萬豪國際 (MAR) 2004 Q3 法說會逐字稿

Welcome to the Marriott International 3rd quarter 2004 earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the Executive Vice President, Chief Financial Officer and President of Continental European Lodging, Mr. Arne Sorenson.

Please go ahead, sir.

Thank you, Abe.

Good morning, everyone.

Welcome to our 3rd 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 in to 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, October 2nd, 2004.

And will not be updated as actual events unfold.

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

For the 3rd quarter, Marriott's earnings-per-share from continuing operations totaled 55 cents, a 45% increase over the prior year.

Even excluding the impact of our synthetic fuel investment, earnings per share from continuing operations still increased 45%.

Operating income from our lodging business increased 40%, reflecting the impact of unit growth and REVPAR improvements on our fee revenues and stronger profits from our time share business.

With strong cash flow this year we have repurchased 13 million shares year-to-date including just over five million shares in the 3rd quarter alone.

Adjusted EBITDA totaled $239 million during the 3rd quarter, up 22% from the prior year.

I'll have some more comments about our EBITDA calculations in a few moments.

Base and franchise fees combined increased 16% during the quarter reflecting higher REVPAR and increased distribution.

Incentive fees rose 17%, consistent with our guidance last quarter due to higher property level revenue and house profit margins.

Approximately 1/4 of our managed properties recorded in incentive fees in the 3rd quarter reflecting the lower profitability of this time of year.

This is an increase of about 10% in the hotel's P&C since the same quarter last year.

Our fiscal 3rd quarter 2004 income statement reflects the period between June 19 to September 10.

North American comparable system-wide REVPAR increased approximately 8% during this period with over half of the increase coming from room rate improvement.

Worldwide comparable system-wide REVPAR on a constant dollar basis increased 9.3%.

Including the favorable impact of foreign exchange, worldwide REVPAR increased 10.2%.

House profit margins for North American comp managed hotels improved 70 basis points reflecting stronger rates and continued efficiency improvement.

Productivity improved 2% during the 3rd quarter 2004.

Full service hotel margins increased about 80 basis points while limited service hotel margins declined slightly.

Property level margins were impacted by higher wages and benefits, somewhat lower telephone profits and the cost of free high-speed internet access at limited service properties.

In the U.S., the east and west reported very strong demand while the midwest and south central regions lagged.

The northeast reported 13% growth in comparable managed unit REVPAR across all brands.

While we were pleased to host the democratic convention in Boston and the republican convention in New York, transient demand has been so strong in New York and Boston that our REVPAR growth would likely have been higher in those cities if the conventions had been held elsewhere.

In addition, security concerns discouraged other business from coming to New York and Boston at and around the time of the convention.

Fortunately, business appears to be improving overall and we expect to push rate aggressively in both markets in the 4th quarter.

House profit margins in the northeast region improved two percentage points during the 3rd quarter.

San Francisco REVPAR was up about 11% during the quarter, including rates up 1%.

Demand for resorts in the California and Arizona deserts was strong, and Los Angeles REVPAR growth was over 9%.

House profit margins in the western region increased 130 basis points and are likely to improve more when REVPAR includes more rate growth.

Despite the challenging weather during the quarter, the southeast region reported a 3rd quarter REVPAR increase of 9%.

Florida and Louisiana were buffeted by winds and flooding from hurricanes Frances and Charlie.

Vacationers and group attendees cancelled reservations with each weather channel warning but for hotels that remained open guest rooms were occupied by local residents finding shelter in our hotels during the storms.

Many others checked in after the hurricanes subsided and are likely to remain as homes are repaired.

They were joined by FEMA and insurance company representatives.

As a result, REVPAR in the region was strong with about two-thirds coming from crisis.

House profit margins in the southeast region increased about 1 1/2 percentage points during the quarter.

Our 4th quarter began on September 11th so -- so the 4th quarter will reflect the impact of both hurricanes Ivan and Jeanne.

Unlike the 3rd quarter storms, hurricane Ivan closed hotels in the Caribbean along Florida's east coast and in the keys.

While we are relieved that the storm bypassed much of the densely populated area of eastern Florida, our properties in that area did not experience any material post hurricane lift in demand.

Hurricane Jeanne on the other hand, brought so much wind and rain that eight of our hotels in Florida remain closed today as repairs are made.

Some coastal properties suffered beach erosion, landscape damage, or loss of power but no injuries to guests or associates were reported.

Net-net we would expect our 4th quarter results, excluding the impact of time share to be depressed by a penny or so as a result of these hurricanes.

Today traveler interest in the Caribbean remains strong.

Many in Florida on the other hand including the governor, are concerned about lingering traveler caution about Florida and its fickle weather and we expect some "Welcome to Florida" advertising to hit the markets soon.

For our part, we love Florida.

Our south central region was also impacted by hurricane Ivan which will be reflected in our 4th quarter.

Compared to Florida, however, business was weak before the storm hit.

Third quarter REVPAR in the south central region increased only .1% reflecting continued soft demand in Denver, Dallas, San Antonio, and New Orleans accompanied by increases in supply in some markets.

You may recall that hotel markets in the middle of the country held up better going into the recession and have been slower to emerge.

Our hotels in the region focused on costs during the quarter and improved productivity.

