萬豪國際 (MAR) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to this Marriott International first quarter 2004 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.

Please go ahead, sir.

Thank you David.

Good morning everyone.

Welcome to our first quarter 2004 earnings conference call.

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

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 this press release that we issued earlier this morning along with my comments today are effective only today April 22, 2004 and will not be updated as actual events unfold.

In keeping with FCC regulations, you can find a reconciliation of non-GAAP financial measurements referred to in our remarks on our website on at www.Marriott.com/investor.

Every spring in Washington we experience somewhat of a rebirth.

For a few minutes everyone forgets about the struggles between left and right, Democrat and Republican, investigating committees and the investigated and we all come together to join in the annual traffic jam to see the cherry blossoms around the Tidal Blossom -Tidal Basin.

This spring is even sweeter than normal as the hotel business has finaly emerged from a long winter.

As you can guess we are in a great mood.

To quote Bill Marriott, customers are not just looking, they're booking.

For the first quarter Marriott's Lodging operating income increased 29% and diluted earnings per share from continuing operations totaled 47 cents, a 31% increase over the prior year.

Excluding synthetic fuel, our EPS growth is even more dramatic up 54% to 43 cents this quarter.

Our total EPS exceeded that of the first quarter of 2000, the last great year of the lodging business and tied that of the first quarter of 2001, the last quarter of U.S.

RevPAR growth before the U.S. economy started to soften.

Our new forecast for full year 2004 EPS now look for record full year results and with some luck, we may post record earnings even ignoring the returns from our tax investments.

The other good news during the quarter is that we repurchased 6.6 million shares of Marriott stock in the market and another 800,000 shares to date in the second quarter of 2004.

With our strong cash flow, low leverage and attractive valuation we expect to continue to repurchase our stock.

Needless to say lodging demand and RevPAR were stronger than expected in the first quarter.

Our first quarter statistics include our first three accounting periods for our U.S. properties, but only January and February for our Ritz-Carlton and International Hotels.

But to be comparable to our competitors, you should know that world wide, system wide RevPAR for the calendar months of January, February and March increased 8.3% impacted by both strong demand and favorable exchange rates.

For our full service hotels alone world wide system wide comparable RevPAR for January, February and March increased 10%, also including the benefit of foreign exchange.

Not surprisingly the strength in RevPAR was overwhelmingly driven by occupancy.

Our business transient travelers posted the greatest year over year growth.

For our company operated full service hotels, first quarter transient RevPAR increased 6.7%, the largest increase in 14 months.

Marriott's comprable airport hotels, a good barometer of business transient demand, experienced a RevPAR increase of 6.9% during the quarter.

With stronger transient demand and our look no further best rate guarantee, we also saw room night production from travel management companies increase 6% during the quarter.

Our all channel guarantee is unique in the industry in that it is designed to reinforce our pricing integrity across all our distribution channels rather than providing comfort only to our internet customers.

Even in the first few months, the program has contributed to higher closure rates and higher volumes across Marriott.com and other Marriott channels.

Room revenue for marriott.com was up 45% year over year during the first quarter.

Even as the business transient segment strengthened, leisure demand remained very strong during the quarter.

Large numbers of German and British tourists hit the beaches particularly in Florida, as exchange rates were very favorable.

Marriott has historically been thought of as a business and group hotel company.

However, our product continues to grow in popularity with leisure guests.

Marriott rewards members earn points on business travel and then use those points to vacation with us over 2 million nights a year.

Our nearly 70 spas represent the largest system of resort spas world wide and are very popular with leisure guests.

And the $300 million in hotel revenue we generate annually from weddings also demonstrates our strengths with the noncorporate customer, we believe our new relationships with Expedia and hotels.com, travelocity and lodging.com will contribute more weekend leisure demand for our products.

And our timeshare business has never been stronger.

Leisure traveler demand for our timeshare products shot through the roof during the quarter.

We sold a record number of weeks at higher prices than last year.

At our investment conference in November we outlined several strategies to improve profits and returns in our timeshare business.

The benefits of that strategy were evident this quarter.

I'll talk more about timeshare in a moment.

Group business also performed better than expected and provided a solid base of business in most markets.

Our event booking centers which provide meeting planners with multiple property, one stop shopping for small groups in large markets, reported a 20% increase in bookings during the quarter.

Most of these meetings will take place this year.

In total our full service hotels booked 2.2 million group room nights in the first quarter and over 90% of those will occur during 2004 those meetings should also generate roughly $325 million in incremental food, beverage and other revenues.

Looking forward, group room nights on the books for the Marriott brand are up 3% in the second quarter and 2% for the rest of the year in 2004.

We expect that actual rooms sold will be even higher as many groups continue to book at the last minute and group attendance is now running ahead of meeting planner expectations.

With the long-awaited combination of strong transient and improving group demand by the month of March we experienced higher average rates in every brand.

While we have raised prices in some markets opportunistically, most of our rate increase during the quarter was due to mixed shift as we replaced low rated business with higher rated business.

For the Marriott brand, for example, first quarter room nights from full rate corporate transient customers increased 16% while discounted room nights declined 3%.

The RevPAR improvement was broad geographically, almost 70% of comprable full service hotels in North America including Marriots, Renaissances and Ritz-Carltons were able to improve RevPAR during the quarter.

San Francisco, Orlando and New York showed particularly strong improvement while New Orleans, San Diego and San Antonio were held back by fewer city wide conventions and some new supply.

