萬豪國際 (MAR) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Marriott International 4th quarter 2004 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 Executive Vice President and Chief Financial Officer Mr. Arnie Sorensen.

Please go ahead, sir.

Good morning, everyone.

Welcome to our year-end 2004 earnings conference Call.

Joining is me Laura Paugh, Senior Vice President Investor Relations.

Donna Blackman, Senior Director Investor Relations and Carl Berquist, Executive Vice President Financial Information and Enterprise Risk Management.

Before I get into the discussion of our results, let me first remind everyone that many of my comments today are not historical facts, and are considered forward-looking statements under federal securities laws.

These statements are subjects to numerous risks and uncertainties as described in our SEC filings which could cause future results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the press release that we issued earlier this morning along with my comments today are effective only today, February 8, 2005, and will not be updated as actual events unfold.

You can find a reconciliation of non-GAAP financial measures referred to in our remarks at our website at www.Marriott.com/investor.

Today I'm going to cover a variety of topics starting with some highlights from 2004, then discuss recent RevPAR trends and rooms growth, discuss our cash flow and finally outline our 2005 forecast. 2004 was in short, the year we've been waiting for.

Business travelers returned to the road and convention-goers filled hotel meeting space.

For our flagship Marriott brand, last year's RevPAR improvement was the best we've seen in 7 years.

Our other brands achieved their largest increase in RevPAR ever.

As a result of this strong demand, diluted earnings-per-share from continuing operations reached a record $2.47. 27 percent higher than the prior year and an all time company high.

We are often asked how long before we will get back to the business we saw in the year 2000.

Well, even excluding the favorable impact of our synthetic fuel business, our 2004 EPS has already passed that benchmark.

Our management and franchise fees totaled $873 million during the year and adjusted EBITDA reached $1.1 billion, a 21 percent increase over 2003 levels.

In other 2004 news excluding Ramada which we sold to Cendant in the 4th quarter we added 24,000 hotel and timeshare rooms to our system, rooms that will continue to contribute earnings growth for the next 20 to 30 years and in many cases even longer.

Approximately one-third of the rooms added during the year were conversions from other brands.

Demonstrating the continued strength and popularity of our products.

Excluding our ongoing timeshare note sales, we received nearly $700 million in 2004 from asset sales and loan activity including refinancings, sales and repayments.

We repurchased 14 million shares of Marriott stock for approximately $650 million, setting an all-time record for cash returned to our shareholders in any single year.

Despite this, our strong cash generation enabled us to reduce our debt net of cash by 55 percent to $550 million, the lowest level since our spin-off in 1998.

Finally, our stock price did very well in 2004, and we appreciate your confidence in our brands and strategy as reflected in the stock price.

Several items contributed to the solid performance.

First was improving demand from our corporate customer, largely related to economic growth.

One measure of this demand was our Marriott Hotel domestic corporate and above rate.

That is our nondiscounted benchmark room rate.

With fewer discounts available in our hotels, the number of room nights sold at corporate and above rates increased 16 percent in 2004 while the prices of those rooms increased 6.8 percent.

For the 4th quarter of 2004, the number of rooms sold at corporate and above rates increased 13.7 percent, while the price of those rooms increased 12.8 percent.

International travel was an important contributer to this very strong trend in demand.

North American room nights booked by international travelers increased 23 percent during 2004.

In New York, the soft dollar attracted Europeans on weekend shopping excursions.

In Florida and the Caribbean, European vacationers drove both occupancy and rates higher.

The weak dollar also kept many Americans close to home, fueling demand at our U.S. resorts in the southeast, the southwest and Hawaii.

Leisure demand remain very robust in the 4th quarter, comparable weekend revenue at Marriott hotels and resorts increased 9.4 percent, and resort destinations remained very popular.

So as it relates to transient demand we were really hitting on all cylinders in the 4th quarter.

Group business is also trending up, the number of small meetings booked at our regional event booking centers increased about 15 percent in the 4th quarter, primarily booked by corporate customers.

Overall, comparable Marriott branded hotel group revenue increased 10.2 percent in the 4th quarter.

Business is so strong that some meeting planners are finding they have reserved too few rooms for the number of attendees who show up for conventions.

Ancillary revenues such as food, golf, spas, AV services and entertainment increased 7 percent in 2004 alone.

So while RevPAR in the group segment lags transient growth, the total revenues for group business are growing significantly.

In 2004, 30 percent of group rooms were booked in the year for the year, but we anticipate the booking window will lengthen in 2005.

During the difficult years of 2001, 2002, and 2003, group rooms were sold at market room rates that appear quite modest by today's standards.

As this low rated group business burns off over the next few years, we expect to be able to improve group room rates further.

Roughly half of our 2004 Marriott Hotel group room nights were booked during those challenging three years.