Nevertheless, with rates down 1% house profit margins declined nearly 2 1/2 percentage points.

Despite the difficult 3rd quarter, however, the region is quite optimistic about rate increases in the 4th quarter and in 2005.

Bookings are up and transient demand appears to be improving.

Albeit at a slower pace than the hotels on the two coasts.

Overall, U.S. leisure demand remains strong during the summer and group business showed steady improvement.

Group REVPAR in the Marriott brand increased 11%, all in occupancy.

But group booking windows remain very short.

We saw continued strength in the small meetings market.

Revenues from small meetings booked through our event booking centers increased 25% during the quarter.

For larger groups we saw less booking around the block during the 3rd quarter as attendees increasingly stayed at their convention hotels and as meeting attendance improved, occupancy at overflow properties also increased.

Despite these encouraging trends we continue to see more modest REVPAR growth at our biggest convention hotels as they work through the lower-rated business that was put on the books before demand started strengthening.

Looking at our major corporate customers room revenue from consumer goods manufacturers increased 6% during the quarter, pharmaceutical travel spending increased 15%, banking and financial customer revenue increased 17%, government contractor revenue increased 35%, and professional services increased almost 40%.

Clearly the business traveler is getting back on the road in growing numbers.

Similarly international arrivals to the U.S. were very strong.

Across North America the number of international travelers increased 21% over last year with particularly large numbers of guests from China and the UK.

Prices are also going up for most customer categories.

Over 85% of our managed North American hotels are quoting higher rates compared to last year.

Over 55% of our managed North American hotels have raised corporate rates 10% or more.

While prices for group business booked in prior years remains lower than we'd like, rates for new groups booked in the past 30 days have increased 5% over last year.

We are just beginning special corporate rate negotiations but based on early indications we expect room rates to increase in 2005.

Of course, we are likely to limit special rates to customers providing substantial volume purchases and, thereby push some customers currently receiving special rates into full corporate rate categories.

Mixed improvements such as this is likely to be an important part of the REVPAR improvement story in 2005.

Outside North America we saw double-digit REVPAR growth for the 2nd consecutive quarter.

REVPAR increased 16% for managed hotels during the 3rd quarter with an over a third of the increase coming from room rates.

Demand in Asia and Latin America was very strong.

With easy comparables, constant dollar REVPAR in our hotels in China increased nearly 40%, REVPAR in Mexico increased 23%, Brazil was up over 30%.

Outside the U.S. house profit margins increased 1.5 percentage points.

Hawaii has been a strong market for some time.

Japanese travelers are returning to the islands and west coast demand remains quite strong.

We currently have 14 properties in Hawaii compared to only one just 15 years ago.

Today Marriott is the largest private employer in the islands.

And we believe this market will continue to offer exciting opportunities for us.

In fact, the Kapalua Bay hotel on Maui just converted to the Renaissance brand in the 3rd quarter.

Of course, room rates and REVPAR do not by themselves represent success in the hotel business.

Long-term profitability is what we're all after.

We leverage our size and systems more than our competitors and it shows in the numbers.

Technology is one area where economies of scale can be meaningful.

Our cost per reservation is the lowest in the industry.

But it is also the most productive.

At peak hours our reservation system including Marriott.com processes new bookings representing $2 million in property revenue every 10 minutes.

But success is never final.

In the next few years we expect to be the first hotel company to be able to manage group and transient demand on one consolidated platform offering the ability to yield managed group business as well as transient demand.

We made considerable progress growing our system during the 3rd quarter.

We opened over 6,000 rooms and nearly half were conversions such as the Doral Golf resort in Miami, now a JW Marriott resort.

The owners who converted hotels to our system in the last 12 months have committed over $250 million combined to renovate the properties to meet our standards.

Since 2000, we have grown our worldwide system by about a third and continue to see expansion opportunities around the globe.

At quarter end our worldwide development pipeline remained at more than 50,000 rooms. 35 to 40% of these rooms are full service hotels, and half of those are outside North America.

Nearly 20% of the full service pipeline are pending conversions from other brands.

We expect to open approximately 25,000 rooms in 2004, and 25 to 30,000 rooms in 2005, excluding the Ramada International brand.

We are seeing a pickup in new build applications for our limited service brands particularly in secondary and tershery markets, but we do not see substantial full service hotel development on the horizon in the near term in the U.S.

Land and construction costs remain very high and existing hotels are still a better way to invest for full service owners looking to expand.

Even once construction begins it will be two to three years before new hotels open so the U.S. industry supply growth should remain below 2% through 2006.

Our general and administrative and other expenses increased 8% during the quarter, largely due to spending associated with growth.

However, it also reflects about $9 million of lower litigation expense as we have successfully resolved the vast majority of owner/legal actions that began at the bottom of the recent economic downturn.

The $9 million of good news is not evident to the P&L because last year we booked a $10 million receipt of insurance proceeds, but we're hopeful that the decline in litigation expense will show through in lower year-over-year admin growth in future quarters.

Each of our brands from Fairfield Inn to Ritz-Carlton is more upscale and more attuned to customer needs than ever before.

Fairfield Inn, for example, began as an exterior corridor economy product.

