萬豪國際 (MAR) 2004 Q2 法說會逐字稿

Good day everyone and welcome to this Marriott International second 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.

Thank you, Jamie, good morning everyone.

Welcome to our second 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 Donna Blackman, Senior Director, 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 the press release that we issued earlier this morning along with our comments today are effective only today, July 15, 2004, and will not be updated as actual events unfold.

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

In the second quarter, Marriott's earnings per share from continuing operations totaled 67 cents, a 29% increase over the prior year.

Excluding the impact of our synthetic fuel investment from both years, earnings per share from continuing operations increased 32%.

Operating income from our lodging business increased 35%, reflecting strong increases in occupancies and rates, modestly improving property level margins, continued unit expansion, and growing timeshare profits.

As you know, just three months ago, we increased our outlook for REVPAR and profit growth yet performance still exceeded our expectations.

Travelers have returned to our hotels faster and in greater numbers than anticipated.

With this recovery in demand and with the benefit of the strong unit growth of the last few years, we are reporting today all-time record earnings per share, even without counting the EPS contributed by our tax investments.

During the second quarter, North American comparable system-wide REVPAR increased over 9%.

Worldwide comparable system-wide REVPAR on a constant dollar basis increased nearly 13%, including the favorable impact of foreign exchange, worldwide REVPAR increased 14%.

Based on this REVPAR growth, we saw a year-over-year growth rates in our base management fees of 20%, our incentive management fees of 29%, and our franchise fees also of 29%, showing the strong growth that comes from same store REVPAR increases and unit growth.

REVPAR benefited from the easy comparisons associated with the war in Iraq and the impact of SARS in Asia and Canada during the second quarter of 2003.

However, apart from the easy comparison, demand was just plainly strong during the quarter and continues to strengthen in most markets.

Today the economic recovery in the lodging industry is playing out at a faster pace than we expected.

We saw improvement in both transient and group demand in our company operated hotels in the second quarter.

Transient guest demand increased and REVPAR of Marriott hotels located at airports increased about 15%.

Marriott hotels in downtown locations increased REVPAR almost 12%.

Our Courtyard brand targeted at transient guests saw U.S. system-wide comparable REVPAR increase over 11%.

Group business also improved throughout the system.

We went into the second quarter with group nights on the books for Q2 only a little better than flat with the prior year.

Yet with a very short booking cycle and substantial bookings in the quarter for the quarter, the Marriott brand group room nights increased roughly 10%.

Revenues from meetings booked through our event booking centers increased 35% as we landed considerable small meeting business.

We saw less booking around the block during the second quarter as attendees increasingly stayed at their convention hotels, and meeting attendance improved.

In fact, we believe many group meeting planners have underestimated attendance for meetings in the second half of the year, which we expect will increase occupancy for our overflow properties.

This would have a very favorable impact on room rates.

Even with the late strength in group bookings, on the other hand, Marriott's biggest convention hotels saw REVPAR increase only about 4% during the second quarter.

These hotels, which rely on groups for two-thirds of their business, have significant blocks of association business booked in 2001 and 2002, at rates lower than the rates available in the market today.

The big group REVPAR boxes, therefore, lag a bit on both the down and the up ramps.

Overall, the New York market was strong, benefiting from solid demand from the financial services industry and international arrivals, particularly British and Chinese travelers.

Nationwide, we estimate international arrivals in our U.S. hotels increased 34%.

We expect New York to strengthen further in the second half of 2004.

Demand in San Francisco also improved.

Although occupancies and rates remain far below those of the peak years of 1999 and 2000.

In the second quarter, the city benefited from comparisons to the Iraq war and SARS, and there are signs that tech spending is returning.

While San Francisco is expected to continue to show REVPAR growth in the second half, it will likely be at a slower pace.

While not showing increases as strong as New York and San Francisco, Boston is also having a better year.

Tech and bio tech are strengthening, and business is improving not only downtown but in the suburbs as well.

The city is expected to have more demand compression days offering good pricing opportunities in the third quarter when the Democrats come to town.

Like the other markets we've mentioned, Washington D.C. was impacted significantly by 9/11.

The market has come back very strong and as hotels have filled up we have begun significant cross-selling.

Courtyard has particularly benefited from the cross-sell.

We're expecting that the inauguration will sell out the market regardless of who wins in November.

Outside the U.S. results in many markets increased dramatically, reflecting the comparisons to the war and SARS.

Overall, REVPAR outside the U.S. already exceeds the levels experienced in the year 2000.

REVPAR in Asia increased 71% during the second quarter.

The J.W.

Marriott Hong Kong's occupancy rate averaged 85% during the second quarter, compared to just 29% in the year-ago quarter.

The Middle East is benefiting from Europeans returning to the region, and strong interregional demand and Caribbean demand is at record levels.

Destinations in Great Britain, Italy, and France are seeing more American tourists; but central Europe, particularly Germany, is held back by a weak economy.

Around the world, demand for luxury hotels was very strong during the quarter.

Ritz-Carlton's worldwide REVPAR increased 22% during the quarter, on a constant dollar basis.

