萬豪國際 (MAR) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to this Marriott International fourth 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 and Chief Financial Officer and President of Continental European Lodging, Mr. Arne Sorenson.

Please go ahead, sir.

Thank you.

Good morning, everyone.

Welcome to our year-end 2003 earnings conference call.

Joining me today is Laura Paugh, Senior Vice President Investor Relations, Leeny Oberg, Vice President of Investor Relations, and Carl Berquist, Executive Vice President Financial Information and Enterprise Risk Management.

We just launched a new advertising campaign that showcases our service culture titled "It's the Marriott way."

You may have heard the music from the ads on our call as it began this morning.

It rolled out on major cable and network TV last week and will also appear online and in national print media.

You can view three of the television spots on Marriott.com/Investor.

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, February 10, 2004 and will not be updated as events unfold.

In keeping with new SEC regulations, you can find a reconciliation of non-GAAP financial measures referred to in in our remarks, again, at our web site at www.Marriott.com/Investor.

Today, I am going to cover a variety of topics, starting with some highlights from 2003 that explain our new income statement format, recent RevPAR and demand trends, recent rooms growth and supply trends, summarize our segment results, discuss our cash flow and finally outline our 2004 forecast.

It's a lot to cover, so let's get started.

As we prepared our fourth quarter results, I was reminded of the old proverb, "The worse the passage, the more welcome the port."

The last three years haven't been easy on any of us, but we are gratified today not only that we've made it through the storm, but we can look back with pride on some significant accomplishments. 2003 was a particularly noteworthy year.

Diluted earnings per share from continuing operations reached a record $1.94, 1 cent higher than 2000 earnings and 11% higher than 2002 results.

We sold $1.1 billion in assets in 2003, including over $150 million in hotel loans.

We also reduced debt by $320 million and repurchased 10.5 million shares of Marriott stock.

We added 185 hotels with over 31,000 rooms during the year, far in excess of the number added by our next leading U.S.-based competitor.

Our number of rooms in our system grew 5% in the U.S. and nearly 9% outside the U.S.

We were particularly pleased to open the JW Marriott and the Ritz-Carlton Hotels at Grand Lakes, Orlando, the Ritz-Carlton at South Beach in Miami and the Wentworth By the Sea Marriott Hotel and Spa in New Hampshire.

We received our request of private letter rulings from the IRS in 2003 and completed the sale of half of our synthetic fuel business during the year.

When the Synthetic Fuel Tax Credits Law ends at year-end 2007, we estimate our roughly 600 -- excuse me, roughly $60 million investment will have generated over $500 million in after-tax cash flow over its seven-year life.

For business travelers, we ended the year with 1400 hotels wired for high-speed internet.

With more hotels wired around the world than anyone else, this is proving to be a key competitive advantage.

By the end of 2004, we expect over 2,000 hotels will be internet-enabled.

We also introduced wireless internet access in lobbies, meeting rooms and public spaces in 900 hotels throughout the U.S. during the year.

We announced our global rate guarantee in 2003, covering all company reservation channels, guaranteeing that our guests will get the lowest available rate when booking through any Marriott channel.

If a customer finds a lower rate through any source, including a Marriott channel or through a third party, online or off, we will match the lower rate and reduce it further by 25%.

Customer, owner and franchisee response has been overwhelmingly favorable.

With only a month of results, customers booking on Marriott.com who know about the guarantee are about twice as likely to book a room than those who aren't aware of the guarantee.

The major travel management companies or TMCs have been particularly pleased with our Look No Further best rate guarantee.

In fact, in recent negotiations with them, we were able to simplify and generally reduce fees while at the same time increase preference for nearly all of our hotels and the world.

The TMCs are willing to make such agreements because our guarantee is so broad.

They know that the rates offered to their customers are the best available rates and that shopping on other distribution channels is not necessary.

As a result, we expected that our market share of their business should increase.

Complementing our 2003 Look No Further best rate guarantee, we recently announced agreements with Travelocity, Expedia and Hotels.com.

These agreements provide our properties with access to the three largest third party Internet travel sites in the world at a lower cost of sale than individual properties could negotiate.

The agreements support our revenue management strategy and Look No Further best rate guarantee, and will include an automated booking process without contractually required inventory allocations.

We have emphasized global rate integrity in conjunction with our single image inventory distribution strategy for some time.

To this strategy, we have added agreements with third party internet sites and TMCs and a powerful rate guarantee.

As a result, we are well positioned to seize more than our fair share of the coming upturn in lodging demand.

Before we talk more about our 2003 results, let me spend a few minutes on our new income statement format.

Early in 2003, we completed the disposition of our senior living services and distribution services businesses and became a pure play hospitality company.

Reflecting this focus, our new income statement format provides more detailed information about our lodging results.

We believe that this is another step forward in the area of financial disclosure.

Our new format not only provides greater detail, but also changes the position of some items.

Gains and equity joint ventures are identified below the operating income line.

The gains line includes hotel assets and other investment gains and our regular time share note sale gains.