Today Fairfield Inn and suites is an interior corridor moderate tier product and beginning in 2005 is expected to offer the most luxurious bedding package among the competitors in its price tier. 71 Courtyards is have undergone reinvention including new decor, furnishing, a luxurious bedding package, 24-hour food access, more television choices and a refurbished lobby with better services.

Results from the Courtyard reinventions are impressive.

Among the reinvention hotels we estimate intent to return by our customers is up fully three points.

Overall, guest satisfaction is up five points.

Margins are up two to three percentage points and REVPAR premiums have increased 15 to 20 points.

Roughly 75 Courtyards are scheduled for reinvention in 2005.

For the past 25 years, Residence Inn has defined extended stay lodging in the U.S.

This year, 21 first generation Residence Inns have completed renovations, including new furnishings, exercise rooms, work desks and lighting.

This is the seventh new generation Residence Inn since our acquisition of the brand 20 years.

Renovations and reinventions are necessary for every brand on an ongoing basis.

Hereto, guest satisfaction scores, occupancies and room rates have increased with these recent product improvements yielding an outstanding return on investment for our owners.

Roughly 50 Residence Inns are scheduled for renovation in 2005.

For the Marriott brand we will introduce a new look and feel for our hotels later this year.

Not only will this include a new 2005 guest room but it will also encompass innovations in food and beverage and technology.

We've had the help of our major owners, Host Marriott and others in the development of our new room designs, and we're very excited about the new look.

The design will be progressive and sophisticated but it will also have color and warmth.

As a result of just completed customer tests, we believe the new room will increase trip share, perhaps even more interesting, business travelers who have seen the room tell us they'd be willing to pay more for the new design.

We have just begun housekeeping testing on property.

Today the new room is available to see at our corporate headquarters and we invite you to call Laura or Donna the next time you are your in the D.C. area if you'd like to see the room.

For any of you who have visited one of the nearly 30 Ritz-Carlton properties opened in the last year I'm sure you've already seen the evolution of that brand.

Modern and sophisticated designs accompany the finest personal service.

Our oldest property, the Ritz-Carlton Boston, completed a major renovation earlier this year adding new vitality to classic grandeur.

Unlike many other hotel systems, the Ritz-Carlton systems average daily rate is much higher than five years ago, not just because of price increases but because the new hotels added to the system are well located and spectacularly well designed.

And our customers are delighted.

In fact, it was our success in the luxury tier that was the genesis of our newest brand.

Bogary Hotels and Resorts.

Bogary, the celebrated contemporary Italian jewelry company, selected us as a partner in this venture which will open the finest hotels in the world.

Indisputably unique locations, contemporary designs and superior service are the key elements destined to characterize this collection of hotels.

Each detail will be a tribute to absolute luxury with lavish appointments and personalized services.

The first Bogary hotel opened in Milan in May, room rates in September exceeded $875 a night and occupancy was strong.

The second Bogary hotel is expected to open in Bali in late 2005.

Marriott was the first hotel company in the world to segment the markets.

When in 1983 we introduced Courtyard, a hotel designed by business travelers for business travelers.

Our commitment to product excellence has never wavered, but we also recognize that good products are not enough to win.

Guests in our hotels expect more.

They expect outstanding service and unique experiences.

Our goal is to build personal relationships with our guests, to help our guests enjoy their stay with us, be productive and accomplish, feel that they're among friends and that they're truly appreciated.

When we delight our guests not just with product but with service too, we earn their loyalty and gain competitive advantage by ensuring true satisfaction and preference.

Today we have the culture, the systems, the distribution and the associates to do just that.

Our time share business has also successfully segmented the industry.

We offer distinctive brands, Marriott Vacation Club, Marriott Grand Residences, Horizons and Ritz-Carlton Club.

Our brands encompass a variety of price points, weekly and fractional products, a variety of trading and service options.

The business held up well during the recession and is growing rapidly today.

Contract sales in the 3rd quarter increased 25% driven by strong sales at new projects in Hilton Head and Las Vegas.

Time share segment results increases 48% even though our projects in Orlando and St. Thomas were impacted by the hurricanes.

With closed sales offices and fewer customer tours we estimate the storms reduced time share profits by two to $3 million in the 3rd quarter.

Third quarter prices increased 11% year-over-year with about half of the increase due to sales of more expensive projects such as Aruba, Newport Coast and Hawaii.

Marketing costs as a percentage of sales also declined meaningfully as we are using less expensive marketing channels.

At our analysts meeting last year we showed the typical pace of sales and investment in a new time share product.

Several of our resorts are just beginning their peak sales years and we expect the cash flow of this business to remain strong for several years.

Gains and other income in the 3rd quarter include $19 million in earn-out payments from our synthetic fuels joint venture partner.

These gains are also included in the 13 cents of total EPS we earned from the synthetic fuels segments so please be careful not to back out both the EPS total and the gain in your calculation of earnings excluding synthetic fuel.

In addition gains and other income during the quarter included a $4 million gain on the sale of some land and a $13 million gain on the disposition of our interests in the Two Flags joint venture.

Book losses from our lodging joint ventures totaled $8 million during the quarter.

Last year's 3rd quarter results included an approximately $5 million profit from our Two Flags joint venture which we did not have this year.