While Ritz-Carlton's Caribbean and Florida resorts had terrific performance in the first quarter, demand at U.S. downtown destinations also soared in the second quarter.

Incentive business, which is probably the most economically sensitive segment, returned to Ritz-Carlton in the second quarter.

Overall, worldwide house profit margins for our managed hotels increased roughly 2 percentage points during the second quarter.

Outside the U.S., house profit margins increased nearly 6 percentage points, reflecting very strong REVPAR and great cost control.

In North America, house profit margins increased 1/2 a percentage point, despite continued catch up in repairs and maintenance spending, higher wages per occupied room, and lower telephone profits.

Productivity improved as manhours per occupied room declined 1% during the quarter.

We did an outstanding job on margins during the tough economic environment and continue to focus on cost.

Today manhours per occupied room at the Marriott brand are 7% below 2000 levels.

From 2000 to 2003, house profit margins for our Marriott branded hotels declined roughly 6 percentage points, which we believe was better than the decline experienced by many in our industry during his difficult period.

Gross room additions totaled nearly 8,000 rooms during the quarter.

So the number of rooms in our system today is roughly 5% higher than a year ago.

Nearly 1/2 of the added rooms were valuable full-service rooms.

We passed the half a million room milestone during the second quarter with the opening of the London Marriott West India Quay.

At quarter end, our worldwide development pipeline was at more than 50,000 rooms. 27% of these rooms are outside of North America, 38% are full-service properties, and 16% of these rooms are pending conversion from other brands.

Interestingly, of the 12 full-service hotels added to the development pipeline during the quarter, 3 are located in China.

Today we have 40 hotels open in China and another 10 in our pipeline.

Owners continue to prefer our brands by a large margin.

Excluding Ramada, 17 hotels with nearly 3,000 rooms converted to one of our brands during the quarter representing nearly 1/3 of rooms added.

As industry fundamentals improve, we expect our conversion pace to slow a bit.

We have seen a considerable number of full-service hotels in the U.S. industry changing hands in the last year.

Recognizing the dramatic upturn in REVPAR and profits that are expected over the next few years, many investors have been eager to go long in hotel real estate.

We remain focused on management and franchising, although we will put modest amounts of capital to work where we can obtain a long-term management contract.

We are seeing a growing number of franchise new-build applications.

For Courtyard, Residence Inn, Townplace Suites, SpringHill Suites and Fairfield Inn, most in secondary and tertiary markets.

With higher prices for properties in many markets, improving REVPAR in the industry, and less pressure on construction costs in many areas of the U.S., franchisees are showing greater interest in new development.

Most of this development, when it happens, will be profitable new unit growth for us, but some of it will replace older product that will be leaving our system.

We continue to work with a variety of owners on new deal opportunities.

We invested approximately $30 million recently in Diamond Rock Hospitality, a new full-service hotel REIT that we hope will purchase attractive full-service hotels with opportunities for conversions or renovations.

While neither of us is under any obligation to work together, we believe our relationship with dIamond Rock will benefit us both.

Of course, we continue to work with our other owners and franchisees as well and believe our relationships with these important partners are strong and extremely important to us.

Our brands are preferred by owners largely because our brands are preferred by travelers.

In a recent outside survey, travelers preferred the Marriott brand over the next leading competitor by 2 to 1.

There are several factors that make Marriott a preferred brand.

First and foremost is our focus on service.

Our culture, standards, and systems are concentrated on providing the most outstanding and consistent service in the lodging industry at each price point at which we compete.

Whether it's owned, managed, or franchised, we place great emphasis on guest satisfaction and the consistently of service delivery.

Secondly, distribution drives brand awareness in value.

Over 25 years ago, we decided that we can either grow our units or own our hotels, but we couldn't do both.

Given the importance of distribution to this business, we made the obvious choice.

Today with nearly 2800 properties, customers know that they can find their favorite brands when they need a comfortable home-away-from-home, and owners know whom to call when they want to improve performance and our 20 million member strong frequent traveller program reinforces their preference.

Third, our customers expect a high-quality, fresh-looking room.

Our full-service hotels replace soft goods in rooms every 5 to 6 years and replace hard goods every 10 to 12.

We typically roll-out new room designs for each brands every 3 to 4 years.

Our last new Marriott hotel design was rolled out in 2000.

A new bedding package was included in that design, and has been rolled out with those regularly scheduled renovations.

Today over 85% of our full-service and Courtyard hotels offer residential-style bedding, including down duvets and thicker mattresses, and all properties will be so equipped within the next 9 months.

Our customer satisfaction scores across the system remain extremely high, and they have been increasing in both 2003 and YTD in 2004.

Roll-out of our new 2005 Marriott room will begin in the first quarter of next year.

The design will be progressive, sophisticated, and include new lighting and technology packages.

We have had the help of our major owners, Host Marriott, and others in the development of this new design and we are very excited by the new look.

We received very favorable feedback not only from our customer tests, but also from members of the media who were given a sneak review of our designs in May.