Improvement in the mix of customers has pushed RevPAR higher.

Cross-selling revenue increased 27 percent as fully occupied hotels shifted business to other properties.

In 4th quarter corporate rate negotiations, we declined to bid on some special corporate accounts that were not producing adequate volume.

While the volume of special corporate rates is expected to decline in 2005, special corporate room rates are expected to increase at least 5 percent.

In some markets our rates have moved up enough so that lower rated association group business is moving to our hotels in slower markets or moving to less desirable competitor product.

In both cases we are replacing the business with higher-rated corporate and above business.

To be sure, demand has improved, but our RevPAR has also benefited from product improvements made over the past several years.

Hotels that have been renovated over the past three years are outperforming the company's average RevPAR growth and extending their RevPAR market share premiums.

And the new and exciting hotels that we've opened in the past few years such as Grand Lakes, Desert Ridge, and London Park Lane are redefining our brands.

After extensive work with our owners including Host Marriott and our franchisees, we announced that we will roll out new bedding to 628,000 rooms worldwide.

Our full service Marriott and Renaissance hotels will replace the traditional bedspread with down comforters nestled inside sheeted duvets.

Another first for the industry, the duvet covers will be freshly laundered for each new guest.

The bedding will feature 300 thread count cotton rich white top and fitted bottom sheets making them among the finest and softest sheets of any global hotel chain.

Let's talk about margins.

While RevPAR is important we remained focused on bottom line profitability that allows owners to cover debt service, earn desired returns, reinvest in their hotels and pay incentive fees.

House profit margins in North America increased 180 basis points during the quarter and 80 basis points for full year 2004.

We mentioned before that our house profit margins are quite different from owned hotel EBITDA margins reported by many of our competitors.

For example, house profit margins do not include deductions for property insurance, taxes, or hotel management fees.

If we adjust for those items to make our results comparable to our competitor's owned hotels, across all our brands in North America, property level EBITDA margins increased nearly 300 basis points during the quarter and over 150 basis points for the full year.

For the Marriott Hotel and resort brand alone, 4th quarter EBITDA margins increased roughly 350 basis points.

We leverage our size and our 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 and our conversion ratio of calls to booked reservations is the highest in the industry.

I thought we would take a few minutes to describe some of the regional trends we saw in the 4th quarter compared to the year-ago quarter.

RevPAR at our managed hotels on the west coast increased 9.2 percent in Q4 and house profit margins increased improved 1.6 percentage points.

Demand in Arizona is very strong, while the bay area continues to recover slowly.

Demand growth in the south central region and the midwest has been lagging the two coasts during 2004 but the 4th quarter saw a dramatic improvement.

In the 3rd quarter, the south central regions RevPAR was flat.

In the 4th quarter RevPAR was up 5.6 percent.

In the 3rd quarter midwest RevPAR increased 3.6 percent.

In the 4th quarter RevPAR increased 9.7 percent.

House profit margins also showed striking improvement.

In the southeast RevPAR increased 9.8 percent with rates up 5.4 percent.

House profit margins increased 2.6 percentage points.

Rates are moving up in some cases dramatically.

Fourth quarter RevPAR in the southeast would have probably been higher except for the September hurricanes.

Coastal residents filled inland hotels during the storms and after the storms displaced homeowners, insurance adjustors and FEMA representatives filled hotels, mitigating much of the negative impact.

Today American, European and Latin American tourists have returned to the beaches, the cruise operators are also doing well which has helped our hotels in Miami.

The mid-Atlantic region's 4th quarter RevPAR increased 13 percent and house profit margins improved 2.4 points.

Room rates increased 6.8 percent during the quarter, transient business was strong and our limited service hotels benefited from cross-selling from the full service brands.

The northeast had an excellent 4th quarter.

RevPAR increased 12.5 percent with nearly 8 points of it rate improvement and house profit margins increased 1.9 percentage points.

Our Manhattan hotels RevPAR increased 15 percent, nearly all rate improvement.

Like the rest of the country, corporate transient customers and group business was solid but New York also benefited from very strong growth in international leisure customers.

Downtown Boston had fewer citywides in the 4th quarter than a year earlier but the Boston suburban markets surged forward.

It was the first time we have seen an upturn in that market in four years.

Hotels in the Boston suburbs saw RevPAR increase 13 percent with ADR up nearly 5 percent.

Financial services, defense contractors, government and biotech are all picking up in that market.

As the economic recovery extends from the major metropolitan areas to the rest of the country, we are delighted to have extensive geographic and price point distribution.

Outside the U.S., excluding Ritz-Carlton, company operated hotel RevPAR increased 14.3 percent during the 4th quarter, nearly 10 percent on a constant dollar basis.

Most of the increase was rate driven.

Thus profit margins increased 100 basis points.