Our interest in Two Flags was essentially monetized in April so our joint venture results no longer reflect this income item.

However, we initially received a $200 million note which generated approximately $4 million in interest income in the 3rd quarter.

The note was paid off and we received $200 million in cash in September.

Last month we announced the signing of a nonbinding letter of intent for Cendant to purchase Ramada International hotels and resorts.

The deal is pending approval by regulatory authorities and final negotiation of terms.

We don't expect the financial impact to Marriott to be material.

We purchased approximately 13 million shares of Marriott stock year-to-date through the 3rd quarter, a bit over five million shares in the 3rd quarter alone.

Since the beginning of 2002, we purchased in excess of 31 million shares of our stock for roughly $1 1/4 billion.

And in the process we've reduced our fully diluted share counts by 15.8 million shares or 6%.

Despite the aggressive share repurchases our debt has declined steadily to roughly $1.3 billion today.

Our synthetic fuel business generated 13 cents per share of earnings during the 3rd quarter consistent with expectations.

Several months ago we were informed that IRS field auditors had issued a notice of proposed adjustment challenging the placed in service date of three of the four synthetic fuel facilities owned by the joint venture.

One of the conditions to qualify for tax credits under Section 29 of the Internal Revenue Service code is that the production facility must have been placed in service before July 1, 1998.

We strongly believe that all the facilities meet the placed in service requirements, and we're engaged in discussions with the IRS about this matter.

Pending resolution of the IRS issues we have entered into an agreement with our partner which results in a shift in the allocation of tax credits between us.

For the facility that is not being reviewed by the IRS, our partner will pay a higher price per tax credit to Marriott to receive an additional allocation of 40% of the tax credits for the next six months.

For the three facilities under IRS review, our partner will reduce its allocation of tax credits from 50% to an average of roughly 5% during the next six months.

If there's no successful resolution of the IRS matter by March 31, 2005, our partner will relinquish its interest in those three facilities.

If there is a successful resolution by March 31, their share of the tax credits from all four facilities will return to 50% at that time.

In any event, on March 31, 2005, our share of the tax credits from the one facility not under review will return to 50%.

If final resolution is not complete by the end of March, Marriott will retain the flexibility to continue production at full levels and retain all of the tax credits for our own use, turn off the facilities all together or set the dial anyplace in between.

But as we've already said, our best estimate today is that a final resolution will occur before March of 2005.

It will be favorable to Marriott.

Marriott will retain 50% of the tax credits and our EPS next year should be 41 to 45 cents a share.

You will notice in our press release this morning that we included a new schedule on EBITDA.

During the 3rd quarter our crack internal analysts discovered that there was a surprisingly broad range of numbers in the sell side reports about our EBITDA, not just forecasted EBITDA but actual EBITDA results for prior quarters.

As we looked more closely at the numbers we realized that we had not given you, as our competitors had, depreciation and amortization and interest expense for our joint ventures.

Our adjusted EBITDA calculations also back out the impact of our synthetic fuel investment.

You'll find these figures back to the 1st quarter of 2003 now in our press release.

Now let's turn to our outlook.

For 4th quarter we expect North American system wide comparable REVPAR to increase seven to 9% with about half attributed to rate improvement.

Our international hotels will have tougher comparisons though international constant dollar REVPAR is expected to increase just five to 7%.

We should see North American house profit margins improve about one percentage point to yield for Marriott base franchise and incentive fee revenue of 270 to $280 million combined.

We estimate that the September hurricanes will reduce lodging operating income by at least three to $4 million in the 4th quarter with potentially greater impact in our time share business.

On the positive side, interest rates are running lower than we expected a few months ago which will improve our gains from time share mortgage note sales.

We also expect some gains from transactions that are still pending.

We expect our synthetic fuel business to generate 12 to 14 cents in earnings-per-share and in total we expect earnings-per-share to total 72 to 75 cents in the 4th quarter.

For full year 2004, investment spending is expected to total approximately $400 million including $60 million from maintenance CapEx.

This is about $100 million less than our 2004 spending forecast of a quarter ago.

For full year 2005, we expect North American system-wide comparable REVPAR to increase five to 7% with about two-thirds of the increase coming from rate improvement.

We expect international system-wide constant dollar REVPAR to increase about 5%.

For the full year we expect North American house profit margins to improve about one to 1 1/2 points.

We look forward to welcoming 25,000 to 30,000 new rooms worldwide to our system in 2005.

Based on our projected REVPAR, house profit margin and rooms expansion we expect 2005 based franchise and incentive fee revenue to total $950 million to $1 billion.

In total, the time share segment results should approximate $245 million to $255 million.

Overall we expect gains to total 50 to $60 million, much lower than in 2004 since fewer assets are left to be sold.

In fact, most of our gains will come from the sale of our time share mortgage notes.

Our base case scenario assumes net interest totals a favorable 20 to $30 million.

With these assumption 2005 EPS is expected to total $2.47 to $2.84 including 41 to 45 cents coming from our synthetic fuel business.

Before closing, let me make a few editorial comments about our 2005 forecast.

First and most importantly, we are just beginning our bottoms up budget in process for 2005 and there are always changes that come out of that process.

We'll obviously give you updated forecasts a quarter from now that will have the benefit of a full budgeting process.