We are also developing a new Renaissance Hotel & Resort prototype and rolling out the seventh generation Residence Inn in 2005, and we are about midway through the reinvention of our Courtyard system.

Now turning to our Timeshare business.

Contract sales increased a record 39% during the quarter.

We started sales at 2 new resorts, the Chateau Las Vegas and Surf Watch at Hilton Head, both of which will be ready for occupancy in 2005.

We have already increased prices at the Chateau after only 2 months of sales.

This resort is very popular with our existing owners who want to buy an additional week.

Prices are also moving up at our resorts in Hawaii.

We expect to begin sales at 2 additional resorts later this year.

Segment revenue for the Timeshare business increased 34% due to high sales of timeshare intervals at popular resorts, accompanied by a favorable construction pace.

Our Grand Vista resort in Orlando and the Ritz-Carlton resort in St. Thomas were significant contributors to our financially reportable results.

We were also successful this quarter in leveraging fixed costs on these higher sales, reducing marketing costs and selling a larger proportion of high margin Ritz-Carlton fractional projects.

We sold $150 million in Timeshare notes during the quarter.

Note sale gains from the Timeshare business declined from $32 million last year to $27 million this year, reflecting a lower spread due to higher interest rates, offset somewhat by higher volume of notes sold.

On the income statement, note sale gains are included in gains in other income.

As you know, we sell our timeshare mortgage notes every 6 months, typically in the second and fourth quarter, but we retain the interest rate strips on the paper, reflecting the difference between the roughly 12% that the customer pays and the investment return required by the investment community who purchase this highly rated portfolio.

Every quarter, we are required to mark-to-market our interest rate strips, reflecting our cost of funds and interest rate trends.

Given those trends, we increased the discount rates on the strips, reducing the value of the strips by $7 million, which flowed through the income statement this quarter.

Timeshare contract sales are expected to grow 15 to 20% in the second half, but we expect that the Timeshare segment results will reflect a bit less impressive financially reported revenue and profit growth due to the construction pace expected at our new resorts and lower gains from our Timeshare note sales.

Joint venture profits totaled $1 million during the quarter.

In the 2003 second quarter, we earned $3 million, including 6 million from the Two Flags joint venture.

In the second quarter of this year, Cendant Corporation, our joint venture partner, exercised its option to redeem Marriott's interest in the venture, which owns the trademarks and licenses for the Ramada and Days Inn lodging brands in the U.S.

This effectively monetizes 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 will record a $13 million gain in our third quarter.

In the meantime, we are accruing interest on the receivable and no longer recognizing joint venture profits from this investment.

You should also note that our reported gains in the second quarter include roughly $10 million of payments received from our partner in the synthetic fuels joint venture, which for purposes of our synthetic fuel segment results are also included in that segment.

Adjusted for this gain our year-over-year gains are down modestly.

General and administrative expenses totaled $127 million during the quarter, and included approximately 6 to $7 million in higher legal expenses, as well as higher admin costs associated with our growth.

We also had $5 million in lower foreign exchange gains compared to the prior year.

On a comparable basis, G&A is up about 10% over last year, split roughly evenly between year-over-year cost increases and cost growth driven by unit and revenue growth.

Incidently, the dollar amount of total guarantees including -- excluding senior living amounts declined roughly $160 million, while future loan commitments declined approximately 130 million from year-ago levels.

By the way, we are seeing numerous signs that the uplift in performance may accelerate the reduction in our guarantee and loan balances on existing hotels.

Total debt was 1.4 billion at the end of the second quarter, compared to 1.7 billion at the end of the first quarter.

Depreciation and amortization totaled $37 million in the second quarter, compared to $34 million in the prior year.

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

Our synthetic fuels business completed more production than expected in the second quarter.

The impact on net income was a favorable $31 million, or 13 cents per share.

As I mentioned, $10 million of pretax income from synthetic fuels is included in our gains, and therefore should not be counted separately from the 13 cents of synthetic fuels earnings which we reported in the quarter.

We expect the business to generate earnings per share of 40 to 42 cents for the full year.

Our quarterly synthetic fuels earning estimates are 11 to 13 cents for both Q3 and Q4.

And the outperformance in the third quarter would be offset by lower performance in the fourth quarter since we are limited in the total volume we may produce in any year.

As you can see, we now consolidate our synthetic fuel business consistent with FIN 46.

We purchased our 4 synthetic fuels plants from Pacific Corp.

Financial Services in 2001.

In late June we were notified that an IRS field audit team, working on an audit of Pacific Corp. synthetic fuel operations suggested that 3 of 4 facilities had not been placed in service prior to July 1, 1998, the cutoff date for plants to receive tax benefits under the current legislation, and therefore it was the IRS's position that they were not entitled to tax credits.

The IRS field audit team is handling the matter at this time, and we are examining various procedural alternatives for pursuing this issue to resolution.

We remain confident that our facilities qualify for section 29 credits, and are continuing to produce synthetic fuel in line with our previous expectations.

Our core tax rate, excluding the impact of the synthetic fuels investment, was 35.7% in the second quarter.