Looking at revenues, time share interval sales and services now has its own revenue line, having formerly been included in other lodging, and the cost of time share, excluding G&A, are now included in their own operating expense line.

These two lines will enable you to see the core profit element of our time share development business with financing from time share note sale gains reported separately, and with management fees from the long-term management contracts in time share resorts continued to be reported in the base fee line of the P&L.

Segment results, including a table in the back of the press release, puts all of the time share pieces together for you.

Revenue from our ExecuStay business, totaling nearly $130 million in 2003, has moved from other lodging to owned, leased corporate housing and other.

And, of course, the expense line also changed.

G&A expenses now reflect general and administrative expenses for the entire company, including domestic and international lodging, our ExecuStay business, time share, as well as corporate expenses.

We believe this presentation, supplemented by our segment disclosures, will be helpful to investors, particularly as you compare us to other public companies.

Now, turning to RevPAR and demand trends, overall company-operated North American RevPAR across all our brands was flat during the quarter.

If we adjust the quarter to a calendar basis and include Hawaii, company-operated RevPAR increased about 1%.

North American RevPAR at our company-operated full service brands was similarly flat in our fiscal fourth quarter and with the same adjustments, increased more than 1% during the calendar quarter.

Leisure business remains strong in the fourth quarter, especially at our upscale warm weather resorts.

Our Ritz-Carlton brand, with a higher mix of resort markets in its portfolio, benefited from this trend and posted 4.8% RevPAR growth in the quarter.

The number of small meetings booked at our event bookings centers increased about 15% in the fourth quarter, primarily booked by corporate customers.

Trends in 2004 have started with steadily building strength.

Reservations booked at our reservation offices increased 8% in the first five weeks of 2004.

Of course, that growth reflects improving demand, as well as an increase in the number of hotels in our system.

Adjusting for this unit growth, our reservations volume is up 3.6%, implying a healthy pickup in occupancy for transient business in 2004 to date.

2004 has been strengthening with each week, with some decided bright spots, including Ritz-Carlton, which was up 12% in January.

We estimate our systemwide U.S. averages should reflect a 2% increase in January RevPAR.

This is consistent with our expectations, as our portfolio should generate relative strength in leisure destinations, next with transient business and so far less strength in group.

Nevertheless, we see group business building, and I expect it to be up on a full quarter's basis in the first quarter of 2004.

Among our special corporate accounts, our large volume transient accounts, 2004 pricing is flat with the prior year while global volume is expected to increase roughly 10% in the full year.

Special corporate accounts generally make up for 10% to 15% of our transient business.

In the fourth quarter, we saw improving occupancy among travelers in the pharmaceuticals and aerospace industries as well as financial services and consulting.

Regionally, the Mid-Atlantic, Southeast and Western United States markets showed the best performance during the quarter.

Group business remains very short-term, but government business provides a solid base of demand.

Our Courtyard company-operated hotels in the Mid-Atlantic benefited from improving business transient demand and showed very favorable midweek RevPAR trends.

In the Southeast, Atlanta and Fort Lauderdale were strong.

Orlando less so.

However, stronger group booking trends in Orlando give us encouragement for the first quarter.

The West showed positive RevPAR in the fourth quarter.

San Diego and Los Angeles were strong, while San Francisco and Phoenix continued to suffer from soft demand and some new supply.

Outside the U.S., company-operated hotel RevPAR increased 8.8%, but adjusted on a currency-neutral basis, increased 4%.

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

While the number of European visitors hasn't picked up, American leisure demand remains strong.

Continued cold weather in the U.S. and Canada has kept visitors checking into our Caribbean properties.

Overall managed RevPAR in the Caribbean increased 7.3% on a currency-neutral basis.

In the Middle East, RevPAR increased 23% in the fourth quarter.

Group business is picking up in Egypt, and our resorts in Sharm El Sheikh are filling with Russian travelers escaping the cold winter.

RevPAR at our U.K.-managed hotels increased 5% in currency neutral terms and over 11% including the impact of favorable exchange rates.

While the U.K. is an expensive destination for American tourists today, it is more affordable for visitors from the continent who are benefiting from an even stronger Euro.

In contrast, RevPAR in Continental Europe declined .6% during the quarter, reflecting the soft economy across much of the region and less tourism.

At year-end, the dollar value of the Euro was 20% ahead of last year, which has dramatically increased the price of an American vacation to Europe.

Business in Germany is particularly soft, but demand is stronger in Italy.

Using -- using actual exchange rates, RevPAR in Continental Europe in the quarter increased by 12%.

RevPAR in Asia was mixed during the fourth quarter, and overall RevPAR increased only 3% in currency-neutral terms and 6% including the favorable impact of exchange rates.

The strongest markets were China, Australia and Malaysia.

Weak markets included Hong Kong, Japan and Korea.

We see some indications that Japanese travelers may be venturing to international destinations such as Thailand, although Hawaii has not yet seen a material improvement in Japanese arrivals.

Turning to the supply picture, the news remains very good.