The Caribbean and Latin America benefited from the strong leisure business during the quarter, the number of European visitors improved and American leisure demand remains strong.

RevPAR in the region increased 13.5 percent during the quarter on a currency neutral basis.

In the Middle East, RevPAR increased 20 percent in the 4th quarter as leisure business filled hotels in Dubai, Cairo and our Red Sea resorts.

RevPAR at our UK managed hotels increased nearly 5 percent in currency neutral terms and nearly 16 percent including the impact of favorable exchange rates.

Our Park Lane and Chancery Court hotels in London did particularly well despite fewer Americans visiting London.

RevPAR in continental Europe increased 5.5 percent during the quarter using actual exchange rates, RevPAR in continental Europe in the quarter increased by 15.5 percent.

Our hotels in Italy did well despite the weak dollar while Paris, Amsterdam and Germany continue to lag.

RevPAR in Asia was strong in the 4th quarter and overall RevPAR increased 12.6 percent in currency neutral terms and 14 percent including the favorable impact of exchange rates.

China benefited from an easy SARS comparison in the 4th quarter although economic growth is also driving demand.

While international tourism and business travel are up in China, domestic Chinese travelers remained the largest source market for 4 and 5 star hotels in that country.

As domestic employments continue to grow in China we think this will be a high growth market for a considerable period of time.

Incentive management fees increased dramatically during the quarter, primarily from improved profits in U.S. market, including New York, Boston, Orlando and Tampa.

U.S. incentive fees alone increased 72 percent during the quarter.

We recorded approximately $7 million in 4th quarter incentive fees that were earned in prior periods but received and recognized in the 4th quarter.

Approximately 31 percent of our managed hotels booked incentive fees in 2004 compared to 29 percent in 2003 and 65 percent in 2000.

Of our full service hotels only 41 percent booked incentive fees in 2004 compared to 38 percent in 2003, and 61 percent in 2000.

Timeshare contract sales increased 16 percent during the 4th quarter, reflecting solid demand at Hilton Head, Aruba, Lake Tahoe and Aspen resorts.

Time share interval sales and services revenue declined 8 percent in the 4th quarter reflecting the fact that higher 2004 contract revenue occurred from sales of product in non-reportable buildings.

Our timeshare margins improved on lower sales and marketing costs and a favorable mix of projects and units sold.

Total G&A and other increased 19 percent during the quarter.

G&A included a 13 million non-cash charge associated with the write-off of our investment in the Courtyard joint venture management agreement as well as expenses associated with Sarbanes-Oxley, foreign exchange losses and the write-off of some timeshare development costs.

Gains and other income totaled $69 million in the 4th quarter, $36 million of this total is the gain on our sale of timeshare mortgage notes compared to $32 million in the year-ago quarter.

We also earned a $5 million gain on the repayment of the debt on our Grand Lakes project, a $5 million gain on the sale of an international joint venture interest, a $5 million gain on the sale of a hotel, and a $4 million gain on the sale of the Ramada International business.

The 2003 4th quarter included $10 million gain on the sale of an international joint venture interest.

Excluding synthetic fuels our equity joint ventures generated a $5 million loss during the quarter, compared to a $16 million loss in the year-ago quarter.

The improvement in equity earnings was largely due to profit increases in several joint ventures including RevPAR improvements in the Courtyard joint venture offset by the impact of the sale of our Ramada Two Flags joint venture early in 2004.

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

Overall industry supply growth is modest, but Marriott is gaining share around the world.

During the quarter we opened 6,000 new rooms.

Excluding Ramada at year end, our worldwide pipeline of rooms awaiting opening totaled nearly 350 hotels with over 55,000 rooms.

An increase of 9,000 rooms since year end 2003.

Looking at our current pipeline over 40 percent of the rooms are high value, full service rooms, and half of those are outside the U.S.

Specifically the pipeline includes 15 Ritz-Carlton hotels, 12 of them outside the U.S., 60 percent of our full service pipeline is already under construction or is pending conversion.

Compared to two of our U.S. competitors we have been very successful in turning our pipeline into new rooms.

At year end 2003, we reported a 50,000 room pipeline which contributed to our 27,000 room openings in 2004.

At the beginning of 2004, one of our competitors reported a pipeline of 34,000 rooms, yet reported a year-end 2004 system size only 1,420 rooms bigger than when their year began.

While the other competitor reported a pipeline of 53,000 rooms but opened 10,000 fewer rooms than we did.

In the U.S. alone we opened 18,000 rooms during 2004, and after all deflaggings we had 12,160 more domestic rooms at year end.

One-third of the additions were high value full service rooms.

We continue to believe that worldwide unit expansion is an important element in driving brand value and we take pride in translating pipeline rooms into real guest rooms.