Now let's turn to our outlook.

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

We expect system-wide comparable North American REVPAR will increase in the 7 to 9% range in the third quarter, although today we are running at the high-end of that range.

Outside the U.S., constant dollar REVPAR during the quarter is likely to increase in the low teens.

Lodging operating income is expected to total 115 to $125 million in the third quarter, and our Timeshare segment results should total roughly $30 million.

In total, we expect earnings per share from continuing operations to total 52 to 56 cents, including 11 to 13 cents from synthetic fuel.

For the fourth quarter, we also expect North American system-wide comparable REVPAR improvement at the higher end of the 7 to 9% range, but our international hotels will have tougher comparisons.

So international constant dollar REVPAR is expected to increase just 5 to 7% in the fourth quarter.

We should see house profit margins improve steadily as REVPAR gets greater contribution from rate and the cost comparisons to last year get a bit easier.

For the full year, we expect North American system-wide comparable REVPAR to increase 7 to 9%, and international system-wide constant dollar REVPAR to increase 10 to 15%.

For the full year, we expect house profit margins to improve modestly, with international margins stronger.

We expect to open 25 to 30,000 new rooms worldwide in 2004.

In total, we expect our lodging operating income to range from 600 to $615 million for the full year 2004.

Timeshare segment results are expected to total 190 to $200 million, including a $25 million timeshare note sale gain in the fourth quarter.

We expect earnings per share to range from $2.32, to $2.40 for the full year, including 40 to 42 cents from synthetic fuel.

With these results, Marriott will post record earnings per share in 2004.

Jamie, we'd be happy to take any questions.

Thank you. [Caller Instructions].

We'll go first to William Truelove with UBS.

Hi.

Good morning, guys.

Hey, Will.

Hey.

You know, last year you said that in terms of number of hotels that were earning incentive fees was about low 20%.

Can you sort of give us a sense of where that is today?

And furthermore, how many hotels are within 5% of earning an incentive fee at this point?

The percentage that's probably come up of hotels to the high 20s in the second quarter.

I don't remember off the top of my head what the percentage was in the second quarter of last year, as opposed to the full year number, but I suspect this is a fairly modest increase of a few points, call it 3 or 4 point's worth year-over-year is my guess.

There are, how many are within 5%?

I can't tell you that in Q2.

Obviously the incentive fees to some extent are most intense in the fourth quarter.

And it's really on the basis of full year calculations that we can do a meaningful look at how many are within various percentage thresholds of the level they need to be at in order for us to earn an incentive fees.

Trying to do that in the second quarter is a difficult task.

Well maybe -- let me phrase it slightly different then.

For your full year outlook of the 2.35 to 2.40 in your lodging operating profits, of 600, 615, what kind of -- would you sort of have a full year kind of estimate as to how many would be earning incentive fees at that point?

I would guess it's in the 30 to 35% range.

That's great.

The second point is, when you're talking about REVPAR growth of 7 to 9% North American-wide, how much of that is just raw, kind of, internal growth versus maybe just easy comps?

Is there -- do you [inaudible] have easy comps, sort of, in the second half?

I thought the comps got tougher or is just that just the raw internal growth that we're seeing now?

The REVPAR -- it's interesting when you look at the balance of the year our sense is the REVPAR growth -- REVPAR comps get a little tougher in the U.S., obviously they get a lot tougher outside the U.S. because of the impact of SARS, but the cost comps get a little bit easier.

And so while we are continuing to look at 7 to 9% REVPAR growth for Q3 and Q4, there is probably a little less REVPAR upside, if you will, but at the same time we feel pretty good that demand is strong across all segments.

And as I mentioned, we're already performing at the high-end of that range through 3 weeks of our third quarter.

Very good.

And one last question and I know your favorable topic is syn fuel here.

Have you had verbal communications with the IRS field team?

Exactly -- could you provide a little more color than what you provided in the press release on that?

Yeah, we had some verbal communications and they said, well, they are weighty enough issues why don't you communicate with us in writing?

[Laughter] How convenient.

Okay.

Great.

Thanks so much.

I'm afraid that issue will take awhile for us to get resolved.

I wish we could tell you we'd have an overnight answer to it but our guess is it's going to be sometime before we can provide you with a definitive answers to it.

Great.

Thanks, guys.

Good quarter.

Thank you.

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

Good morning, guys.

How are you?

Hi, Joe.

Hi, Joe.

Question for you.

Back in November at your analyst meeting, you were very nice to provide us with different lodging fee revenue recovery scenarios, and just kind of given the current trends, are those still reasonable recovery scenarios to look at, particularly as we're looking at the incentive fees?

Yeah, I think so.

We provided a -- Joe's referring to, I'm not sure all of you are familiar with it, in our November -- I think it was November -- Company-sponsored analyst conference in New York last fall, we looked at 2006 results and what they might look like if we had three different REVPAR recovery scenarios.

That was -- the most conservative was a 3% compounded annual growth rate in REVPAR.

We also did a 5% and an 8%.