Lodging econometrics reported recently that U.S. lodging supply growth in 2003 was 1.3%, the lowest rate of growth since 1994, and they expect supply growth to remain at less than 1.5% in 2004 and 2005.

For our brands, during the quarter, we opened 7,000 new rooms under our flags around the world, including 1100 rooms with the Ramada International brand.

At quarter end, our worldwide pipeline of rooms awaiting opening totaled more than 300 hotels and 50,000 rooms.

Of the 50,000 total rooms, 1/3 are high-value, full-service rooms, and nearly half of those are outside the U.S. 75% of our full-service pipeline is already under construction or is pending conversion.

Approximately 4,000 rooms in our pipeline were Ramada International rooms and are primarily conversions of existing hotels.

In total, roughly 20% of our global room additions during the fourth quarter were conversions from other brands.

Our pipeline of signed but not yet opened conversions is roughly 60 hotels, compared to less than 30 hotels just nine months ago.

Of course, as we are adding some outstanding products to our system, we are also pruning our portfolio. 9 hotels with 1600 rooms left the system in the fourth quarter and we anticipate 6,000 rooms will be asked to leave the system in 2004.

Given the strong demand for our brands, this is an excellent opportunity to upgrade properties with attractive brand-enhancing hotels.

The combination of modest improvement in system wide RevPAR along with unit expansion allowed us to increase base and franchise fees revenue during the quarter.

Incentive management fees, on the other hand, declined $19 million, reflecting higher property level expenses, despite significant productivity improvements during the quarter.

Hours per occupied room declined about 2% during the fourth quarter but telephone profits declined, and wages, benefits and insurance costs increased.

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

For the quarter, house profit margins declined 2.7 percentage points in North America, and were flat in international markets.

International margins are important to consider since nearly half of our incentive fees are now coming from properties outside the United States.

Approximately 26% of our managed hotels booked incentive fees in the fourth quarter, compared to 35% a year ago.

Revenues from owned, leased, corporate housing and other increased 11% due to the $36 million payment for lost revenue from the loss of the Marriott World Trade Center hotel on September 11th, 2001, offset by the impact of lower demand for corporate housing and lodging, as well as a 12% decline in owned and leased rooms.

In addition, we have shifted several corporate housing markets from company-managed to franchised.

At year-end, the company owned just six hotels.

Time share interval sales and services revenue increased 19%.

Our time share business continues to experience strong sales in waterfront communities in Aruba, Hawaii, South Carolina and Newport, California.

We are also seeing strong sales performance at our new Desert Ridge resort in Arizona.

Our improved margins are the result of a favorable sales mix at higher margin projects, lower construction costs in Hawaii, and lower costs associated with marketing incentive promotions.

If you look at contracts signed by our time share customers in the fourth quarter, some of which will be recognized as revenue in future accounting periods, contract sales increased 11% over the prior year.

We are encouraged that Orlando appears to be regaining strength while sales at the Western ski resorts appear to be improving as heavy snowfall has attracted buyers.

General, administrative and other expenses totaled $187 million during the quarter.

G&A and other includes overhead associated with the time share business, our ExecuStay corporate apartments business, our owned hotels, as well as general corporate overhead.

Total G&A and other increased 7% during the quarter.

We wrote down our guarantee on our property in Istanbul by $8 million as occupancy has reached extremely low levels following the bombing in that country in November.

We also took charges associated with a property in Mexico and one in California totaling $7 million.

Other cost increases included higher litigation expenses, offset somewhat by foreign exchange gains during the quarter.

Gains in other income totaled $52 million in the fourth quarter. $32 million of this total is the gain on our sale of time share mortgage notes, compared to $14 million in the year-ago quarter.

We also earned a $10 million gain on the sale of an international joint venture interest in the fourth quarter of 2003.

The 2002 fourth quarter also included a $44 million gain on the sale of Interval International.

Of course, we also recognized smaller gains from various transactions in both years.

Excluding syn fuel, our equity joint ventures generated a $16 million loss during the quarter, compared to a $6 million loss in the year-ago quarter.

The $16 million fourth quarter loss was anchored by a $10 million loss from the Courtyard joint venture.

Interest expense increased by $6 million during the quarter as capitalized interest continued to decline along with our investment spending.

We also increased about $3 million in extra interest expense when we purchased on the market some of our long-term outstanding debt in the quarter.

Total debt was under $1.5 billion at the end of the fourth quarter, down from roughly $1.8 billion at year-end 2002.

Interest income increased $4 million during the quarter from $47 million last year.

About 2/3 of our interest income was noncash, including the cash deferral of our interest income from the Courtyard joint venture.

We purchased 1.4 million shares of Marriott stock during the fourth quarter and about 2.2 million shares thus far in 2004.

Asset sales totaled $1.1 billion in 2003, including $163 million for three hotel properties and land parcels, $25 million for the sale of our equity interest in three joint ventures, $162 million for four hotel loans, $280 million in time share note sales and approximately $450 million for senior living services assets.

Capital expenditures declined during 2003 from $292 million in 2002 to $210 million.