Also interesting this quarter was the change in reservation closures.

In studies completed over the last few years our brands consistently lead the industry in converting reservation inquiries to actual reservations.

In this quarter that already high closure rate improved dramatically to levels not seen in more than 15 years that we've been tracking the data.

We believe that a stronger economy, available inventory, our best rate guarantee and our information-packed website are helping guests to stop looking and start booking.

Outside North America first quarter RevPAR performance was even more impressive.

System wide RevPAR outside North America increased 13.4% or 6.4% excluding the impact of exchange rates.

The Caribbean and Mexico benefited from the cold winter and snow in the Northeast U.S.

Our three hotels in Cancun, for example, are doing particularly well.

Our nearly 30 properties in the Middle East experienced strong it demand during the quarter.

While not in our comp base due to a significant renovation last year, our hotel in Cairo increased RevPAR 31% while Dubai's RevPAR was up over 20% both hotels referred to in constant dollars.

In the Asia Pacific region RevPAR improved 8.1% including exchange rates and 4.1% based on constant dollars.

As economic growth surges forward, we expect Chinese outbound travel to exceed 20 million trips in 2004 which for the first time would make the Chinese international travel market even larger than the sizable Japanese market.

This year Chinese business and leisure travelers are likely to stay close to home and visit markets such as Thiland or Vietnam but in a few years we believe they will be visiting Hawaii and Australia as well.

Including Ramada we have about 40 hotels in China and another nine are in the pipeline.

We are currently the second-largest lodging company in China but the largest full service company in that growing market.

Today our 5,000 rooms in Hawaii are benefitting from foreign exchange rates as more Americans vacation in the islands rather than take a relatively more expensive European vacation.

The airline industry also expects Japanese arrivals to pick up.

Airline lift form Japan to Hawaii has increased 19% over the past two months.

On the other side of the world our new hotels in London performed quite well particularly considering that large numbers of Americans have not yet returned to the U.K..

Our new and very upscale products at Chancery Court and Park Lane showed very strong RevPAR growth.

Speaking of noncomprable hotels, while our RevPAR statistics are impressive this quarter, it is important to note that a large number of properties are undergoing renovation this quarter or just emerging from renovation completed last year.

Unlike some competitors, a renovated hotel becomes part of Marriott's comp set only in the second full year after its renovation is completed.

That means that our statistics are not enhanced by the very favorable RevPAR performance that occurs when you compare post renovation periods to periods when renovation was under way.

A good example of this is one of our newly renovated 1500 room flagship convention hotels which completed its renovation in 2003 and will not become a comprable hotel until 2005.

First quarter RevPAR at that hotel was up 31% but, again because of the comparability it is not included in our quarter statistics.

Along these same lines I'd like to pause for a minute to talk about the growth in our rooms in recent years.

Net of all deletions our total rooms have grown roughly 5.4% since this time last year or almost 26,000 rooms.

And if we go back four years to the end of the first quarter 2000 before any sign of weakness entered the market, we can see the net addition to the Marriott family of 135,000 rooms to our global system, an increase of 37%.

With RevPAR growing again, we should start to see all these rooms begin to reach their potential for us as well as for our owners and franchises.

Turning to our P&L, our revenues from base and franchise fees were up 11% reflecting strong RevPAR and that unit growth.

Our incentive fees increased 14%.

Overall world wide house profit margins for our managed hotels increased .4 percentage points.

Despite some modest room rate increase, North American house profit margins declined about half a percentage point.

Impacted by a catch-up in repairs and maintenance spending, declining telephone profits and higher utility, unemployment and medical insurance costs.

However, our operating efficiency continued to improve.

Man hours per occupied room declined 2% during the quarter in North America, the fifth consecutive quarter of improvement.

House profit margins outside the U.S. increased almost 3 percentage points reflecting very strong RevPAR and good cost control.

As a result of the decline in our incentive management fees over the past three years, our overall operating income has become substantially less volatile, yet we retain considerable up side.

While we did not increase the number of hotels paying incentive fees in the first quarter compared to the fourth quarter of 2003, our convention hotels in Orlando and Anaheim experienced strong demand in the first quarter and booked significantly higher incentive fees.

We talked already about room expansion which is obviously important because it drives higher fees and profits, but room expansion is also important because it enhances the value of our brands by adding new and exciting product to our system.

If you have any doubts I urge you to visit some of our new properties.

Our newest London property is a 1919 era grand residence facing the green expanse of Hyde Park.

In 2003 it opened as the 157-room Marriott Park Lane appealing to travelers who appreciate boutique hotels yet expect five-star service and amenities.

This hotel has gone from the newest entrant in this premiere gateway lodging market to market share leader within its competitive set in its first year of operations.

In Germany, we opened the Ritz-Carlton Berlin on [Potsdammer] Platz in January of this year.

Standing just a short distance from what was formerly a section of the Berlin Wall, this luxury hotel is already the most preferred and prestigious address in Berlin, hosting diplomatic, social and business functions.

The new Berlin Marriott, standing across the street from the Ritz-Carlton is also off to a great start.

Our customers simply love the product.

The JW Marriott Desert Ridge Resort and Spa in Phoenix is the newest and most spectacular resort in the Southwest U.S.

It includes Arizona's largest ball room seating over 2,200 close friends for an intimate banquet dinner.

And it offers a 20,000 square foot spa and 36 holes of world class golf.