Obviously, given the way we're going now in 2004, the relevance of a 3% model is not obvious.

We would suggest that probably you ignore that.

The extent we've been able to go back and look at kind of, how we're performing against that 8% model, we think we're pretty well on track and that that's about the right kind of -- in other words, the sensitivities that we put out there for 2006 seem to be holding pretty well.

Great.

Thanks a lot.

That's it.

You bet.

We'll go now to Brian Egger with Harris Nesbitt.

Good morning.

Hi, Brian.

Hi.

I just wanted to follow up and clarify with respect to your gains in other income.

I think you made this pretty clear, but you had 27 million in Timeshare note sale gains and 10 million payments from syn fuel joint venture.

Is the remaining -- I guess 11 million in your gains basically from real estate transactions?

Yes.

Yeah, it would be probably primarily deferred gains on sale of hotels and to some extent, I think during the quarter we sold some land underlying some old Fairfield Inns that we had leased and we had a few million of gains with that in the quarter.

Okay, great.

And just a --

-- one of the reasons I pointed it out is we've noticed in some of the early notes that have come out, I'm not sure which notes they were, reference to both 3 cents of upside in synthetic fuels and 10 million of upside in gains.

It's actually double counting, if you will, because the syn fuel upside includes that 10 million of gains.

Right.

Understood.

And just as a follow up if I could, you made the comment that your cost comps get a little easier.

Maybe you could give us a little update with respect to some of your benefits and insurance-related cost increases, in particular the one that's gotten a lot of attention is workers' compensation and efforts in California towards reform.

Any thoughts specifically with respect to some of the elements of those cost pressures that have affected flow through?

Yeah the a -- they're the same old issues that we've been talking about the last few quarters in terms of what we've experience today.

We've got probably generally a 4%-ish cost increase without counting in the staffing that's necessary in order to run in a shop with fuller occupancy.

That's driven mostly by wages and benefits, including workers' comp and employee-related insurance costs.

Beyond that obviously we've had REVPAR driven more by occupancy than by rate, which puts some additional pressure on costs.

And the other two things that we would point out so far have been repairs and maintenance continues to run higher than it has historically, in part that is driven by some hotels which probably got a little less capital than they would have normally gotten in stronger times, and so to some extent the hotels are using repairs and maintenance, and the current expensing of that to deal with the issues that they've got.

And secondly would be telephone.

While the year-over-year impact of telephone is probably only 3 points I suppose of margin, when you look at the impact of telephone profits versus 2000, it's a pretty significant impact.

The reason we think cost gets a little bit better is as we get into the second part of the year, some categories of insurance were in the next year now, when we get out past July 1st, so year-over-year the growth rates are going to be much less significant.

Secondly, last year in the second quarter, particularly from a global basis but even in the United States alone, that was the toughest quarter we had and as a consequence we had, you know, done various things to encourage employees to take vacation or use personal leave days and in other ways really screwed down as tightly as we could those costs.

To some extent that makes the comparisons in Q2 tougher and will make them easier in Q3 and Q4.

Okay.

Thanks very much.

We'll take out next question from Heather Shoham [ph] with JP Morgan.

Good morning.

You said that your REVPAR on a year to date has been mainly driven by your -- by occupancy.

It looks like that -- the rate is becoming a larger part of that REVPAR picture.

I was wondering if you could comment on the second half of the year how you see that split?

Yeah -- the first part of your question was a little hard to hear.

Oh, sorry.

I was fixing my head set there.

You had mentioned just in the beginning -- in a previous comment that occupancy has been the main driver for REVPAR year to date, but it's gaining strength.

Wondering if you just comment the second half?

Yeah, rate -- when we look at the second quarter, rate became an increasingly important contributor to our REVPAR growth period by period.

So we got more from -- we had 3 periods, obviously, in the second quarter, periods four, five, six and we added a point and a half of contribution from rates when we look at period six versus period four.

Occupancy bounced around a little bit in truth, and REVPAR bounced around a little bit during that period.

The fourth period where you had a comparison to the war actually is the strongest year-over-year because the comparisons were so easy.

When we look at the balance of the year, we expect we will see a shift from a second quarter run-rate of probably two-thirds occupancy driven and one-third rate driven, more towards 50/50 as the year goes along.

And with the easier cost cuts, we think we'll see steady improvement in U.S. hotel level profit margins as the year progresses.

Great.

Thanks.

We'll go next to Mike Rietbrock with Smith Barney.

Hey, guys.

Hey, Mike.

Just two quick ones.

Arne, I think you said that the REVPAR at the largest convention hotels was up about 4%.

Any rough sense of what percent of the total rooms that represents?

Oh, I couldn't tell you.

We could provide it to you supplementally.

I think -- we're talking here about the hotels that are above 1,000 rooms. we must have about 30 of those, 25 to 30 of those hotels?

It's about 15.

15.

Okay.

So of the domestic Marriott managed, which is where most of those are going to be, it's a meaningful percentage.

It does not really -- it's not really relevant to Renaissance or Ritz-Carlton and it's not relevant to international results.