Loan advances were flat with the prior year at approximately $240 million.

Looking at the balance sheet, excluding time share notes, notes receivable increased only slightly from a bit over $1.1 billion in 2002 to a bit under $1.2 billion in 2003.

Reviewing contingent obligations, unfunded loan commitments declined from 2002 to just $80 million in 2003.

Lodging and time share guarantees declined almost $100 million during the year.

Despite the decline in lodging and time share guarantees, a lower level of new lodging loans and lower capital expenditures, our strong brands fueled our lodging system growth of 31,000 rooms during 2003.

Since we continue to operate the company on a segment basis, we have also provided segment results in the tables included in the earnings release.

Unlike the face of the income statement, the segment results of each business include gains associated with the respective businesses, joint venture results and overhead associated with each segment.

Segment results for our time share business, including financing and service income, declined 12% to $64 million in the quarter.

In the year-ago quarter, we reported a $44 million pretax gain on the sale of our interest in Interval International and a $14 million gain on the sale of our mortgage notes.

You will recall, as we've mentioned in previous quarters this year, that in 2002 we sold mortgage notes quarterly, and in 2003 we executed only two sales, one in the second quarter and one in the fourth.

In the fourth quarter of 2003, we reported a $32 million gain on the sale of our mortgage notes.

Our last segment is synthetic fuel.

On an after-tax base, synthetic fuel contributed $32 million to income from continuing operations.

During the quarter, our synthetic fuel segment produced 3 million tons of treated fuel.

You may recall that we sold a 50% interest in our synthetic fuel business to a financial institution in June 2003.

As a result, we received $25 million at closing and will receive additional profits over the life of the venture, based on the actual amount of tax credits allocated to the purchaser.

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

The profits from the sale of these credits eliminated our typical pretax operating loss from the business.

The purchaser had a one-time put option, which would potentially have allowed it to return its ownership interest to us if a satisfactory IRS private letter ruling were not obtained prior to December 15, 2003.

Since this put option remained outstanding until November 6, we continue to consolidate the venture until that date, and reflected our partner's share of the business on the minority interest line on the income statement.

For the period after November 6, the put option was eliminated and the venture was reported using the equity method of accounting.

Bottom line, the impact on net income was a favorable $30 million or 12 cents per share, 2 cents per share lower than the prior year's quarter.

Excluding synthetic fuel, our tax rate was 34.6% for continuing operations in 2003, and 34.5% in the fourth quarter.

Now, let's turn to our outlook.

We spoke earlier about our transient outlook.

Of course, roughly 40% of our full services businesses grew.

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.

Group revenue on the books for Marriott's convention and brand resort hotels is up almost 5% in the first quarter of 2004 and down just 1.5% for the full year.

The booking window remains very short.

Approximately 40% of our group's business is booked in the year, for the year.

Given this short booking window today, we are quite optimistic about group business in the second half of the year.

Groups are doing more shopping and we believe that lookers will turn into bookers as the year progresses.

Our new Grand Lakes resort in Orlando and Desert Ridge in Phoenix will help us attract meeting planners looking for the new and different, as well.

Combining our group and transient outlook, our forecast assumes a steady recovery of demand.

Given the slow expected growth in U.S. lodging supply as our hotels achieved 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 as well as continued unit additions.

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 economies strengthen, and growth in the U.K. market, particularly in London, will depend on a return of U.S. travelers and an increase in airport traffic.

In the Middle East, 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 continue to forecast North American RevPAR growth of 3 to 4% 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 are likely to see only a small increase in house profits and incentive fees.

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

At 3$ to 4% 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 avoidable, -- excuse me, unavoidable, we continue to keep a firm handle on costs throughout our business.

With our strong pipeline of hotels under development or pending conversion, we are confident in our ability to add 25,000 to 30,000 rooms to our system in 2004.

With 3 to 4% RevPAR growth and unit expansions in 2004, we expect base fees should increase roughly 5% and franchise fees should increase more than 10%.

And even with flat margins in the U.S., stronger international business, and maturing hotels, should increase incentive management fees around 10%.

Our time share business has been relatively 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.

Closing rates, margins and operating incomes associated with time share interval sales are likely to improve.

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

Overall, lodging operating income could total about $550 million in 2004 compared to $480 million in 2003, around a 15% year-over-year growth rate.

Gains from time share mortgage note sales are highly dependent on interest rates but could total 75 to $85 million in 2004, compared to $106 million in 2003.

Remember, that 2003 amount included $21 million on the sale of three international joint venture interests.

Excluding syn fuel, equity joint venture losses totaled $17 million in 2003 and we expect them to be about break even in 2004.

Syn fuel is estimated to reflect a $45 to $50 million equity loss before tax benefits and credits in 2004.

We expect investment spending in 2004 to total roughly $500 million, down slightly from 2003 levels.

Debt service and operating income guarantees in 2004 are likely to remain flat with 2003 levels as new deals replace expired obligations. 2004 debt maturities are expected to total only $64 million.