Of course, as we are adding some outstanding products to our system, we are also pruning our portfolio.

We sold the Ramada International brand late in the 4th quarter with its 210 hotels and 28,000 franchise rooms for $34 million.

The business earned only $1 million pretax in 2004.

Excluding the sale of Ramada ,11 hotels with 2,000 rooms mostly Fairfield Inns, left the system in the 4th quarter.

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

The investment climate for hotels is hot.

Low interest rates and readily available capital has accelerated sales of existing hotels as owners and franchisees reposition their portfolios.

Typically, new owners invest new capital.

Renovating hotels to drive profits higher.

For example, of the 10 full service hotels that converted to the Marriott or Renaissance brands in North America last year we estimate that their owners will spend about $40,000 per room to upgrade or refurbish the properties to meet our brand standards.

Now let's turn to our outlook for 2005.

Pricing improvement in the 4th quarter was broad and pronounced, clearly mix shift contributed to strong RevPAR but it was pricing that was the key to top-line growth.

And 2005 has started where 2004 left off.

Full service North American RevPAR in the first four weeks of 2005 increased nearly 10 percent over 2004 levels giving us a good start to the new year.

Our first week which started on January 1 this year, but started on January 3 last year, provided an especially tough comparison.

Without which RevPAR from our 1st period would have been up in excess of 10 percent.

Based on current bookings, 1st quarter 2005 group revenue is expected to increase more than 9 percent.

Compared to the typical U.S. hotel, our hotels derive a greater portion of their revenues from groups particularly in the spring and fall where the booking window is beginning to lengthen, we still have considerable group business on the books at relatively low rates which means that group pricing will continue to turn up in 2006 and 2007 as this business burns off.

Outside the U.S. we expect our hotels in Asia to increase constant dollar RevPAR 7 to 8 percent as China continues to drive demand in the region.

Demand in the Caribbean, Latin America and the mideast is expected to drive RevPAR up over 10 percent.

We are less bullish on Continental Europe where we expect RevPAR to grow less than 5 percent.

Given the strong performance in the 4th quarter we have increased our forecasted North American RevPAR growth to 7 to 9 percent for full year 2005 and expect similar RevPAR growth in our international operations on a constant dollar basis.

With our strong pipeline of hotels under development or pending conversion, we are confident in our ability to open 25 to 30,000 new rooms in 2005.

Without Ramada, this is an increase from the growth rate we achieved in 2004.

Nearly half of our room additions are expected to be high value full service rooms including the Grand Caiman Ritz-Carlton, Marriott Star Pass Resort in Tucson and the new Bulgari in Bali.

With RevPAR growth and unit expansions in 2005, we expect management and franchise fees should increase roughly 13 to 16 percent and flow through to lodging operating income should be strong.

Our 2005 forecast assumptions are outlined in our release so I won't go into details here.

To summarize we expect management and franchise fees to total $990 million to 1 billion 10 million.

Continued growth in timeshare profits with growing contract sales and margin improvement and declining comparable G&A spending.

Overall, lodging operating income could total about 795 to $815 million in 2005, compared to $575 million in 2004, a 38 to 42 percent year-over-year growth rate.

This excludes the impact of stock options or our bedding incentive program.

With the refinancing of debt on Grand Lakes and the pending recapitalization of the Courtyard joint venture our interest income is expected to decline substantially in 2005.

We invested in these projects with the expectation that over time the hotels would mature, we would be repaid, and at the end of the day we would retain an attractive long term management agreement with little to no capital investment.

Receipt of these funds is an endorsement of that strategy.

For the Courtyard venture we will retain meaningful equity participation and we will benefit from both the lower cost of funds and a more rapid roll out of renovations.

We are very excited by the prospects to reinvest this cash in more attractive opportunities excluding share repurchases.

Excuse me, including share repurchases.

We will continue to focus on recycling capital by selling hotels and mortgage notes as conditions warrant.

Of course, since we don't own many assets I wouldn't expect asset sales in 2005 to be as meaningful as they have been in the last few years.

All in all, we expect net interest cost to total about 10 to $20 million in 2005.

Given these assumptions and those outlined in the press release we believe earnings-per-share for the full 2005 year will likely total between $2.73 and $2.83 per share.

As you all know the cost of options will be expensed in the 2nd half of 2005 at an estimated cost of $20 million pretax.

Split roughly evenly between the 3rd and 4th quarters.

We have not included the option impact into our EPS guidance yet, but we'll leave it to you to decide when and how to adjust your forecast to take into account the new accounting rules on options which apply to all companies.

By the way, we have made significant reductions in the usage of options in the last three years, and estimate the impact to next year's, that is, 2006 earnings will only be 25 to $30 million pretax or roughly $0.06 to $0.07 for the full 2006 year.