It's probably in the 15 to 20,000 rooms kind of category.

Okay.

And concentrated in the Marriott brand?

Concentrated in the Marriott managed comps.

Okay.

Good.

And just one final question on syn fuel.

There hasn't been -- as part of your communications with the IRS, there hasn't been any implication that any changes would be retroactive has there?

Well, not exactly, but what they're saying early is that they believe they weren't placed in service.

And if they maintain that position they could take -- the most aggressive position they could take is that not only do we lose the benefits going forward, but we lose them retroactively.

Now we thinks as we've had said formally and repeatedly that they're simply not right, and the issue will not ultimately be pushed in any way.

But even if it didn't become clearly resolved that way I think there are lots of solutions to this which are a long way from giving up credits that we recognize today.

What does your counsel tell you to expect in terms of a time line?

Counsel tells us to expect we'll win, but counsel cannot really tell us when, because we don't know at what level we'll convince them to change their position.

Okay.

Thanks.

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

Good morning.

Hi, J.

Hi, J.

Hey, listen.

I have a few questions for you.

First on the third quarter guidance, maybe I wrote this down wrong before, but did you lower your lodging operating income forecast today relative to what you had announced at the last quarterly call, and if so, why?

And then also on the quarter -- the third quarter, does your 52 to 56 cents EPS guidance include that gain, $13 million related to the Cendant Ramada joint venture?

And then I have another question.

Yes to the latter question, and yes to the former question as well.

When we look back at what we told you a quarter ago, we were a bit higher in operating income in Q3 than what we've told you today.

And we were a bit more lower in Q4 versus what we told you today.

And as we went back and looked and try to reconcile those we are decidedly not bringing down expectations.

There's no part of what we've experienced today which cause us to have a anything but more optimism for the future.

When we looked at it, what we saw was that based on the Timeshare business particularly and the construction completion schedule, there was a bit more falling into the fourth quarter than the third quarter, and that's what caused the fine-tuning of those two bits of guidance we gave you today.

If I could also add, the $13 million gain from the Cendant Two Flags joint venture was also discussed on our last call so that was included in the guidance we provided last time.

No, no, I understand that actually.

Looking back at the numbers in my notes I kind of figured that I was having a hard time getting to your guidance before, now I understand why.

That's what I thought it might be, I just wanted to confirm that.

And then in regards to, totally different issue, this Diamond Rock Hospitality opportunity, can you tell me a couple things?

How exactly is this going to work?

Which brands are we talking about?

Do you have any specific transactions to discuss?

How are you going to minimize conflicts of interests?

Obviously that's been something you've been trying to do more here.

There have been some issues, lawsuits, etc., and although those are clearing up, and then also why do you need this entity?

Can you help me with that?

That'd be very helpful.

Well, they're all good questions.

Diamond Rock -- it's obviously an environment which there is a lot of capital that has been and is interested in investing in hotel real estate.

And we saw a number of funds that were raised by others in the industry.

It was obvious that there was a significant pool of capital that was available there and we thought it would be useful to have some of that capital positively inclined towards invested in the assets that we would manage.

And so with a group folks who have had a Marriott affiliation in the past, went forward.

They're the team.

They ran the process to raise the funds and their plan really is to go out and buy existing assets, either assets already in our portfolio of hotels that may need repositioning or renovation, or assets that have other flags on them and can be converted to our brands.

In terms of legal conflicts and the like, we were very careful to structure this in a way that makes it obvious that they are formally and practically independent.

We have no employees that are involved in operating that business.

We have no members on the Board of Directors.

We have no ability to control in any way the decision making that that entity makes.

So they're going to go out and do deals on their own, and we hopefully we'll find deals that we like.

In terms of other -- on some level our existing owners and franchisees, which we care about a great deal, all of them would tell you they don't want another one in the industry, because they just assume not have competition for any hotels they're looking at buying.

It the same time there is 50 to $60 billion of hotel real estate in our system.

We have many, many partners.

We already have many partners that are often bidding on the same transactions, and to have another one that's interested and focused on Marriott-managed property we think it's generally a good thing, and is not inconsistent with having continued strong relationships with our existing partners, who we are very committed to.

And when you say there's -- they've had a Marriott affiliation in the past, just so I'm clear, maybe I just haven't read enough on this, but were they former Marriott employees in most cases or are they just primarily former Marriott owners of hotels?

No.

Former employees, of the 3 most senior people, 2 have just left Marriott's employ and one, Bill McCarten [ph], was the CEO of Host Marriott Services, when that was spun out of Host Marriott in 94 or 5, I don't remember the precise date.

He has consulted with us since, worked with us to dispose of the Senior Living and Marriott Distribution Services businesses but has not been a regular employee of Marriott for about a decade.

Gotcha.

Thanks a lot.

You bet.

We'll go now to Will Marks with JMP Securities.

Thank you.

Good morning, everyone.

I just had some very quick questions regarding Timeshare.

Do you see -- is momentum actually picked up, do you think in the Timeshare business?