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 don't own many assets, I wouldn't expect asset sales in 2004 to be as meaningful as they have been in the last few years.

All in all, we expect net interest to be flat year-over-year.

Next year we expect earnings per share from our synthetic fuel business to increase to roughly 38 to 42 cents a share.

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

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

Compared to our October guidance, which forecasted lodging segment results of $770 to $790 million in 2004, our current guidance, based now on a bottoms up budgeting process, reflects segment results at the lower end of this range.

For the first quarter, we continue to estimate North American RevPAR is likely to grow 2% to 4%.

Incentive fees should be flat to slightly down, base and franchise fees should increase consistent with unit growth and RevPAR and total lodging operating income should total $120 to $130 million.

We don't expect to complete a time share mortgage note sale in the first quarter, so gains should be modest.

With our lower debt balances, interest income is likely to offset interest expense.

n total, we expect earnings per share should increase to 38 to 42 cents, with approximately 6 cents coming from synthetic fuel, consistent with the forecast we provided last October.

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

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

Thank you, our question and answer session will be conducted electronically.

If you'd like to ask a question, please press star 1 on your touch-tone telephone.

If you are on a speaker phone, please make sure your mute function is off so your signal can reach our equipment.

Once again, if you'd like to ask a question, press star 1 on your touch-tone telephone.

We will pause for just a moment.

And our first question comes from Steve Kent with Goldman Sachs.

Hi, good morning, Arne, Laura and Leeny.

Hi, Steve.

Hi.

Arne, can you just give us a little more color on the earnings guidance?

I guess I'm having trouble with a couple of things you said.

You said base fees up 5, franchise fees up 10, flat margins but incentive fees up 10%, yet the guidance looks like it's very much second-half loaded, because you're not really guiding very much for the first quarter.

In fact, it's almost -- because you're increasing your synthetic fuel contribution, it looks like you're actually lowering the overall operating.

Is it really that -- do you expect second half to be much stronger than the first half?

Is that sort of what is driving some of this?

A couple of comments on this, Steve.

I think our forecast for the first quarter is essentially the same as the forecast we gave a quarter ago for the first quarter.

At least that's the way we view it internally.

I think the -- the -- and we feel good about that growth rate that's in the first quarter.

I think the only comment I would note that I think is consistent with what you're suggesting, is you could hear from our comments that we expect incentive fees to be roughly flat in the first quarter year-over-year, while on a full-year basis we expect incentive fees to be up about 10%.

So, I think our implication is we will probably have somewhat stronger RevPAR growth as the year progresses, not dramatically different but a little bit stronger as the year progresses, but we should start to see better performance of the incentive fee line as the year progresses and we get an ability to get a little bit more margin improvement.

The other thing I'd note on the first quarter, last year's first quarter we had 8 cents of synthetic fuels.

Our forecast for 2004 is 6 cents of synthetic fuels.

And so when you adjust that, I think we're seeing good, core growth in our lodging business.

Just to stay on the incentive fees for a moment because that seems to be the swing, I thought you said earlier that 26% of the -- of the properties were paying incentive fees this quarter, but 36% a year ago.

If you look at sort of where you are right now, how close are some of these to threshold where they'll start to pay incentive fees?

I mean are we very close, or, you know, 5 basis points away, or is there a lot more to go before you'd be able to -- ?

We -- we've shared a chart at our investor conference in November that really looked at the number of hotels and how far south they were on the house profit line from incentive fee levels.

We don't have any better information than that today.

I think that's still the analysis we would send you to.

But roughly 50% of the hotels are a long way south of incentive management fee land, with house profits about 30% less than what we think the level ought to be.

But, you know, a number of hotels that are quite a bit closer.

Okay, thank you.

Moving on, we will now hear from Harry Curtis with JP Morgan.

Good morning.

Good morning, Harry, how are you?

I'm great, thank you.

How are you?

Great.

You had mentioned midweek occupancies.

Can you give us a little more color about where they are today?

And how much they need to expand before you really do begin to see pricing power?

These are tough questions.

At least the latter part of it.

I think what we've seen, though, is at roughly the beginning of the year, maybe a little bit in the first part of December, although December is a little squirrelly because you've got all the holidays bouncing around, but really just within the last couple of months we have started to see better RevPAR performance on a year-over-year basis, midweek as opposed to on weekends.

As we've talked about before, the most important thing for us in terms of driving average rate is to get full hotels during midweek.

That gives our managers and sales people the confidence to be a bit more aggressive in pricing of group, and it also allows them to start to shift some business more towards business travel as opposed to leisure travel, or in any event higher-rated and less-discounted business.

We think that on a full week average we probably need about 75% occupancy to start to see that shift in rate.

What that means in terms of midweek occupancy, obviously, would mean midweek occupancy had to be higher.

I'd say probably in the 80 to 90% range.

Okay.

And using the set --

Obviously you don't need that on a brand average, what you need that on is individual hotels, which allowed those hotels, then, to start to be more aggressive.

And are you about 300 to 400 basis points below that number now?

I don't have that number in front of me for the last few weeks.