The front cover of our new Annual Report shows Marriott's Grand Lakes Resort, featuring both JW Marriott and Ritz-Carlton hotels.

Located on a 500 acre campus, the Ritz Carlton is really the only true luxury property in Orlando.

One of the most popular group meeting markets in the world.

The two hotels at Grand Lakes already have more than half a million group room nights on the books through 2007.

While new hotels provide a halo to our brands, improving existing hotels is also important to increase customer preference.

Owners of our hotels have accelerated reinvestment in our properties to enhance their competitive position.

Our owners invested nearly $700 million in existing hotels in 2003 and we expect over $1 billion will be invested in 2004.

We regularly redesign and upgrade all of our brands.

For example, exciting new generation designs for our Marriott and Renaissance rooms will be rolled out soon.

Our Courtyard system has an aggressive reinvention program under way which includes major improvement to it's guest rooms, lobby and public spaces.

The Courtyard system today encompasses 630 hotels.

The vast majority of which have opened in the last ten years.

Of the oldest 200 company operated hotels, approximately 80 have already been renovated or reinvented.

Another 50 are expected to be renovated or reinvented by year end 2004 with the remainder expected to be completed in 2005. 15 managed Courtyards are both reinvented and stabilized with at least four periods of financial results since their completion.

At these stabilized hotels guest satisfaction scores have improved significantly, market share has increased dramatically and RevPAR is up in excess of 20% versus last year and up in excess of 16% versus the first quarter of 2002.

As we mentioned before, since these properties were under renovation last year, they're strength is not included in our comp statistics.

In addition to product repositioning and renovations, new product and marketing initiatives also contribute to customer satisfaction and improved performance.

On April 1st we rolled out improvements to rewarding events, our frequent traveler program for meeting and event planners.

Through rewarding events, meeting planners earn 3 Marriott rewards points for every dollar spent or one airline mile for every dollar spent during their events at Marriott Renaissance, and Courtyard hotels world wide.

With 20 million members, Marriott rewards is the most popular frequent guest program in the world and we believe it will be as important for meeting and event planners as it has been for our individual guests.

As of the end of March, over 1900 hotels in our system were equipped with high-speed internet access.

That is more than any other hotel system in the world.

Compared to a year ago, the percentage of guests who use high speed internet access has nearly trippled.

We believe we have a significant first mover advantage by providing this service offering that our guests value.

Our pace of hotel conversions was excellent during the quarter.

Excluding Ramada, nearly 30% of out room additions were conversions from other brands including the former Meridians in London and Dublin.

More typicaly known as the Gosvenor House and the Shelbourne.

Since joining our reservation system in February, the Gosvenor House reservation activity is running more than double the reservation volume from the prior year under its former brand.

Both propertys will be undergoing substantial renovations and expansions.

We expect continued strength and conversion activity in our brands, especially in light of considerable investor interest in purchasing, renovating and repositioning hotels into our brands.

At quarter end, our world wide pipeline was standing at 50,000 rooms. 27% of these rooms are outside of North America, 38% are full service properties and 9,000 of those rooms are rooms pending conversions from other brands.

Turning to our timeshare business, contract sales increased 30% during the quarter, a record single quarter growth rate.

Sales were strong at seasonal resorts in St. Thomas, Colorado, California and Hawaii.

Contract sales in Orlando, which had been soft for some time strengthened during the quarter.

The results on the business segments page included with our press release combine all the pieces of our Timeshare segment including base fees, profits from the sale of timeshare intervals, joint-venture earnings, and all expenses including timeshare G&A.

Timeshare segment revenue increased 44% to $385 million.

Strong Timeshare results came from leveraging fixed costs on the substantially higher sales, higher usage of lower cost marketing channels and a larger proportion of sales at higher margin Ritz-Carlton fractional projects.

Most of the increase in profits and roughly three quarters of our timeshare development profits during the first quarter came from resorts that are on average only about 3 years old.

These are large products and with expected sequels, we expect they will continue to sell product for a decade or more.

In this sense our timeshare business is evolving into a more predictable and recurring profit stream than would be possible if we only had smaller projects that produced only a few year of sales.

We are particularly pleased to see how well these relatively new resorts have driven sales and now we have even more confidence in our plans to double the returns in our timeshare business in the next few years.

By the way, since we didn't sell timeshare notes this quarter or in last year's first quarter, the strong profits you saw this quarter did not include any timeshare note sale gains.

Joint-venture losses from our lodging business totalled $2 million during the quarter.

This included $6 million in profit from our Two Flags joint-venture and a $5 million equity loss from our Courtyard joint-venture.

For the Courtyard venture, since the first quarter of 2003 the senior debt principal has declined by approximately $30 million and we continue to reinvent properties.

Our performance should improve both from the reinventions and the stronger economic climate in coming quarters.

In 2003 for the full year we earned $24 million pre-tax from the Two Flags joint-venture.

This month Cendant Corporation our joint-venture partner exercised its option to redeem Marriott's interest in the venture which owns the trade marks and licenses for the Ramada and Days Inn lodging brands.

This effectively monitizes an essentially zero growth asset which we originally acquired as part of the Renaissance acquisition.

We expect to receive roughly $200 million in cash from Cendant in September and to record a $13 million gain at that time.

As a result of this transaction, we would expect lower earnings from joint-ventures beginning in the second quarter of 2004.