Second, these forecasts obviously depends first and foremost on the REVPAR assumptions of plus five to 7%.

We feel good about these forecasts now but ultimately the actual results will depends mightily on the state of the economy globally.

Third in addition to the usual risks let me highlight that with the strengthening profitability in our hotels we think it is quite possible that our investments, particularly loans to hotel owners, will be paid off as hotels are refinanced with cheaper debt.

It is difficult to predict the amount and velocity of this trend, but there is a significant likelihood that our interest income will decline from the guidance we have just provided.

Of course, if it does, we will be compensated by capital returning to Marriott to pay off these loans.

Of all the risks to EPS to have, this is the one we relish most.

In closing, we've made a lot of changes in our business in the past five years from exiting low growth businesses to starting new brands.

From finding new operating efficiencies in hotel operations to improving our return on invested capital.

Yet our strategy in many respects is the same.

We are managers and franchisers of the leading lodging brands in the world.

And we continue to work to make our brands even stronger.

We understand our competencies.

We pride ourselves in our corporate culture, a culture of service to others.

We listen to our customers and shareholders, and sometimes even to our competitors.

Marriott is a hotel company with a more than 75-year history of creating value for its shareholders, and we are committed to continuing to do so.

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

Thank you, Mr. Sorenson.

Our question and answer session is conducted electronically.

If you would like to signal to ask a question, press the star key followed by the digit 1, star, one, on your touchtone phone.

If you have muted yourself for any reason, please make sure you're not muted.

If you are muted that will block your signal.

Again, star, one.

Mr. Sorensen our first question the of the day will come from Fred Taylor of Lord Abbett.

Good morning, gentlemen.

Congratulations on a great quarter.

I had a question more on the stock repurchase and the debt side of the balance sheet and recognizing that that's a discretionary item that, you know, you can turn the dial up or down on that.

What is your feeling into '05 given the guidance that you have given us both on the EPS and the capital expenditure for share repurchases?

And what is your desire in terms of a corporate debt rating?

Let me start with the latter.

Okay.

Absent unusual circumstances, which are -- we don't really actively contemplate.

We would expect to remain a strong investment grade credit.

Right.

That's where we are.

We actually think we've got significant room in our current rating and believe there are really no issues around that.

I would agree.

With respect to the cash that we're generating and let me I guess talk a little bit about share repurchases but as well as dividends.

When we look over the next three years or so we think we'll generate 2 1/2 to $3 billion worth of cash.

That's really cash from operations net of all expenditures including tax.

But not including investment in the growth of our business.

We expect that investment in growth of our business in normal terms we should be able to generate enough capital from disposition of our loans or current investment we have to fund that.

So, in fact, the 2 1/2 to $3 million is an available for growth over and above the normal growth levels that we anticipate and/or to return to our shareholders.

We obviously will look at transactions, opportunistic transactions and assess whether or not they will create value for our shareholders and if we find some of those we'd be prepared to use capital, some of that capital for those.

If we don't, I suspect the bulk of that capital will be returned to our shareholders primarily through share repurchases.

Okay.

So you wouldn't rule out a debt finance acquisition that you'd then use that excess cash flow in the future to repay?

Correct, correct.

Now I think we've got -- because I think we've got significant room, it's not necessarily the case that any particular transaction we do will have an immediate impact to reducing impact to our share repurchase program.

We look back over the last number of years, I had a few comments about this in the prepared remarks, we've spent almost $600 million through the end of the 3rd quarter to buy back stock in '04.

Uh-huh.

And back in prior years we spent about $400 million in '03, 250 in each of '02 and '01 which was obviously the depths of our industry.

Right.

And 350 and 400 in each of '99 and 2000.

No reason to expect anything other than at least that level going forward and probably significantly higher.

Right.

Yea, I noticed that you have plenty of room in your debt ratings.

It almost he so, so -- is the debt approximately -- you said a billion three?

Yes.

On $12 billion of market cap it seems like you're a single a company but I'll let it go at that.

Thank you for your good answer.

You bet.

Next we will go to Jeff Bali at Wachovia Securities.

Good morning, guys.

Hi, Jeff.

Hello.

Question for you on [inaudible].

What impact has there been, I guess along the gulf coast area, just the demand for construction, labor and materials on your ability either to add time share product or perhaps on the openings expansions and conversions of hotels in that region?

Yeah, it's a good question.

I don't have much on it, tell you the truth, Jeff.

The projects we've got underway such as time share building and the like were underway before the hurricanes hit.

I expect their construction resources at least in terms of people and contractors and the like were committed and they remain committed to our projects.

I suspect the more interesting stories have to do with the eight hotels that were hit hard enough that they're closed today and there's work underway there and I'm sure those folks are scrambling to find contractors as everybody is in Florida to get those hotels open as quickly as possible.

And I guess just as an add-on to that.

More broadly, of the 25,000 to 30,000 rooms you folks expect to add in 2005, I'm trying to get at just how much of that I guess committed and versus what is still to come.

Are you able to quantify how much of that is either under construction today or in advanced stages of negotiation or conversion?

Rough guess, Jeff, I'd say two-thirds is essentially totally committed with scheduled opening dates and maybe about a third is not quite as committed.