I would guess, though, that it's got to be about that area.

Okay.

300 to 500 basis points, maybe south of that.

Okay.

Thanks a lot.

You bet.

We'll take our next question from Joyce Minor with Lehman Brothers.

Hey, Arne.

Hi, Joyce.

Just trying to reconcile maybe a little bit what we're hearing from you versus what we heard from Starwood last week.

I guess I'm just trying to get your sense of -- do you feel that the slope of the recovery line has changed at all?

Are you seeing much of an increase in the slip of the line, if you will?

Or is your take that the slip of the line is unchanged?

You're just one quarter closer to the recovery?

Kind of any comments you have there.

I think the latter, really.

We'd say that this is unfolding about the way we would have expected a quarter ago.

Obviously we -- we live in a world of uncertainty and we make a bunch of assumptions as we go through and we're right on some assumptions and we're wrong on others.

Fortunately, I think, where we've been off has tended to be in much more minor areas, really, if we look at our internal sets of planning from a quarter ago to today and with the budgeting process.

But I think our RevPAR expectations for 2004 have remained roughly constant.

Our expectations for transient business and group business have been roughly constant.

We continue to believe we'll see good, steady recovery throughout 2004 with -- with a decent slope in that curve and at the same time, we'll see some things which, you know, are going to be frustratingly slow in terms of dropping dollars to the bottom line, particularly for hotel owners.

It's going to come from occupancy first, which is going to put more pressure on margins and therefore house profit.

And it's still going to be a number of quarters before we see, in common sense terms, real pricing power.

And I think it's on those areas where -- where our tone would sound a bit more conservative, I suppose, than some others.

Not because we don't think the recovery is real and strong, but we think in order to really get pricing and the leverage dropped to the bottom line, we still need a few quarters of growth.

That's what we've thought for some period of time.

That's what we still think today.

That's helpful, thanks.

And I guess as we look at your guidance for lodging results, I guess we're calling it, which used to be 777 to 790, now at the lower end of the range, with you indicating that most things are sort of unchanged in your outlook, what's sort of driving that?

Is it all the time share gains lower in '04 versus '03, is that sort of new news from you or no?

Is it, kind of, margins or something else?

Well, I think I would start by just pointing out the different approach that happened a quarter ago and today in terms of our guidance.

A quarter ago, we kind of sat upstairs in corporate headquarters with obvious input from our field, but did our best to come up with some guidance.

It was done before the budgeting process, which is really a much more bottoms-up kind of approach.

And as a consequence, suffers a little bit from having to rely on more general assumptions and a little bit less information.

I think at best guess we can -- we have since that time, done a Marriott-like intensive, time-consuming, by the book budget and that budget comes in and now produces the numbers that put us in a position to give the guidance that we'd given.

We don't see a lot of fundamental differences in the assumptions that we've made a quarter ago and the general assumptions that are now made in our budget.

We do see obviously a -- hundreds of different, independent decisions that are made there, and I think if we were to generalize on one of them, it would probably be that incentive fees were a bit worse than we expected in the fourth quarter, which is reflecting that tough margin environment that we've got out there.

How much worse in the fourth quarter than we thought?

You know, $5 to $8 million, I suppose, something like that for the company as a whole.

And to some extent, though the math isn't done this way, my own read of the budget would say that we're probably a little bit more modest in our incentive fee expectations for next year.

Okay, that's helpful.

One last question for you would just be your sense of kind of the net impact of the weak U.S. dollar in '04?

I guess I might have expected to see more Americans start to travel to Europe for summer vacations in summer '04 versus last year with the Iraq concerns.

But with the dollar being so weak, to what degree do you expect that to offset that and push back maybe that recovery, and then on the flip side, to what extent are you benefiting from inbound international travel here in the U.S.?

And net-net, what ends up being more important?

Is the weak dollar helping you or hurting you?

Normally I suspect the weak dollar would help us because we are -- we've got more mass, obviously, in the United States, and so to the extent we had greater international travel of non-Americans coming to America, that would probably help us.

A couple of thoughts, though, on this and I don't think any of them are all that positive.

Obviously with the increase in the the Euro -- value of the Euro, it is more expensive for Americans to go to Europe and to the United Kingdom, given the strength of the pound.

And that is going to tend to dampen the return of that traveler -- I suspect we'll still see year-over-year growth because 2003 was a really tough year, certainly on the leisure side as people were making their plans, those plans were often made in the context of an Iraq War that was getting under way and clearly many, many Americans decided to stay in the United States or go to the Caribbean rather than to go overseas.

Some of them, notwithstanding the strength in the Euro, will go back next year, but again, the cost will make it a little more difficult.

I think the other observation we'd make here is while the United States is on sale to many other folks whose currencies have appreciated, there still is a sort of geopolitical environment out there that I think is dampening to some extent the growth in international visits to the United States.

We hope that begins to move but it's not moved as much as you would normally expect from the weakening dollar so far.

Okay.

Thank you.

You bet.

We'll take our next question from Brian Egger with Harris Nesbitt.