Your contract sales were pretty phenomenal, I guess they have been or awhile, but just some color on the overall business, and than can you just reiterate what your Timeshare strategy is?

Yeah, the last question is pretty general.

Let me start with the first.

I think what we're seeing in the Timeshare business is a steadily building acceptance of Timeshare as a quality product that is acceptable for broad segments of the -- not just middle class, but higher income levels as well.

And it's been steady in the sense that if you compare the business today to 18 or 19 years ago when we first got into it, it then was not very reputable.

And for a long time Marriott was one of the few reputable names slogging through an industry, and I think had an advantage by being the only reputable player, but had a disadvantage in competing in an industry which by and large still had a negative connotation.

I think the positive that comes from many of our competitors getting into this business as well as the number of owners that we've sold timeshare to is that that acceptance level is broadening.

And as it broadens, the potential customer base broadens, and I think that's causing steadily building momentum in the industry.

I think it's less about the month-to-month vicissitudes of consumer spending, and clearly, those trends will have some impact in individual periods in how much we sell.

But more broadly than that I think it's the acceptability of the product.

Our strategy in the business is to use our leading lodging brands and leverage the value of those brands to sell either Timeshare or fractional product that is branded with our lodging brands.

And usually to try and do that in locations which are next to or somehow affiliated with existing hotels or hotels which are going to be developed, so that both the hotel and the timeshare product get the benefit of the shared infrastructure costs, whether that be roads or swimming pools or golf courses or beaches.

Do you -- and given the use of capital, do you feel like you're -- and the higher returns you're getting from this, do you feel limited because it's such a high user of capital that you could grow it more quickly?

The capital is the biggest riddle for us in this business, and I don't want to sound more negative than your question suggests, but we are not satisfied that we're getting sufficient returns from the capital we have in the business yet, but we're making tremendous progress in that respect.

At the analyst conference, we talked about a bit before in November, we spent a considerable amount of time talking about this and we are working very hard and are very focused to double the pretax returns in his business for us in our long-range planning period, which is three years.

We're going to do that by being more efficient with the capital that we use.

Secondly, some of it is the natural impact of the maturing of big resorts that we added over the last 3 or 4 years and in the first 3 or 4 years the returns are the slimmest, and to some extent we hope to contribute to the improving returns by bringing in third-party capital, probably initially through joint ventures where we will end up providing service for the joint venture of sales and marketing and hopefully enhance our return somewhat in the process of that.

Great.

Thank you, Arne.

You bet.

We'll go next to Zachary Cherry [ph] with Neuberger Berman.

Good morning, guys.

All of my questions have actually been answered.

Thanks.

We'll go next to Ben Sun [ph] of Adams, Harkness, and Hill.

Good morning.

Congrats on the good quarter.

I have two questions.

First deal relate to the syn sale in the press release put out July 7, I guess, quoted here, we are confident this issue will also be resolved in our favor and we are examining various procedural alternatives for pursuing this issue to resolution.

I'm just wondering, could you comment a little bit or give a little bit of color on the procedural alternatives?

As we already understand, I guess, it will be a long time for this issue to get resolved.

Yeah.

It potentially may be awhile before it gets resolved.

I don't -- I'm not an expert on the IRS procedures, but generally, we'll be working first with the IRS audit team in trying to convince them of the wisdom of our position.

I think if that doesn't succeed, there are both other avenues available within the IRS itself and ultimately if that doesn't work, there are various more formal appeal and litigation processes and we'll probably step up the level of formality if the lower level, more informal, more practical ones are not successful.

Okay.

And also as I understand there are other players that are related; it's not just the Marriott, so has there been any talks with other companies that involved?

Not significantly, no.

There is another company that made an announcement about the same time that we did and they've got an issue that involves the same issue.

Same regulatory issue.

We're not sure that their fact pattern is similar to ours.

And otherwise, we don't, I think at this point know of any sort of industry-wide synthetic fuel issue.

So at the moment, we're working really with our -- the seller of the plants to us and our joint venture partner and with the IRS to see if we can't get this resolved as quickly as possible.

Right.

My second question, very excited about the development in China and you mentioned there are currently 10 in the pipeline.

I'm just wondering in light of the recent government policies to slow down the economy, does that have an affect on the building or construction of the hotels, or how will that affect the future plans of Marriott to expand in Asia?

We don't -- we think that is probably a shorter-term phenomenon rather than a longer-term phenomenon.

Long-term, China is clearly a tremendously growing market and huge travel destination an huge place where travelers will come from both.

And we think there's great near, medium and long-term growth in that market.

Okay.

Maybe just specifically, are there any delays due to that, short term?

No.

No.

Okay, great.

Thanks so much.

Thank you.

We'll go now to David Anders of Merrill Lynch.

Great.

Thank you.

Hey, Arne.

Maybe you commented on it, but sequentially interest income really picked up.

Was that just associated with the $200 million sale?

Where did that come from?

That's a big piece of it.

You've got basically all of our income from the Cendant joint venture moving from joint venture earnings to interest income in Q2.