We've talked a great deal about our product initiatives over the past couple of years including our Courtyard reinventions, Residence Inn renovations and most recently our bedding program incentives.

We believe all of the incentives have or will provide meaningful upside to RevPAR, guest satisfaction and hotel profitability.

In 2005 we expect these one-time owner incentives to cost us 40 to $45 million.

We think the returns make this well worth the cost.

This one-time cost is not included in our EPS guidance.

In the 1st quarter 2005 we should begin to see the impact of some significant trends in comparing our year-over-year results.

First, modest growth and eventually declines in G&A.

Second, lower earnings from gains, and third, lower earnings from net interest.

Net-net, these trends will dampen our year-over-year EPS growth but with strong fee growth and better profit margins on those fees, in any event our core earnings will be impressive.

For the 1st quarter we estimate North American RevPAR is likely to grow 6 to 8 percent.

We estimate total lodging operating income should total 175 to $180 million, a 16 to 19 percent growth over the prior year.

We don't expect to complete a timeshare mortgage note sale in the 1st quarter, so gains should be modest.

With our lower debt balances and a much smaller note portfolio, net interest expense is likely to be roughly zero.

In total, we expect earnings-per-share should increase to $0.52 to $0.54 with approximately $0.06 coming from synthetic fuel. 2004 has been a great year, and I hope we haven't bored you with our comeback story.

Oscar Wilde once noted that anybody can sympathize with the suffering of a friend but it requires a fine nature to sympathize with a friend's success.

Kim, we'd be happy to have you open up the line, and we'll take any questions at this time.

Thank you. [Operator Instructions].

Our first question today comes from Harry Curtis from J.P. Morgan.

Good morning.

Arne, can you just review where your absolute debt level and cash levels are and have you received all the cash from your assets and the asset sales in the 4th quarter as well as loans receivable and where I'm going with this is have you assumed any share repurchase in your guidance of $2.73 to $2.83?

We have at year-end $700-some million of cash and net of cash our debt levels are about 550 million.

That includes I think our debt before cash would therefore be about a billion three.

Something like that.

There are two long term bond issuances which mature this year.

They're about $500 million or so.

One I think in the 2nd quarter and one in the 4th quarter.

But we're obviously sitting on a lot of cash and very low debt levels.

We are not modeling specific assumptions or giving you specific guidance about what kind of share repurchase volume we'll do in 2005.

But obviously we continue to like our stock and expect we'll be aggressive buyers of our stock throughout the year.

Thank you.

And moving on our next question comes from Jeremy Cogan from Banc of America.

Hi, good morning.

I'd kind of like to follow up on that question just asked.

You said $14 million for the year which leads me to believe that there wasn't much if any repurchase activity in the 4th quarter and giving your underlevered situation.

Can you talk a little bit more about that?

And also I was wondering, can you talk on a little bit more about why you guys view this bed thing as a one-time situation?

What exactly are these incentives payments, it's a pretty big number for a manager, why is it one-time and help us understand that.

To me it seems like it's more part of the core business.

Yeah, first questions first.

The share repurchases in the 4th quarter were reasonably modest at a bit over a million shares.

Obviously the full year was aggressive at very record levels.

Fourth quarter obviously our stock price was strong.

We tend to be very careful about using the share buy-back program to support a growing stock price.

And as a consequence with that kind of momentum we were a bit less active in the 4th quarter than you or we might have expected.

I think looking forward, we've already purchased more in January, I think about a million and a half shares than we did in the 4th quarter.

The stock's been flatter, if you will, in the month of January and therefore, we feel a bit more at liberty to be active in the market and obviously we'll continue to be active as we go forward.

The bedding incentive, this is the first time Marriott has provided an incentive of this kind of magnitude to our system.

Why are we doing it now and how do we think about whether it's sort of recurring or not?

Basically, we believe that the new bedding is so important that we are dramatically accelerating the time really shortening the period of time we want our owners and franchisees to get these things installed.

Typically when we adjust brand standards, we would adjust brand standards and then let the normal renovation cycle implement those new standards so that a new room standard might take 4 or 5 or 6 years to get installed throughout the system.

In that circumstance we don't provide any particular incentive.

It's just part of the continuing refreshing and evolution of the brand.

Here with the beds we are requiring implementation by year-end '05 and with that kind of speed we felt it was important to our owners and franchisees and they felt it was important as well, I might add, that we participate in it and we think actually it's fair that we do it that way.

Let me ask you maybe a quick follow-up on that.

As you think about your incentive management fee or your overall franchise and management fee outlook for '05 and '06, how much above and beyond what you guys had outlined back in November of '03 would initial like this add?

In '05 probably very little.

You think about it, we've just announced it.

The beds will be sheets and mattresses and pillows and the like, orders I suspect will go in some time in the 2nd quarter and the beds, while we want them installed by year-end I suspect it's going to be mostly a 4th quarter installation.