Good morning, Arne.

Good morning.

Just had two questions for you.

The first is respect to the flat house margin expectation.

Maybe -- can you speak a little bit to what you're expecting for categories like wage, benefits, insurance, and energy?

And particularly worker's comp, which has gotten a lot of attention.

And my second question would be just any -- in respect to your comments about bookings improving, any change in the relationship between definitive and confirmed -- rather tentative versus definitive bookings due to the timing or incidence of how quickly they're tentative bookings are converted to definitive ones?

OK, let's start with margins.

The -- I think insurance and benefits we ought to see grow at around 10% to 12%, I suppose, on a year-over-year basis.

Worker's comp is a problem, particularly in California.

I think the growth rates in California will be higher than elsewhere.

The averages probably are not so stunning, but maybe also in about the 10% range.

But again, you've got a broader variety, I think there, market to market.

Wage growth itself should not be that significant, probably has a three-handle, not a four-handle and not a two-handle.

That's our guess and again that's going to depend a little bit for market to market , and a little bit whether or not there are union contracts involved.

But that seems to be fairly modest.

Utilities, I don't know to tell you the truth, what we're forecasting in terms of utility growth, cost growth year-over-year.

I wouldn't expect that it's terribly severe.

We do believe that we'll have some productivity improvement in 2004, though not significant.

And the other thing I'd point out on the margin front, which we've talked about the last couple of quarters, I think telephone profits has really changed significantly over the last couple of years.

I don't know that that will continue to change that much, but what we've essentially seen telephones in hotels go from being a profit source to a pure cost element as travelers, almost all of whom now carry their own cell phones, use cell phones for long distance calls and very, very rarely use the -- the hotel network.

,All those things combined and given that we're going to have, again, more occupancy growth than rate growth, are what lead to us conclude that we're going have margins that are roughly flat.

Now, your second question was bookings.

And I don't have much data for you on that.

I think our view is that group bookings are still quite short-term, certainly by historical standards.

We think we're -- in some hotels, maybe enough so that it's going to start to impact the average, we may be seeing the discussions about group events take place further in advance of the group bookings we've had in the last year or two.

I don't have data about pace of conversion of tentatives to definites, but I think it boils down to the same thing, where we've got group planners that are beginning to realize that as demand comes back, they can be less confident about sitting and waiting until the last minute to book their room.

And so they're starting to talk about it in advance.

Hopefully a quarter or two from now we will see some more of that, in terms of the group business on the books.

Thanks, Arne.

You bet.

We'll now take a question from Keith Mills with UBS.

Hi, actually it's Will Truelove.

Arne, when you go back to the 75% occupancy to sort of get the rate to occupancy conversion, and it looks like previously you're running about 70%, can we infer from that that it's probably late 2005 before you start seeing more rate growth and occupancy growth?

Is that sort of how it works out?

I would have thought about a year before that, that we -- we're probably going to have to get through 2004, and maybe around that point in time for 2005, we will start to see some rate growth.

Now, again, there are a couple of ways to think about rate growth here.

The most common sense approach is when do you start raising rates in a particular category of business?

I don't think we'll see broad movement in that until well into 2005.

I think earlier than that, though, we'll start to see average rates improve because we're going to see bette -rated business displacing lower rated business in some hotels.

And again, this will play out on an individual market basis and it won't require the Marriott brand across the United States to be at 75% necessarily, because we're going to see greater strength in some markets and that's going to really start to show in the averages.

That makes sense, thanks.

And then secondly, I don't know if you broke down the $500 million in capital spending for 2004.

Could you go through that, if you went through it previously?

Yeah, that's in the release.

Oh.

It's on the back page of the release.

Last page of text of the release.

Fair enough.

And that finally on the syn fuel being 38 to 42 cents, that's a little higher than previous.

Has that changed related to the new equity accounting?

No, that change really relates to demand for the treated coal.

We have continued to sign good outtake agreements, I can't remember what the term is, but sign -- essentially we try and sign matching agreements to take the untreated coal and agreements with the users of the treated coal, and there's just been great demand for that treated coal and so our tonnage, we think, will go up.

When we first bought the synthetic fuel investment, we thought we'd do 6 million tons a year, something like that, we now think that next year we may produce 10 million tons of synthetic fuels.

And it's that difference, just in the last quarter or so, it has not been that dramatic in the last quarter, but in the last quarter or so, we've probably increased our 2004 expectation by 1 million tons, maybe.

Maybe a little less than that.

That's what's driving that earnings per share.

Okay, great, thank you very much.

You bet.

We'll now take a question from David Anders with Merrill Lynch.

Great.

Arne, just a point of clarification, in your press release you highlight the $36 million gain from the insurance.

But then you offset it against $19 million lower incentive fees.

Is that just normal course of business, off $19 million?

Or was there some one-time event that caused you to highlight that?

No, I think that's a fair comment.

It's more normal course of business.

We were just in that paragraph really thinking about a year-over-year comparison, if you will.

And on a year-over-year basis, that $36 million got spent, really, if you will, by a decline in incentive fees and the Istanbul and related $15 million bucket.