Over time whether through share repurchases or other attractive investments, we do not expect any impact to our bottom line earnings per share or to our EPS growth rate.

Although, you modelers will have to be mindful of some geographic impact on our P&L in coming quarters.

Laura and Leeny can walk you through these.

General and administrative expenses totaled $132 million during the quarter and included approximately $6 million in higher legal expenses and $4 million in reserves associated with performance guarantees.

Below in the interest line we reverse a $3 million loan loss reserve during the quarter as we received payment on a note that had previously been fully reserved.

Incidently, the dollar amount of total guarantees excluding senior living amounts declined roughly $25 million from year end 2003 while future loan commitments declined about $15 million.

Our press release also provides information about our business segment results.

Business segment results were impacted by preopening the guarantee reserves I mentioned.

The impact of renovations particularly in Courtyard and Residence Inn, and the higher administrative expenses.

Although, the geography in our segment charts is a bit different than that on the P&L.

Primarily as a result of repurchases, total debt was $1.7 billion at the end of the first quarter compared to 1.5 billion at year end 2003.

Depreciation and amortization totaled $39 million in the first quarter compared to $34 million in the prior year.

With these figures we encourage you to calculate year over year EBITDA growth.

Our synthetic fuel joint-venture created 2 million tons of treated fuel in the first quarter.

The impact on net income was a favorable $11 million or 4 cents per share.

Production was less than expected largely due to a temporary shutdown of our primary Alabama coal supplier for re-tooling.

We still expect to produce approximately 10 million tons during 2004 and to earn 38-42 cents per share from that investment in the full year.

In the first quarter excluding synthetic fuel, our tax rate was 35.5%.

First quarter investment spending totalled about $160 million and we expect spending will total about $500 million for the year.

Now, lets turn to our outlook.

Second quarter earnings will benefit from the easy comparisons associated with the war in Iraq and SARS.

While comparisons become a bit more difficult later in the year, we nevertheless believe demand is strengthening and we are likely to achieve impressive RevPAR increases.

We expect system wide comprable North American RevPAR will increase in the 7-9% range in the second quarter.

Outside the U.S., constant dollar RevPAR during the quarter is likely to increase over 20%.

Again in the second quarter.

For the full year we expect North American system wide comprable RevPAR improvement to range from 6-8% and international system wide constant dollar RevPAR to increase over 10%.

We expect house profit margins to increase modestly with international margins stronger.

We will open 25-30,000 new rooms world wide in 2004.

Timeshare results should moderate later in 2004.

Our Caribbean and ski resort projects sold particularly well during peak season in the first quarter.

We believe financially reported revenue is likely to grow somewhat slower later in the year as we move a growing portion of our development and sales into joint-ventures.

With the increase in interest rates we also expect lower timeshare note sale gains in Q2 and Q4 compared to the prior year.

In total we expect our lodging operating income to range from $145-155 million in the second quarter, $125-135 million in the third quarter, $165-175 million in the fourth quarter and $590-610 million for the full year we expect earnings per share including synthetic fuel to range from 59-61cents in the second quarter, 52-56 cents in the third quarter, 66-70 cents in the fourth quarter and a full $2.24-2.34 for full year 2004.

Earnings per share from synthetic fuel are expected to be approximately 10 cents in the second quarter and 12-14 cents in each of the third and fourth quarters for a total of 38-42 cents for the year.

A year ago as we talked about the first quarter I quoted Winston Churchill, a man who understood adversity.

He also understood the joy of success that followes adversity.

In 1895 as a young army lieutenant, Churchill signed on as an observer of Spain's war with its Cuban colony.

Escaping from a hot fire fight he remarked "There is nothing more exhilarating than to be shot at without result".

We have to agree.

There's only one aspect of this quarter that you may find disappointing and that is Lene Oberg has accepted a promotion to Marriott's project finance group.

She's been a terrific asset to the company and you can be assured that she will continue to add great value to Marriott shareholders in her new role.

So please be sure to wish her well as you chat with her over the next couple of days.

We thank her for all her help in investor relations over the last few years.

David, we would be happy to take any questions.

Thank you, sir.

If you'd like to ask a question, please press the star key followed by the digit 1 on your touch tone telephone.

If you are on a speaker phone today please turn off the mute function first, and then signal for your question.

Again that's star 1 to ask a question.

If you find your question has been asked and answered, you may remove yourself by pressing the pound sign.

Our first question today will come from Michael Reitbrock with Smith Barney.

Howdy.

Hey, a couple questions.

Saw there was a chance a house bill might be introduced next week aimed at repealing the syn fuel tax credits.

Couple questions there, one, what is your counsel think the likelihood of that passing is, and, two, given that the net present value of that is down to about a buck today and obviously, you know, its kind of met with mixed response from some investors, would you even mind to see it go at this point, what's the outlook there?

Well, a couple of different reactions that I can't comment very specifically on a bill that has yet to be introduced.

Obviously the section 29 credits have been [veded] many times by this administration and the prior one.

The hill's looked at it quite a bit, the Internal Revenue Service has looked at it quite a bit and three or four times now they have reaffirmed the credits that we have.

We would continue to advise folks as we have in the past couple of years that they should presume that the credits will disappear after the end of 2007.

We still think that's the right assumption.

Present value of this investment today, I'd guess in the more buck and a half range per share.

That's, you know, $350 million or so, maybe $400 million.

Don't hold me precisely to those figures.

But I think it would be pretty cavalier to say we wouldn't mind seeing that disappear.