Now most of that third I'm sure is actively under negotiation, probably exchange of franchise or management contracts already and very little of next year's openings would be totally income, 10%, maybe.

Two last ones.

On unions there's been certainly a lot of press out there.

I guess can you summarize for us what impact maybe you folks have experienced and what your expectation is for resolution there?

Well, we have -- obviously we care a lot about our associates.

Marriott has for a long time had a culture which values its associates and which finds ways to communicate to its associates regularly the important role we think they play for the company.

I think in part because of that culture and track record we have relatively few unionized hotels.

The unionized hotels we have tends to be in the urban markets where virtually every hotel is unionized and in those markets it's probably our biggest convention hotel which is the most likely to have the union.

We obviously are watching and have folks involved carefully in the negotiations that are underway in Washington, D.C.

At this point it's hard to handicap that, but we're certainly prepared if the unpleasant eventuality comes with a strike to make sure we work through that and do the best we can to run those hotels and serve our guests until we can get through it.

Jeff, if I could add to that, there's only two Marriott hotels involved in the negotiation that you're mentioning.

Okay.

Just the last question concerns incentive management fees.

I was wondering if you might be able to actually break out for us what you guys expect for '04 and '05 and your outlook and how that maybe compares to the guidance you gave in '03 under the, I guess the 6 to 8% REVPAR scenario.

Is it still in line with that?

I think still in line.

You've got year-to-date incentive fee figures now through three quarters.

I expect our growth in incentive fees through Q4 will be the 20% range, hopefully a few points better than that, but we'll see.

Think of it as being high teens to 25% year-over-year growth in Q4.

And so you can take a look at that and look at the full year 2003 numbers and you'll see, I think a pretty healthy growth.

Next year I think we'd envision incentive fee growth at around 20%.

Great thank you.

I'd like to look at what we shared with you at the company sponsored analyst conference to double check that, but I think that -- it feels to us to be about in line with what we talk about there.

Yea, I think at the analysts conference we really focused at 2006 but we are looking at longer term rates so you won't see those precise kind of numbers but directionally, it's the same direction.

Okay, thanks.

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

Good morning.

Two questions.

The first is with respect to your reduction in your capital spending budget by $100 million.

I assume at least some of the significance of that relates to perhaps a greater reliance on conversions?

Oh, you know, I think obviously when we put together cash flow forecast and the budget there are a lot of things that we're making judgments on and estimating that we'll be able to do or opportunities that we'll find.

I think generally the reason that we're spending less this year than we anticipated is we found based on the capital being interested invest in our industry that our capital is less needed to get the growth that we anticipated.

We're still getting the growth that we anticipated.

And we thought and this consequence we're not really being obligated by our partners to put in capital either, you know, as equity slugs or as interest income and we're also not finding any real compelling opportunities to step out there and buy on our own account an existing hotel with the intention of reselling it and retain the management and agreement later.

There's plenty of capital invested in our industry, so ours is less needed.

Okay.

Great.

And the follow up question, with respect to your initial 2005 REVPAR guidance, are there any, you know, macro economic assumptions that might underpin that, that you know, we should think about going forward?

Growth, we don't, again we've not not had sort of a bottoms up forecast so this is based on top level data.

We have some that we can look which comes out of our system.

We've got some that comes out of our computers when we look at trends in customer demand and the like and obviously, this depends on the GDP growth and probably the three to 4% range but we don't really start with the GDP assumption and then go to REVPAR but test what we're coming up through our internal dynamic against what we anticipate for the economy generally.

Great, thanks very much.

You bet.

Next up, Joe Greff, Fulcrum Global Partners.

Good morning, everyone.

Arne, I know you talked about house profit margins you kind of talked about the relative rates of improvement.

Can you just talk about what the absolute levels of house profit margin is and you can just sort of talk about how that compares with say 1998 and 1999 levels and 2000 levels which I assume is peak.

Let me, we've talked about that over the course of the quarter because to date we have, by and large, only given year-over-year changes by quarter.

We did a year ago at the analysts conference share some number about the way we calculate house profit and what our percentages were for the Marriott brand.

One of the things we've looked at as we look both at our internal data and what our customers are doing there is not consistency in what we're reporting.

Some of our customers are reporting hotel -- I'm sorry competitors.

Some of our competitors are reporting hotel levels EBITDA.

We tend internally to think about hotel level gross operating profit which is before fees, before property taxes and before some of those sorts of things.

We've also looked at hotel level cash flow which is obviously after fees and to some extent is impacted by what's happening with our fee streams whether it be growing or falling.

Obviously that's most relevant to incentive fees.

I think what we're planning to do in terms of giving detailed numbers, I suspect we'll have another company sponsored analyst conference roughly the end of the 1st quarter, maybe the beginning of the 2nd quarter next year but what we'd like to do is take you all through the way we calculate margins and at that time sort of give you what those numbers are.

Now having said that, our -- based on our internal calculation of gross operating profit which is a bit different than what our competitors do we think, we think we're down about six points, six to 6 1/2 points from peak year of 2000.

We think that our competitors on a similar apple to apple basis are down, one of the principal ones is down probably a point to a point and a half more than that and another we think is down two and a half to three points more than that.