Beyond that, there's somewhat larger -- somewhat higher rates than last year on average, but not very significant, and marginally higher balances.

I think those are the things that have driven it, but the Cendant joint venture is the biggest single factor.

And that'll burn off in the third quarter, correct?

We will end up with roughly $200 million more cash and less interest income, correct.

Got it.

And with respect to the Courtyard joint venture, any update there or anyway to monetize that now that the fundamentals have improved?

We'll see.

We've got -- I think the news that we can talk about now is with -- we talked bout the Courtyard REVPAR growth.

If you look at the managed Courtyard numbers, which are in our press release, that is a significant part of the managed universe of the Courtyard joint venture, and you've got great REVPAR growth there.

We've got about half of the hotels in the joint venture that will have renovations completed by the end of the year, and that's going well and the customer reaction is great, both in terms what they tells and the way they're spending their dollars.

And so all of that I think will give us and Host more alternatives to restructure or refinance that as we go forward.

We've got nothing to announce on that at the present.

Okay.

Last question on that, you were accruing some of your fees, correct?

Were you receiving cash now on most of that, or how is that -- how are the payments working?

On a full year basis, we're accruing the interest on the mezzanine which is not cash, and we are recognizing it through our P&L because we believe the loan is not impaired.

So that's what GAAP requires us to do.

We are accrued a little bit of ground rent in 2003.

It was 2 or 3 million bucks, if I remember correctly, not a lot.

I suspect it's running around the same rate year to date, but it's not a very significant figure.

Okay.

Thank you.

If you were to look at the 10(Q) of the joint venture, you might see an accrual there of incentive management fees that may be accrued on the books of the joint venture but would not be booked in our case.

We only book it if we receive it in cash.

Perfect.

Thank you.

We'll go now to Bill Crow with Raymond James.

Good morning, Arne and Laura.

Arne, could you take us, as best you can, inside the mind of the GM today and the mindset and how that's changed since the beginning of the year?

Are you at the point now where you have to kind of restrain the enthusiasm or are they still cautious given the last three years?

That's a good question.

I think GMs are breathing huge sighs of relief to see pretty definitive increases in demand.

After the three years that they've been through, it's tremendously good fun for them.

I think with that, though, they retain a little of conservativism (sic) and while it's hard to accuse them of being conservative when we talk about 6 or 7 or 8 or 9% REVPAR growth looking forward in the next -- next couple quarters.

There's still a little bit of a residual attitude, which is I don't want to get ahead of things and I want to confident that we're going to see those results come in.

And obviously, these guys are slugging it out.

I think it depends a lot by hotel.

I think the toughest issues are around the biggest group boxes and how we price that group business.

We see customers increasingly trying to book business and book business way out in order to take advantage of what they see as low rates.

And every day those GMs, with the help of revenue managers and the sales team, are make decisions about how much to push those rates for future booking and how much to not take the groups and leave it a little bit on the comp.

And I think those are -- that's the area probably where the toughest decisions are for the biggest hotels.

Obviously that's less relevant to a Courtyard.

Okay.

Thank you.

You bet.

We'll go next to Jeff Donnelly, Wachovia Securities.

Good morning, Arne, I apologize if you mentioned earlier.

I might have missed it, but concerning your incentive management fees, did you folks give an estimate or could you give an estimate of where you see them for full year 2004?

I think we gave an estimate for full year incentive fees.

Maybe not.

We've been growing at -- this quarter was 29% year-over-year.

I think we will see that growth rate come down meaningfully in Q3 and Q4, probably into the mid teens range.

And the reason for that relative decline is the impact of -- we won't have he impact of SARS in Q3, certainly, so Q3 I'd say is probably the mid-teens and probably Q4 where incentive fees are a bit more congregated, we'll see the growth rate come back up meaningfully, maybe to the levels around what we saw in the second quarter.

Okay.

And then just one final question is your share repurchase activity slowed a little bit in Q2, I believe.

Have you been active in Q3, and I guess where your stock is today, would you expect to continue to be active?

We have been in the market generally until the point where we reached our, sort of, internally imposed trading band, modestly but daily through Q -- quarter to date in Q3.

I won't talk about what our intentions are specifically over the next few weeks, but over the longer term including this year we expect to continue to be steady and active in buying back our stock.

Okay.

Thanks.

You bet.

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

And we'll take that final question from Celeste Brown with Morgan Stanley.

Good morning.

Coming back to David Anders' interest income question earlier, you're not going to receive the cash for the Cendant -- from Cendant until September, so we should see pretty much the same higher level of interest income in the third quarter; is that right?

Yeah.

That's right.

Okay.

We should receive the cash a little before our quarter ends, but not very much, just a couple of weeks.

Okay.

Thank you.

All right.

We thank you all very much for your attention and your time this morning and for your great questions.

It's a thrill for us to be able to report the results we reported this quarter.

And like our GMs who are glad to see demand return, so are we.

Thank you for your interest and your business.

Bye bye.

Once again, ladies and gentlemen, that concludes today's call.

Thank you for your participation.

You may disconnect at this time.