In fact I think that's tremendous value for our shareholders and we're both glad to have it and expect it to continue until 2007.

Okay, and just two quick questions.

Lower timeshare receivable sales in aggregate this year, could you quantify how much lower this year versus last roughly you expect?

In terms of profit I think we're probably down maybe 10 million on a full year basis. 10-12 probably and, you know, right now that's the gain on the timeshare note sales.

Right now our estimates are based on the forward yield curve.

Expectation that rates will continue to rise over the balance of the year.

If it's 12 million full year I'd say probably four or five of that is going to be year over year impact on the second quarter and the balance which will to be somewhat greater in the fourth quarter.

Okay great.

And then just last question given that the margins were flat I presume no real change in terms of where the break points are terms of the incentive management fees.

We were pleased to see our year over year growth and incentive fees at 14% which seemed like a good number for us given we've really not gotten significant margin movement yet.

RevPAR numbers obviously were significant in the first quarter.

We did in virtually all of our brand C margins improve in our third accounting period where RevPAR was strongest but we continue to think we'll see good growth in incentive fees and are hopeful we'll see better margin performance as the year goes on.

Okay.

Thanks.

You bet.

Our next question from Steve Kent at Goldman Sachs.

Hi.

Good morning.

If we could just continue a little bit more on Mike's question about profit margins.

Obviously this was a a terrific quarter from a RevPAR perspective but at the gross profit level, at the, you know, the house level it wasn't as robust.

I'm just wondering, Arne you said some things that troubled me.

Some of the issues on profit margins sound like maybe a structural change like the telephone revenues and some other things.

I'm wondering if there's more there that maybe doesn't allow you to get the flow through that you got in previous cycles and maybe you could comment on that a little bit and what kind of issues you're facing on the margin side.

And then also just from a Marriott versus West and Marriott versus some of the other properties out there, it does look like even though you showed some strength, your RevPAR premium relative to some of your competition seems to have shifted and narrowed.

Is that just my observation from looking at the public numbers or maybe you could share some of your marketing that would suggest that's different or you agree with me.

Let me take the second issue first.

We obviously spent a lot of time looking at our RevPAR results, but also looking at the market data and making the best assessment that we can of the way were performing against the market and we think we are competing very well.

Still have very strong premiums both in occupancy and in RevPAR over virtually any fair compable set.

I think what we've seen over the last couple of quarters and probably will see over the next quarter or two, is that our portfolio which is - obviously we are reporting on a very broad portfolio, both the managed portfolios, a huge number of hotels and the system wide portfolio is even a more massive number of hotels, but what we're seeing is that the hotels which is are lagging a bit are the biggest group houses.

We talked about in the prepared remarks how the smaller group business is coming back and our event booking centers had growth of about 20% in the first quarter and those are good and early stage improvements in the group business.

The group business that's going to be a little bit slower coming back with the stronger economy is the biggest group stuff.

And so our big box, I'm talking about 1500 room plus flagship convention hotels, of which we've got quite a few are the ones that are challenged the most but in a way that for us is a very natural kind of challenge given the way the economic recovery continues.

And so while we are focused on this and obviously there's a lot of different stories and a lot of different markets we feel we're doing real well.

On the margin side with 5.5 or 6.5% growth, RevPAR growth depending on whether you look at calendar quarter or Marriott's reported quarter, I think we acknowledged that probably the only disappointment in the quarter was that the margin story wasn't better, and we still think it can be better as we go forward.

We talked about continued positive results and efficiency really talked in there about hours worked per occupied room and think we'll continue to see some good developments there.

There are some changes over the last two or three years.

We've talked about before which make the margin story tougher.

One of those is telephone profits.

Telephones used to be a profit center in hotels.

They are now a loss center in hotels because we still have the costs associated with providing the switch and telecommunications but by and large, at least in domestic markets, people use their cell phones and they do not use the hotel phone.

Over time maybe we'll cost some of that back depending on what happens with internet usage but I think our expectation would be the profitability from telephones we should all assume is kind of gone forever.

In the market we're in today, we have really high benefit costs and high insurance costs.

Think we've seen and I'm sure everybody on this call has seen that there are some signs that at least some product categories in the insurance market seem to be softening a bit and hopefully we won't see that as sort of a permanent move.

Medical benefits, personally I'm a little less optimistic about but I think those are the challenges that we've got and that's maybe a point of margin that we'll be fighting to offset with greater efficiency to some extent with greater procurement leverage but we're going to really have to succeed on those things to be back in an identical situation to what we were before.

Okay.

Thank you.

And our next question comes from Harry Curtis with J.P. Morgan.

Morning guys.

Arne you had mentioned early on you saw, or you were pleased with the corporate group business, can you give us a little bit more color an any mixed shift you've seen from the lower rated group business, please?

Oh, I don't have a lot, to tell you the truth.

I know that we're picking up more corporate and a bit less association, but, again the greatest strength is in the smaller groups first.

It's pretty hard to take that data and generalize into precisely what kind of businesses we're seeing move.

Its clear to us anecdotally though that there's a couple of trends under way.

I think during the quarter we begin to see a generalized uptick in the number of attendees versus expectations compared to what we saw really over the last couple of years.

Over the last couple of years, a group would be booked, they'd have an estimated number of rooms and more often than not fewer than the estimate would show up.

That relationship has switched around and we're now getting a bit surprised on the upside.