I don't have a number for you for 2006 in terms of RevPAR upside.

We know from the hotels that we've tested this new bedding in that there is a dramatic improvement in guest satisfaction and intent to return statistics that we're constantly collecting from our guest satisfaction surveys and as a consequence we believe there's upside and certainly value to us from that our piece of that upside management fees.

But I can't give you a RevPAR number now for 2006 which would be incremental from these beds.

Okay.

Thanks.

And moving on we'll take a question from Will Truelove from UBS.

Hi, Arne.

Hey, Will.

In terms of your -- you mentioned that you were reducing your loan portfolio, can you talk a little bit about the outlook for your off balance sheet debt financing, is that guaranteed and how that is changing over time.

And then can you touch on the timeshare revenue?

You mentioned something about timeshare sales were up but there was non-reportable buildings.

Can you just give a little more color on that?

Yeah.

Let's take time share first.

The time share piece obviously is the recognition of sales and, therefore, development profit that go with those sales depends on reaching certain construction milestones.

What we saw in the 4th quarter was that we had a significant amount of sales in resorts that did not meet thresholds on construction.

And that caused us to have significantly higher contract sales than reported sales.

And we'll see some of that trend continue in the 1st quarter, by the way.

Our 1st quarter forecast assumes nearly flat time share operating profit in the 1st quarter, growth of about 5 percent from 2004's 1st quarter and it's very much the same dynamic at work.

With respect to our guarantee exposure, our guarantees are showing essentially exactly the same kind of trends as the loans, guarantees I think we should end up the year with core lodging guarantees, those exclude senior living service guarantees that we are left with that are burning off after our exit from that business.

The core lodging guarantees should be just around $600 million which is down nearly $200 million I think from year-end 2003 levels.

Thank you very much.

You bet.

And our next question comes from Michael Reitbrock from Citigroup.

Hi, Arne.

I'm all set, thanks.

Okay.

And moving on we'll hear from Joe Greff from Bear Stearns.

Good morning, Arne.

Hi, Joe.

Your fee target for '05, the 990 million to 1.01 billion, can you break that out between base, franchise and incentive?

Let's see.

I'll give it to you in this sense.

Base we think ought to be growing in the 12 to 14 percent range, something like that.

So, put those factors on the 435 actual for 2004.

In franchise fees ought to be growing about a turn lower.

Think of it as maybe 10 to 12 percent instead of 12 to 14 and then franchise fees would be probably in the low 20s to the high 20s, year-over-year percentage -- excuse me, incentive fees.

Low 20s to high 20s, year-over-year percentage growth.

Okay, great.

And at the end of the 4th quarter what was the balance of interest bearing loans receivable -- or notes receivable?

As of the end of the 4th quarter, it was about 700, I think.

Let's see here.

Is this with the timeshare notes?

I think it's about, it's 700 and change plus another roughly $300 million of timeshare notes for a total of nearly a billion two.

And of course, we sell the timeshare notes about every other quarter so that portfolio is always turning over.

Okay.

And you mentioned in the press release some additional notes or loan repayments so a year from now that $700 million is something lower, but by what magnitude?

Yeah, let's see I got to make sure I do my math right.

We're at about a billion two, and 300 in change timeshare notes, probably more like 800, 850 let's call it of non-timeshare notes.

Remember, the biggest loan repayment was the Courtyard joint venture which we've announced will have about a $250 million pay off of our mez loan there, that will happen sometime this year.

It's been announced and binding documents have been signed but that has not closed yet.

We anticipate we'll see some other activity in that loan portfolio and absent the extension of significant new loans we ought to see the loan portfolio decline by 3, $400 million over the course of the year.

Great, thank you.

You bet.

If you find that your question has been answered today and you would like to remove yourself from the queue please press the pound key.

Our next question comes from Phil Crow from Raymond James.

Good morning, Arne and Laura.

Good morning.

Couple quick questions.

First of all, how difficult is it these days to invest your excess cash other than the share repurchase program.

Obviously your loan balance is declining.

Are there opportunities out there to invest in?

Yea, we think there are.

There's obviously a huge amount of capital that's looking at deals in the United States, and I think it would be relatively unlikely that we could spend too much in the United States unless there were unique values to us from an asset because of the way we thought we could turn it around.

I think as we look across the globe, Europe continues to be interesting place, and if there are existing assets that we think are dramatically underperforming what they can do with our brands, we can participate in some way, in converting them as a temporary owner even or maybe with a partner that there will be some things that we can do there.

And then we've got a few significant projects that we're looking at at this point.

It's hard to say whether any of them will come to fruition but, for example, as we've talked about before we would like very much to be involved in a significant project, excuse me, in Las Vegas which would be convention hotel, probably a leased casino on the strip.