And that's really 2004 year-to-date against 2000.

We also believe that our margins on an apples to apples basis are anywhere from one to about three or 4% better in absolute terms than those competitors.

Thank you.

And I have a question on syn fuel and I apologize if you went through this and I didn't catch it.

If the IRS issues are not resolved favorably, with what would then be the EPS impact?

I think you went through the scenario of the IRS issue being resolved favorably but what it's not revolved favorably?

What is the EPS impact for '05?

At least based on what you're taking?

There's lots of ways that this could be revolved.

I think the likelihood of any adverse ruling from the IRS is very, very slim but if you assume the worst, the IRS came out and said and established through a court that we were not entitled to any of the credits from the three plants being challenged, our ongoing EPS contribution is going to be in the nickel range, maybe a nickel to six cents, something like that so most of the EPS that we're picking from synthetic fuels would disappear and essentially think about that as being a 50% share of the tax credits generated from one plant.

Right now the 41 to 45 cents we talk about next year is 50% share of four plants.

So I'm thinking through this wrong.

It's probably more like a dime in earnings from with the worst ruling from the IRS, not a nickel.

The other thing to note is again if you assumed the absolute worst, there would probably be some one-time things associated with the credits that we've already done.

We believe that is extraordinarily unlikely.

Gotcha, that's very helpful.

Thank you.

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

Hey, Arne.

Couple housekeeping items.

As far as the 4th quarter goes or looking forward how do we think about that kind of the number of corresponds $19 million that was the gain from the syn fuel that was buried in the equity line item?

I think that's a good number for a regular run rate period so when we're back to the 50/50 splits next year that gain, which is really, you know, it's a gain under GAAP terms.

But it's essentially an earn-out.

It's a profit we're receiving on the credits that our partner is taking.

Right.

That's the right kind of run rate on a steady state basis.

Over the next couple of quarters if you assume the IRS doesn't rule until midnight on March 31st and therefore we keep the higher allocations between now and then the EPS shouldn't change much on a run-rate basis but the geography will be a bit more focused on the operating losses and the tax credits and will have lower gains, lower earn-out from our partner.

So 19 million a quarter is still in a normalized situation is what we should be thinking about.

Yeah, yeah.

One last one.

Time share no sales in 4Q, is that like a $30 million gain again or should we be thinking about a slightly higher number?

Ball park.

I think it's about 25 to $30 million.

25 to 30.

Okay.

And the timing of the repurchase of the shares, does that occur in the end or how should we think about fully diluted share count next quarter?

You're asking about when we're going to purchase shares in the 3rd quarter.

No.

When they occur throughout the 3rd quarter did they occur at the end because the share count obviously didn't go down by five million in the quarter?

Well, that's right.

The fully diluted share count. 230.

I think it's down -- if you look at the fully diluted count for Q3 alone, and the fully diluted count for Q2, probably is down 3 or $4 million in that, 3 or 4 million shares, excuse me, in that quarter alone.

We were reasonably well spread in Q3.

Okay.

Thank you.

And we'll go to Wayde [inaudible] at UBS.

Hi, good quarter, guys.

Good morning.

I have a question on MBCI.

What sort of normalized earning -- or margin for MBCI without the gains on the sale of the receivables?

Depends quite a bit by product type but development profits tends to be around 10%, maybe, you know, hopefully we can move them up to 15, depends a little bit on the maturity of the project and which segment it's planned in.

In addition to that, we've got, oh, 30 to $40 million worth of essentially management and services fees over and above the development profit.

Okay.

Now to be fair, just I'm going to think a little bit about the implication of your question.

We have had gains on sales of time share notes consistently for well over a decade.

Sure, sure, but it looks like it's running about, say, 17% this year or, you know, 16, 17% this year without the gains on the sale of the notes.

The development profit you're talking about or are you talking about --

The profit plus your management fee somewhere around there.

Yeah, that sounds about right.

Okay.

When you're saying 25 to $30 million in the gains for the 4th quarter of the sale, I mean, we have lower interest rates, you're selling more, you know, time shares, so it would just seem to me on a logical basis that that number would be going higher, not really lower from last year.

Why lower than instead of higher?

Well, few things.

We are in part what we've seen I think in the last year is a bit higher prepayment propensity than we would have historically forecast.

That has an impact in the assumptions that go into the calculation, and we're being a bit more conservative about what we're forecasting in terms of prepayment and some of the other incidentals besides interest rates alone.

That's one factor.

I think a second factor is there is some additional paper that we're generating for our highest end buyers, think about the buyers of risk fractionals that tends to have lower interest rates than the rates for the time, classic time share product.

And so that provides a growing percentage of the notes that we're selling and because the coupon is lower on those, we make less profit on those.

Those are probably the two biggest factors in term of the year-over-year change.

Thank you.

I'd add also that the propensity of the higher income bracket buyer to finance is a bit lower than of the MBCI product.

That perfectly makes sense.

One last question.

You're say you're six points against peak house profit margins.

How far are you away from average house profit margins.

If you're going up 150 basis points house profit margins, does that mean that you're two to three years away from average?

I don't know what average is.

What was your historical average house profit margin?