That's a very good thing.

The second thing we've noted is at least anecdotally we are seeing more of the discretionary group meeting, we're seeing more marketing and sales focused corporate events where they are pulling their folks back together to announce new product initiatives or to really look toward growing their sales lines.

And to some extent that business had been squeezed, I think probably, much harder than group meetings that seem to be a little bit less discretionary.

My second question goes back to the incentive management fees.

You mentioned that the number of hotels paying an incentive management fees sequentially was flat.

Do you get a sense that there's a significant number of hotels say five or ten or more that are relatively close to paying an incentive management fee within the next quarter or two if the trends stay in place?

Yeah, I think there are an increasing number of hotels which are getting close to that incentive fee line and when we look at the data it's pretty clear that all of the arrows that are meaningful are pointing up, both in terms of number of hotels either paying or getting close and obviously in terms of the dollars of incentive fees realized and what we'd expect to realize over the balance of the year.

One of the funny things that happened in the year we had a portfolio of limited service hotels which I think last year in the first quarter paid us a grand total of $8 thousand of incentive fees and this year paid us zero and that's probably the most significant reason why the number of hotels year over year paying incentive fees is not up.

As we look at it, again, we feel good about the incentive fee story as it's developing this year.

Very good.

Thank you.

You bet.

And we'll go next to Keith Mills with UBS.

Hi, good morning.

How are you.

Good how about you?

Not too bad.

Just following up on the questions on the incentive fees, is it really a matter of the larger group houses that you aluded to, Arne, before you really start to see the big kick or the big leverage in earning incentive fees you've got to wait for the big groups to come back, the larger group houses of 15 hundred rooms, super tankers to start to perform better for you to earn more material incentive fees? better for you to earn more material incentive fees?

Well, obviously that would be helpful.

I think that and, for example, a return of the incentive fees in Courtyard joint-venture which was a big paying incentive fee portfolio three years ago.

Both of those things would be quite helpful.

But I think even without that and it's included in what we are seeing in the first quarter kind of mid-teens growth and incentive fees and above that as the year goes along should be a reasonable expectation.

Okay.

Next question is regarding the property down in Orlando with the Grand Lakes, the JW Marriott, the Ritz-Carlton, what are Marriott's plans over the next year or two in terms of trying to monetize that investment?

What we have in that hotel is a mezzanine loan and we've got some exposure as a guarantee on the senior debt.

We don't own any of the equity of that portfolio.

And so I think the likely montization, if you will, of our interest is going to depend on the refinancing of the asset.

Hotel has opened great.

It opened roughly July 1, 2003.

It is really doing a spectacular job and I think as it posts a few quarters of decent profitability which it's doing now, hopefully there will be some opportunity to refinance that hotel.

Okay.

And you'll look to do that and move away from having that mez set?

We'd love to do that.

Obviously we don't own the hotel.

So the owner going to have to make the decision about when they refinance it.

Sure, Okay.

And then final question is related to building material costs.

Obviously they've been rising.

What impact has that had for development costs for your franchisees and third party owners?

A related question to that would be does Marriott have, I guess, agreements in place where it helps those third party owners in terms of using the size like it would for the purchase of towels or soaps to try to lock in building material costs and help them out in their developments.

We have, start with the back end of that first.

We provide our leverage, buying leverage, to our owner and franchisee partners more on FF and E packages than on construction, sort of hard construction costs if you will, because we've got just more leverage in those areas.

When you're talking about cement and other building costs that tends to be more locally driven, we're not building very much ourselves and as a consequence we don't have much mass to apply and deliver to our owners and franchisees.

But, when you talk about the rooms package and furniture and the various operating supplies for the hotel, there's a lot we can do there and we do deliver a lot there.

In terms of construction costs generally we are listening to our owners and franchisees we would not see that as a significant factor.

Obviously the pace of new construction has scaled back over the last few years in the U.S.

We expect it , you know, as these RevPAR numbers get posted and now talking about 6-8% RevPAR expectations for full year.

That kind of expectation which we think ultimately will be shared by certainly most of our owners and franchisees will continue to cause people to get re-energized about some projects that they've had sitting on the shelf.

We'll go next to Jay Cogan at Banc of America.

Morning Arne.

Hi Jay.

Got a couple questions for you.

First, to beat a dead horse here, on the margin issue, maybe ask the question a little bit differently, what does up slightly mean in '04 now that you're looking up 6-8% RevPAR.

Can you be a little more specific in terms of, you know, the number of basis points?

And then second, because of the issues that you mentioned and other issues which have been talked about for a while now, do we have is a different type of RevPAR growth rate that we need now going forward to see margin improvement in the industry and I got a follow-up on Timeshare?

Yeah we - good question.

Actually I think our word was "modestly" not "slightly" but I'm not sure I can tell you what the difference, if any between the two words is.

We said a quarter ago that we thought we could hold margins flat at 3-4% RevPAR growth.

This quarter our periods we were plus five four and margins were down modestly, about half a point, little bit less than half a point.

Its a little bit disappointing to us; although, given the way the quarter ramped with the greatest strength in March and all of it being occupancy driven maybe to some extent that's the explanation for it.

I think if we get 6-8% growth I don't have a number target to give you, that's very specific but I'm hopeful that we can get margins to move a point or two depending where we end up in that range.

And does this change again, as the economy gets better and rate becomes more of a factor, we should see better margin improvement.