That likely would be new build.

How much cash we put out this year would be debatable but those projects are obviously very, very expensive and while we are unlikely to do that on our balance sheet alone and unlikely to do it and provide more than a sliver of equity I suspect that those projects are big enough that we could spend a few hundred million dollars ultimately in a project like that.

But, again, barring those kinds of opportunities I think we'll find it more and more likely that this cash is going to go to share repurchase.

Arne, following up on a previous question.

Going back to your 2003 guidance as you look forward to '06, clearly the top line is running at or above the high end of that guidance.

What about the interest -- net interest income on interest expense and timeshare, are those items in danger of slipping or are they running in line with expectations?

I suspect at the moment, timeshare is running consistent with expectations.

We're probably at some risk of having lower interest income than we forecast in that model but I think the offset there is I suspect done quite a bit better in reducing our fully diluted share count and those things hopefully will roughly offset themselves in 2006.

You remember, we have brought our fully diluted share count down from about 270 million shares to about 240 million shares over the last 4 or 5 years.

We had to go back and check those models.

You're referring to what we used at our company sponsored analyst conference in 2003.

Yes.

Looking at the three-year, 2004, '05, '06 time frame.

When the dust settles there and you end up with less interest income but also fewer shares, I think that just shows that we're getting a higher and higher percentage of our business -- of our profits from management and franchise fees and from particularly the 10 recurring timeshare development projects, all of which have significant annuity-like features to them.

Thank you.

You bet.

And moving on our next question is from David Anders from Merrill Lynch.

Great.

Two questions.

First, Arne, could you comment, has the composition of your pipeline changed?

I mean, you said 50 percent of it was full service which was a little higher than I remembered it, number one.

And number two, you actually have where the company ended the 4th quarter as far as the share count?

Obviously we have the weighted average in the press release but do you have the year end?

I don't have a year-end spot and, in fact, in some sense it's -- I'm not sure you really wants a year-end spot because that number is going to be moving constantly with the share price and options exercise so the average fully diluted count is I think is a better number for you to use.

Okay.

And that's about, just under 240 million shares.

Right.

But in our press release, 239.1.

If I could answer your second question, David, the guidance for 2005 rooms had us opening about half the rooms for full service, and you're right, we've got some pretty high profile hotels opening in 2005.

If you look at the pipeline, the pipeline is still about 40 percent full service with about half of those full spurs rooms outside the U.S.

So the pipeline's about the same, it's just that we're opening a few more full service hotels in '05 than is typical to trend.

Okay.

Thanks.

And we'll hear next from David Katz from CIBC.

Hi, guys.

Hi.

Two quick ones.

Most of mine have been asked and answered but what kind of a corporate tax rate should we be looking for at '05?

35.

Okay.

And just quickly, you also mentioned Europe and the opportunity for some of your brands there.

Historically hasn't branding been a little bit less important in Europe than some other countries or is that view changing?

What is a your strategic view on that?

That's worthy of a fairly long conversation and is one that is typically had about Europe.

I think it's fair to say that Europe is significantly less branded than the United States.

I think it's very doubtful that that's because branding is less important and I think, in fact, if you look at hotels that have been added or purchased and converted in the last 10 to 15 years in Europe, you would see that a very high predominance of those hotels have been branded.

And, in fact, the trends towards branding which have to do a lot with economies of scale, reservations systems, rewards programs but also with customer familiarity with the assets, or with brands, excuse me, all of those things will continue to drive hotels that can from a quality perspective be converted to brands that they'll continue to be converted to brands even with significantly lower distribution in Continental Europe, for example, our hotels run RevPAR premiums of 120 percent of their competitive set and that is because of the value of brand in driving the disproportionate number of customers to those hotels and they may not be familiar enough with the markets to pick an unbranded family-owned hotel no matter how nice it is.

Right.

So I think I think the trends towards branding in Europe are strong today and will continue to be very strong going forward.

Is Asia a target market for you going forward?

Asia is a huge growth market.

We've had tremendous success there.

China I think is obviously probably the most dramatic business story of our time in many respects.

We are the largest full service operator of hotels in China.

We've got -- we probably opened 6 or 7 full service hotels in China in the last year.

I think we are around 40 hotels today but great, great pipeline for growth going forward.

The interesting thing about China particularly in many of the Asian markets, there is plenty of capital there for developing new build hotels, plenty of proclivity of that capital towards branding and so the amount of capital that we've used in Asia has been very, very insignificant and we'd expect it to remain so.

Very good, thanks very much.

You bet.

Moving on we'll hear from Will Marks from JMP.

Yes, hi, good morning, Arne.

Good morning, Laura.

