.

Our share count is down about 10 million shares from year-ago reported levels, and we expect to continue to see that, that we will be buying more stock than we will, in effect, be issuing through various employer programs.

If I can add to that, the share count may be a little bit higher than you would have expected in Q3, but that is because the stock price has moved up so aggressively the quarter.

In addition, we have reduced our usage of options this year as we have moved off a lot of executives who had been receiving options into deferred stock plans.

We want to thank you all for very much for your time this morning.

I guess in closing, just one other thing we would say about business trends.

It has been fascinating to us to see again what we hope to be some early signs of recovery in some of our corporate negotiations, a surprising number.

We sense that our corporate customers are anticipating some greater strength by the lodging companies as well, because while they seem to be prepared to pay roughly flat rates, they also seem to be very interested in trying to lock in rates for as long a term as possible and looking for two years worth of rates, rather than just one.

Not enormously significant by itself, but I think it is another early indication that not just the lodging companies, but customers too, expect that business conditions will continue to improve.

We hope that is right.

We look forward to partaking in the benefits of that should it come to pass.

And as always, thank you very much for your interest in our results.

Have a good day.

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