But I - I guess I'm wondering, you know, to that question about whether or not we need to re-think what RevPAR levels companies like Marriott need to achieve to get increases in margins going forward after this year.

What would you say to that?

Oh I think - I am hopeful still that the 3-4% number is the right number over the next few years.

That kind of RevPAR growth is going to be needed to get flat margins and percentage terms.

Obviously that means we'd be growing the profit dollars by the same percentage as we'd be growing revenues.

I think as it relates to our incentive fees and as it relates to owned hotel economics, the whole set of issues here is pretty much identical and that is if you draw your models and if you got no benefit of unit growth you're looking at a single hotel and you want to compare to 99 or 2000, you know it's going to be five or six or seven years depending on what RevPAR assumptions you use to get back to the same RevPAR in dollar terms that you had in 2000 or 99 and you gotta build in an assumption about what's happening with [inaudible] over that period of time.

There's some great developments in terms of productivity, in terms of procurement.

You hear about the growth rate in Marriott.com reservations, those are our cheapest reservations.

All of that's good stuff, but at the same time not only dealing with the telephone profits but we've got five or six years of wage growth and benefit growth and the like and so, you know, there's a whole lot of focus here and a whole lot of effort to try and make sure we can deal with those margins as we go forward.

Gotcha.

And then on the time shares, just so I understand a little bit better, the numbers were significantly better than what we were looking for in both a revenue and a profit standpoint and I know you've highlighted some of the issues.

What I'm wondering is was some of this timing related, you know, was it the sales were so strong that you broke through some of the thresholds from a accounting standpoint.

I guess I'm just trying to square what you did in the first quarter with also your comments about more moderate expectations, you know, good but a little bit more moderate for the second through the fourth quarters.

Yeah.

Well, there's obviously some seasonality in the business.

Now to be fair there was seasonality in last year's business, too, so the year over year comparisons, I don't know that they can be explained entirely with seasonality.

What we found really in the first quarter is less about timing where construction projects were or any of that sort of threshold, but simply that good strong demand from our customers which really allowed us to acchieve significantly higher sales without significantly higher sales and marketing expenses allowed us to drive a very significant improvement in the development margin, and that's what drove the business.

We'd love to see that continue.

But, really those results were spectacular in the first quarter and we just don't think it would be responsible to forecast that they'd continue to be that strong going forward.

I think probably there's also a piece of this which is comparisons getting a little bit tougher as the year progresses.

First quarter of 2003 I think in terms of prior years was a little less strong albeit good, than the latter quarters of the year.

But part of it is, I mean getting back to the seasonality, you just wouldn't expect the same bump in May at a ski resort that you're likely to get in February.

Understood.

Thank you.

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

Morning Arne, morning Laura, morning Leeny.

Morning

Just to clarify something, Arne, you said the number of hotels paying incentive fees in the first quarter was the same as the percentage in the fourth quarter which is 26% if my notes from last quarters conference call is correct, correct?

Same as first quarter last year, I think.

And what was that number then?

20, 23, I don't remember what it is off the top of my head.

And then contemplated within your guidance getting to 590, 610 lodging operating profits for the year by the fourth quarter where do you see that number going toward?

I think that number - I think you ought to take a look at the fourth quarter of '03 number which was high 20s, maybe 30.

I don't remember, go back and make sure you get the right one.

The fourth quarter. 26 for fourth quarter.

26%.

Question is whether you're talking units or - because obviously our number of units continues to go up or whether you're talking percentage of units.

Percentage of units.

Yeah, I would guess that by the fourth quarter we will almost certainly see the number of hotels paying incentive fees higher than we saw in the fourth quarter of '04 given the unit growth where we will be in percentages I'm not certain, but I would guess that it will be an equivalent percentage or a bit above.

And I would add that the dollars that you get from the hotels that are currently paying incentive fees will be higher which is what you saw in the first quarter and delivered those substantially higher incentive fees in Q 1.

And I'd also add that today's incentive fees - roughly 40% of incentive fees today are coming from international properties, so I know it's our tendency to I think about this industry as being a U.S. centric thing but it's really not.

There's an awful lot of international profitability here.

The percentage in the first quarter was impacted by this group of limited service hotels that Arne referenced that paid a really teeny incentive management fee last year in the first quarter and did not this year so that just affected that percentage of units.

Great.

And Arne had mentioned that the delta in incentive management fees paid by Courtyard three years ago to now was pretty wide.

What was the incentive management fee levels paid by Courtyard three years ago?

You can look at our 10-K, it will have it in the Courtyard section, but I think we probably peaked at around 20 million of incentive fees.

Great.

Thank you, guys.

Our next question comes from Bill Crow at Raymond James.

Hey good morning.

Nice quarter.

Leeny, congratulations on the move.

Arne, as you look down - drill down to the property level, could you talk about what the outlook is at the GM level and whether they are more reluctant today to turn rooms over to third party internet sites than they were a quarter or a couple of quarters ago?

That's an interesting question.

I think generally our GMs in the first quarter became pretty clearly more optimistic about where the trends were going.

I think a quarter ago probably one of the reasons in retrospect we were maybe a little bit too conservative is our system was essentially still telling us notwithstanding the economic data that they really weren't seeing the strength show up, sort of palpably.

And I think now a quarter later, there's broadly much greater confidence and much greater optimism that is causing most of our GMs to begin to be a bit more choosey about business.