A couple quick questions, can you reiterate or sort of repeat, I think you gave three reasons on why the higher RevPAR growth wouldn't lead to higher earnings growth?

Yeah, I think the RevPAR growth is leading to really exciting lodging income.

You know, our forecast for 2005 have lodging operating income up roughly 40 percent over 2004 levels.

And we are extremely proud of that, we think it really proves that the model is working but what we've got going on beneath that line really is a very significant decline in earnings contribution from interest.

If you look at 2004 net interest for us was a benefit of $55 million.

The forecast we've provided you has net interest as an expense of 10 to $20 million.

So that shift by itself is $0.18 to $0.20 of earnings.

And if you focus on nothing else, I would look at that as the primary impact for sort of a dampening of bottom line EPS movement year-over-year.

Okay.

And that basically is just cash taken off the balance sheet on --

Yeah, it's loans being repaid.

Right.

Okay.

And then just can you give a quick update on CBN and the announcement you made and don't want you to expand too much but strategy with that going forward?

Yeah.

CBM, basically we've got a new investor that will buy out Host Marriott and become our joint venture partner in the Courtyard joint venture, this joint venture that own 120 Courtyard hotels which we manage.

They will in addition to buying out host stake infuse another couple $100 million of equity so that when the dust settles they'll hold about 80 percent of the equity in the partnership, and we'll hold about 20 percent of the equity in the partnership.

At the same time, at least a portion of the debt in the partnership will be paid off and refinanced with more attractive debt that's available in the market today.

We will provide a smaller reinvention loan that should max out at about $100 million and with the new equity and that new reinvention loan will complete the reinvention of all of the balance of the Courtyard portfolio and hope that as we see RevPAR and margins grow and the lift from those renovations, we ought to have a pretty interesting joint venture over the next few years.

As part of that, we'll also be repaid the $250 million that we had lent to the partnership not only all the funds that we lent to the partnership but all the accrued interest that's paid to date.

Great.

Thank you, Laura, thank you, Arne.

You bet.

Our next question is from Ben Sun from Adams Harkness Hill.

Good morning.

Arne, I wonder if you could bring us up to date regarding your [inaudible] and in particular the issue with IRS?

Yeah, unfortunately we don't have much new to report.

The IRS has basically received or within the next few days will have received from both their agents and from us all of the factual submissions which it needs to consider the issue whether or not these plans were placed in service.

They'll consider that issue.

We are hopeful that they'll rule reasonably quickly.

But we could still be a number of months away from definitive decision by them.

We remain very, very optimistic that the IRS will ultimately determine as we believe the facts to be that these plants were placed in service and therefore be able to tell you within a few months that the issue is behind us.

Okay.

Thanks.

You bet.

David Richter from ABP Investments has our next question.

Hey guys.

How are you?

Good, just actually a follow-up to two questions ago.

Just on an apples to apples basis versus the guidance you gave in the 3rd quarter.

The way to think about it is just the guidance is coming up by around $0.18 to $0.19, is that the kind of the way to think about it?

It's close.

I think if you look at gains, our gains numbers are going to be down meaningfully from 2004, our G&A performance I think will be better than 2004, those things come close to offsetting themselves.

Okay.

And so there may be a few pennies difference there either way, David, but I think roughly you're talking about sort of high teens, if you will, impact of interest.

Okay.

And just the only other one, does the new guidance assume any kind of return on the proceeds from the loan sales?

No, does not.

Okay.

Great, thanks, guys.

And we have a follow-up question from Will Truelove from UBS.

My follow-up question is about the way you talked about you how people like to compare 2004 relative to 2000 and you also gave a breakdown which is very helpful of how many hotels are earning incentive fees.

I was hoping you could also maybe give us another way of looking at it.

Can you tell us what the house profit margins were for your full service managed hotels in 2004 relative to your house profit margins back in 2000?

How far are we away are we from peak house margins?

We're probably 5 points on average.

It could vary -- it's going to vary a little bit by brand.

And this is something we've talked with you all before about a little bit.

I think we'll go into some more detail when we have our company sponsored analyst conference in May, is it May?

June 1 and2.

Sorry about that.

June 1 and 2, mark it on your calendar but I think we'll spend a little bit more time talking both about what the performance of margins has looked like over time as well as some of what we referred to in our prepared remarks which is how, how house profit margins compare with EBITDA margins which many of our competitors report.

I've got, for example, on domestic Marriott house profits down just under 6 points from 2000 to 2004.

Courtyard as a comparison down just under 6 points as well.

Six points, great, thank you so much.

You bet.

And there are no further questions at this time.

Mr. Sorenson, I'll turn the conference back to you for additional or closing remarks.

Okay.

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

And for the great support you provided us throughout the year, we look forward to another great year in 2005.

Thanks very much.

And that concludes our conference call today.

Thank you all for your participation.