Okay.

And just as a question on the group and conference business, because all lodging companies are saying that's soft, but all my Vegas guys are saying it's strong.

Is there a fundamental shift, your field people giving you any indication that lodging in general, U.S., is losing business to Vegas?

It's hard to get a measure on, but I think it's clear that Las Vegas over the last decade has become a more attractive destination for group meeting planners.

And as a consequence, I suspect it is taking some share.

We're still hearing, though, from group planners with consistency that they don't want to go to Las Vegas every year.

And to some extent, some are attracted to being in or near Las Vegas but not necessarily on the strip in Las Vegas.

But Las Vegas clearly is an attractive destination, as attractive as it's ever been.

It is one of the reasons we've been looking hard at trying to add a big box Marriott hotel on the strip in Las Vegas.

We'd like to have a -- an outlet there for our customers who we think would like to do business with us.

We really can't do anything on the strip.

We do have some great product at both Lake Las Vegas and up in Summerland, but I'd like to have something to compete on the strip.

Great, thank you.

Now we'll take a question from Bill Crow with Raymond James.

Good morning, everybody.

Hi, Bill.

A couple of questions.

First of all, the detailed bottom-up budgeting process you just completed.

Has that resulted in any changes to the longer term forecast you presented in November?

No.

Okay.

And do you think -- you know, from where you sit and you see these budgets coming in from the property levels, from the GMs.

They certainly have reason to be conservative given the last three years.

Is there any thought on your part that the GMs would rather err on the conservative side here?

I'm sure the GMs would love to err on the conservative side if we let them.

And I know you all would like to hear us say that 3% to 4% is a really conservative number and we ought to take the over, whatever it is, the language people are using these days.

But I think that to come up with that end of the budget, we started with forecasts from the hotels.

We participate in a dialogue with the hotels.

I think the net result of that was probably to increase their forecast because we would really challenge their conservativism and we think now we've got a pretty good balance and a pretty good forecast.

Okay, and two quick other questions here.

Are you thinking about providing us the first three quarters of 2003 results in the new income statement format?

And then second of all, Arne, at the Alice conference you talked about getting more aggressive toward asset acquisitions.

Would you like provide any -- any other detail on that, and what you're thinking is there?

Okay, the -- we hope to file our 10K maybe as early as the end of this week, but certainly relatively soon.

The 10K will include 2001, 2002 and 2003 on the new P&L format.

So, you will see it.

And the quarters we will make available next week on our web site.

With respect to real estate exposure, I think I saw a couple of reports come out after the Alice conference that seemed to put a whole lot more weight on some fairly casual comments on a panel than I would have ever intended.

All we really said was that we believe that we're at a nice stage in the cycle.

There is to be sure significant amount of capital chasing deals in our industry, but if we can, with our partners, participate in some of that and add valuable management contracts to our system, that is something that we're prepared to do.

And clearly given where our debt levels are, we expect to continue to be a buyer of our stock, but expect to continue to have some resources that we can invest otherwise.

Our aim will continue to be, as it's been in the past, to be a management and franchise business and not a real estate owner, and we will continue to look at any investments we make and make sure that we've got maximum chance to recycle that capital and the ability to drive good fees going forward for a period of time.

So, I don't see that really as being quite as significant as some other people did.

We're going to take one last question and then shut her down.

So, anything else on the queue?

We have a question from Jeff Donnelly with Wachovia Securities.

Good morning, guys.

Hi, Jeff.

How you doing?

Cendant I believe has an option to purchase your interest in your Ramada in 2004.

I was wondering if you could confirm what the date was for that and explain maybe how pricing is determined, and shed some light on what you think -- your expectations are, or any indications you've received from them?

And then just as a follow-up, I was curious if you have factored into the guidance potential dilution that might come from them exercising the option?

The answer to the latter is no.

The Cendant joint venture is in our joint venture line, on the new P&L.

And we've got about, oh, it's about $6 million a quarter. $5 or $6 million a quarter, I think, of joint venture equity pickup.

And that's in our forecast for full year 2004.

You are right to point out that I think sometime in our second quarter, I believe, Cendant has an option to dissolve that partnership.

If that exercise that option, we will trade, in effect, the joint venture pickup of $5 or $6 million a quarter, whatever the precise number is, for roughly $200 million worth of cash.

Now, there's a formula and you could push me on it and I'm not sure I could tell you exactly what the formula is.

That $200 may be a little light, but it's going to be ballpark.

Our assumption assumes that that is not exercised.

We don't know whether they will exercise it or not.

But if it does, we will end up with a cash that's generated and some impact on the P&L and we will advise you just as soon as we know what is happening there.

Okay, great, thanks.

All right.

I want to thank you all very much for your time.

We look forward to really good times in 2004, and good, steady, continuing upramp for our results, I think say that with more enthusiasm and more confidence than we've been able to say it anytime in the last few years and it feels great.

Thank you very much.

That does conclude today's conference call.

I'd like to thank everyone for their participation.