Going for higher rated business probably where possible accepting a bit less contract business or other forms of lower rated business so you've got that trend which is under way and that trend also will impact rooms that are offered through various discount channels.

Now at the same time, as of roughly the first of the year with our look no further best rate guarantee, we now have the ability to sell our rooms at the same prices on some of the channels which formerly were viewed as discount channels.

THey no longer are discount channels as it relates to the Marriott product and we expect that we will see all things being equal more rooms heading toward those channels.

But those channels carry with them higher costs.

The revenues may be the same but relative to your own site, for example.

Well, certainly relative to Marriott.com, every other channel has a higher cost.

But, our philosophy is to sell the way the customer wants to buy.

As long as we can have integrity across those channels, and as long as the business is profitable, our bias will be to have our rooms available on the channels the customers want to use.

Second thing we point out is that some of the more notorious examples of high cost channels have been brought down significantly and when you adjust for certain ancillary charges of telecommunications and other processing charges, bad debt and the like is actually not as expensive as you might think.

One final question, if I may.

You mentioned that margins turn positive, house profit margins in the third accounting period, could you just tell us what RevPAR growth was in that third period and what the margin growth was in that third period or if you have it, the March results would be even better.

I think the third period we probably saw - if we were 5.4% for the first quarter as a whole we're probably 1.5-2 points higher than that in the third period.

I don't have those at my fingerprints and the margins varied significantly across brands but are probably up a quarter of a point to up a point and a quarter.

Thank you.

Our next question comes from Brian Egger with Harris Nesbit.

Arne, do me a favor and just repeat for us, I kind of missed part of your operating income and - lodging operating income and EPS guidance by quarter, do you mind running through that again?

Let's see here.

I'll find my notes.

Operating income Q2 145-155.

Q3, 125-135.

Q4, 165-175 and full year 590-610.

EPS Q2, 59-61.

Q3, 52-56.

Q4 66-70.

And syn fuels by quarter 10 in Q2 and 12-14 in Q3 and 4.

Perfect, thanks alot.

Were going to take one more question if there are any.

David?

Our final question from Jeff Donnelly at Wachovia.

Hi Arne, yeah. actually a couple of questions if I could, how far away in your view is the occupancy threshold the industry needs before RevPAR growth over a 3-4% translates into margin improvement and are there segments of the business or geographies today where you guys aren't just gaining pricing power but you actually have it right now?

Oh, yeah.

There's some markets where certainly in some days of the week we've got some pricing power and we're at least experimenting with it if not moving significantly but that's still more the exception than the rule.

It tends to be more in markets that have some seasonal strength like the Florida resorts and the Caribbean resorts.

Also markets like DC have been able to push rates a bit higher.

But it is more the atypical than the typical.

In most cases it's driven by mix improvement.

Occupancy, it's interesting.

You can see our statistics by brand in our press release where we have got rate and occupancy broken up.

Tell you, In the third period ccupancy in every one of our brands in the United States was in excess of 70%.

Average probably being right around 74-75.

Residence Inn was close to 80% in the period and that's tremendous growth year over year up 4 or 5 or 6 points depending on the brand that you're talking about.

If we were able to maintain and grow just a few points above that, I think, again, we're talking - here when we talk about these averages they're kind of gross averages and this gets played out more in a market by market basis.

But I think as we start to move occupancy a bit higher than that, not a lot higher than that, we should start to see a bit more pricing power show up in these various markets.

Okay.

And the question on labor expenses, I mean they are certainly putting pressure on the hotel owners and they've hampered I would deem significant margin improvement at least in this quarter, how significant were head count additions at your full service hotels and, I guess, how much further could that potentially increase as the year progresses and is there any competitive advantage that Marriott provides to your owner clients to help them control these costs?

Head count is generally down as a percentage of rooms, excuse me, occupied rooms.

THat's what I meant before in terms of productivity.

Hours per occupied room are down and so what's pushing the labor cost is not efficiency at all but it's benefits and wage rates and unemployment insurance particularly in some markets like California and the like.

One of the great tools we've got is just this spectacular labor management scheduling system which we rolled out about a year and a half ago if memory serves correctly which has been instrumental in driving the efficiency improvements through our hotels.

And then just last two questions is, is it your experience or expectation that the raised expectations for 2004 RevPAR are going to loosen purse strings among lenders or attract incremental equity that could accelerate your development pipeline as the year moves on and do you foresee Marriott returning to becoming a developer maybe in '04 or even '05?

I wouldn't expect a lot of Marriott on balance sheet development dollars in '05, certainly '04 is a while from now and we'll kind of have to see how things go.

We are already, before the increased expectations that we're communicating today, seeing over the last two or three months a tremendous amount of capital interested in investing in our industry.

I can't imagine anything we say today will dampen that, but a lot of that's going to depend on what happens with interest rate environment and deals that are available out there in the market and I suspect it will be a pretty active year in terms of transactional flow in our industry.

And of course most of that cash that's chasing deals today is loking at existing hotels rather than generally new ground-up development.

Okay.

Just one last question.

Is there anything in your guidance for additional share repurchase activity?

We don't publish in advance the specific number of shares we intend to acquire.

All we can tell you at the moment is we've got about 5 million shares remaining in our authorization as of today, but we'll hear more about that as the year progresses.

I'd like to thank you all very much for your time and patience and look forward to talking with you again soon.

Goodbye.

Thank you everyone for your participation in today's conference call and you may disconnect at this time.