I mean, with the economic cyclicality we're going to see undoubtedly falling six points in this environment as a more severe drop than we took in the early '90s but the house profit margins move up and down steadily.

If you basically said, I think probably another way of getting to your question would be to say all right, if you view 2000 as being sort of artificial peak like, go back and look at '98 or '97 as a proxy for a sort of a normalized margin.

Uh-huh.

I think that six-point drop probably becomes a four point drop, ball park.

So if it's four point drop and you're going up you say about 150 then it's probably maybe call it two years away roughly from average?

Two or three, yeah, two, probably three at least.

Okay.

Thank you very much.

Yeah, you bet.

And we'll now go to Will Marks at JMP Securities.

Good morning, everyone.

I had a couple quick questions.

One, you referred to, you touched on a 10% figure when you were talking about I think it was rates going up, corporate rates and then you said that this year you expect to raise rates across-the-board during the negotiating season.

What does that 10% number refer to?

What we said is about 50, 55% of our managed hotels in North America have already raised corporate rates 10 points.

Okay.

And then --

85% of our managed portfolio has increased rates.

So basically you've got only 15% that are still in an environment in which they have not been able to raise rates and they are likely to be in the south central region or the midwest regions that we talked about which are the toughest.

When we look at next year, it's still very early in terms of negotiation.

But one thing I think might be a good reference point is you can see that group business, for example, that's coming in now late is up 5% on rates.

And hopefully we see, you know, meaningful, positive rate increases next year as those negotiations go forward.

They're going to vary significantly market by market.

We'll have much greater pricing power in New York and, you know, some of the cities that have the greatest strength and in others, even in the corporate rate negotiations, the rates are really set by hotels in that market.

And the most important determinant of house profit margin trend is rate.

We've talked about how, about REVPAR for some time but I think we're at the point now the costs are really in line.

We've got a good handle of productivity in the hotels and what we need now is some rates.

Okay.

One other unrelated question to that.

You also touched on the decline of limited service margins, and I think you mentioned some of it had to do with the high speed Internet.

Can you just talk a little bit more about why limited service margins are down and what you expect for next year?

High-speed Internet access is now free to our Courtyard customer which means a year ago we were not paying for the costs for the provider of that service to our hotels.

But the customer was paying for it out of a separate charge if the customer used it, and we're now paying for it.

That is singularly the biggest impact of limited service margins.

That's different from full service.

Beyond that, it's the same dynamics at work.

The more we're getting rates as a contribution to REVPAR the more we're seeing great lift in margins.

The more we're seeing occupancy driven, we're, you know, struggling to grow the margins at all.

And it's obviously the biggest factor in that is other than high-speed Internet access is wage rates and benefits costs, and all things related to the cost to people.

You might also remember for limited service hotels their margins tend to be much higher than full service hotels to begin with, because they don't have as much ancillary services so they also have fewer variable costs so there again you need rate in order to get the margins up.

Great, that's helpful.

Thanks, Arne and Laura.

We'll now go to Mike Reitbrock at Smith Barney.

Hey guys.

Hey Mike.

Just a quick question.

Do you have a feel for the relative growth rates of guests booking directly on to your sites relative to third-party sites?

The Marriott.com sight is growing faster than most of the third-party sites as we speak.

I think we believe that in the 3rd quarter out of all Internet bookings now probably 85% is coming through Marriott.com.

The Marriott.com growth year is probably in the 30 to 35% range and while every third-party Internet site is not the same, some are clearly losing ground, some are gaining ground faster than others.

The average for the third -- collection of third-party Internet sites is probably only up 15%, something like that.

Okay.

Thanks.

We'll now go to Steven Kent at Goldman Sachs.

All right, Steve.

You win the prize.

This'll be our last question.

Okay.

How are you?

It's a good one.

Given what a headache the synthetic fuel operation is just from a legal investor relations factor, could you just tell us really what is the return if you factor in all of the expense, the costs and I guess to stick with it for a second, I don't understand how this entity could be your partner if the partner is going to get a higher percentage of the plant where there's no question and is going to get less a percentage of the plants that have questions and you get to keep the ones with questions on it.

So I guess I'm trying to figure out was it all worth it when you look at synthetic fuel and if you add up what your expense was and what the returns are maybe you could put a little bit more color on all this?

There will only be one scenario, Steve, in which I think we would conclude that this whole investment was not worth it.

And that is if contrary to everything we expect we lose with the IRS.

And in that circumstance, it will be an unmitigated disaster.

We will have gone through dealing with questions like the ones you've just asked and spending far more time talking about a tax investment than normally you would suggest and ultimately end up with very little from it.

We do not think that's going to happen and if it doesn't happen what we're seeing now is investment that is delivering internal rates of returns probably closer to 200% than 100%, and will generate still we think half a billion of cash for us by the time it is over that we would not have had otherwise.

And that cash is available to, you know, invest in our growth businesses or to return to shareholders.

What was the original investment to put that you know, the $500 million you think you're getting in benefit?

Between 55 and $60 million.

Okay.

All right, thanks.

Yep, you bet.

Well, we want to thank all of you for your attention and your time.

And look forward to talking with you again soon.

Bye-bye.

Thank you.

That does conclude our call.

We do participate -- we do appreciate your participation.

At this time you may disconnect.

Thank you.