萬豪國際 (MAR) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to this Marriott International first quarter 2005 earnings conference call.

Today's call is being recorded.

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

Mr. Sorenson, please go ahead, sir.

Good morning, everyone.

Welcome to our first quarter 2005 earnings conference call.

Joining me today are Laura Paugh, Senior Vice President, Investor Relations, Donna Blackman, Senior Director, Investor Relations, and Carl Bergquist, 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 are not historical facts and are considered forward-looking statements under Federal securities laws.

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

Forward-looking statements in the press release that we issued earlier this morning, along with my comments today are effective only today, April 21, 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 web site at www.Marriott.Com/investor.

Today we are going to spend some time discussing our strongest first quarter results ever, cover our P&L outlook for the second quarter and the rest of the year, and provide an update on investment opportunities.

For the first quarter, Marriott's lodging operating income increased 34%, driving diluted earnings per share from continuing operations to $0.61, a 30% increase over the prior year.

EPS, again, reached record levels.

Systemwide, comparable worldwide RevPAR increased 8.8% during the quarter, with nearly 7% coming from room rate improvement.

In North America, systemwide comparable RevPAR rose 8.4%.

Through February, our U.S.

RevPAR index measuring comparable hotel market share increased 1.1percentage points across all our U.S. hotels.

Group revenue from comparable domestic full-service hotels increased 7%, with rates up 4% during the quarter.

For groups that booked in the quarter for the quarter, room rates rose roughly 5%.

For groups that are booked in the year for the year, rate growth is nearly 10%.

Given this, we expect group RevPAR to continue to improve, as existing group business continues to burn off and is replaced by new higher rated businesses.

As we noted last quarter, we are seeing strong demand in most markets.

The northeast remains hot, with comparable managed RevPAR up 8.3% during the quarter.

New York is particularly strong, with considerable transient demand and lots of international shoppers.

Following a 5-month renovation, we reopened The View restaurant on top of the New York Marquee to excellent reviews and large crowds.

Japanese school groups began returning to the Big Apple during the quarter, and we are seeing growing Chinese traveler interest in the city.

Our comparable Manhattan area Marriott and Renaissance hotels increased RevPAR 15.3% during the quarter, and increased their RevPAR index over 3 percentage points through February.

We are seeing very little consumer sensitivity to rate.

We remain very bullish on this market.

The Mid-Atlantic market benefited from the presidential inauguration in Washington during the quarter and strong transient demand in the region.

The Courtyard brand benefited from strong government business, driving RevPAR up double-digit rates.

Overall, the region's RevPAR increased nearly 10%.

The Southeast region has been strong for 5 quarters now.

High season in Florida benefited from Americans fleeing the snowy Northeast, as well as large numbers of international travelers.

First-time international visitors to the region came to take advantage of the great entertainment and inexpensive shopping in Orlando, while leisure travelers from Argentina, Brazil and Japan vacationed in Miami, including South Beach.

Of course there is still room for improvement in the Southeast region.

Atlanta is struggling with a lack of city-wide conventions and the continued migration of office workers from the downtown to the midtown area.

In addition, the Southeast region continues to experience the lingering impact of last year's hurricanes.

Third quarter group bookings were soft in the region -- will be soft in the region as meeting planners are taking a wait-and-see attitude towards this summer's weather.

On the other hand, with some of the oldest select service hotels in the Marriott system, the Southeast region is reaping the benefit of reinventions and renovations.

Courtyards in the region reported RevPAR increases of 14%, while Residence Inn's Rev PAR soared 19% during the quarter.

In all, we have reinvented over 90 Courtyard hotels nationwide, with 80 properties complete for at least four months..

For these stabilized hotels, RevPAR index is up a whopping 7 percentage points to 136.

And all the hotels show improvement in customer satisfaction and intent to return.

You may recall that last year the South Central region reported managed hotels RevPAR growth of only 2%.

This quarter, the region gets the most improved award, as they kicked in with a 9% RevPAR increase.

While Houston suffered through property renovations and a tough comp to last year's Super Bowl, New Orleans had a strong quarter, with RevPAR up 24% and RevPAR index showing an impressive advance against competitors.

Increased citywides and in-house groups contributed to the excellent performance.

San Antonio has only just begun to push room rates, and our hotels in that city are looking at good group business the books for the balance of the year.

Denver is also on an upswing, with strong transient demand.

Hopefully the Midwest region will get the most improved moniker next quarter.

For the time being, the Midwest RevPAR increased only 2.2% during the quarter, with improvement primarily in their select service and extended stay hotels.

Chicago downtown and Kansas City airport suffered through a rooms redo, but with the renovations out of the way, the region is looking forward to a better second quarter and a much better second half.

Our Western markets also experienced less robust demand, as our three largest hotels in the region, Anaheim, San Diego and San Francisco's Musconi Center had fewer large groups than the year-ago quarter.

In addition, four hotels in the region were under renovation.

Despite this, RevPAR in the market still increased 5.8% during the quarter.

The Renaissance brand deserves some special note.

With only 68 hotels, the nationwide Renaissance comparable system-wide hotel RevPAR growth exceeded 10% during the quarter.

Group business at our managed hotels increased 9%, alone.

Properties that did extremely well during the quarter included the Esmeralda in Indian Wells California, the Mayflower in Washington and the Renaissance Vannoy in St. Petersburg, Florida.

RevPAR index for the Renaissance brand reached 104 last year.

Year-to-date through February, Renaissance's RevPar index is running up another 300 basis points.

For hotels that have been renovated and stabilized over the past few years, RevPAR index stands at 117.

We are very encouraged by these results.

Across all our brands, our hotel results in Asia remain very strong, with China leading the region in unit growth and RevPAR improvement.

Ten years ago, we had only one hotel on the entire Asian continent.

Today we have 31 hotels in China, alone.

During the first quarter our hotels in China reported over 20 % RevPAR growth on a constant dollar basis.

You may be surprised domestic Chinese travelers remain the largest source market for 4- and 5-star hotels in that country.

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

Today we have a meaningful market share in China with a growing base of Marriott rewards players.

As Chinese travelers venture offshore, we believe we will get more than our fair share of this business too.

Our hotels in Mexico increased RevPAR 25% on a constant dollar basis, while RevPAR among Caribbean destinations increased 11%.

Over the last five years we opened 11 resorts in Mexico and the Caribbean.

And today we have another nine hotels under development.

In the Middle East, Dubai remains a hot market with plenty of leisure demand , while Egypt is rebounding with strong European and Russian tourist demand.

We currently have four hotels in Dubai and another two properties under development.

Despite slower growing economies, our hotels in Europe turned in quite respectable RevPAR improvement during the quarter.

On a constant dollar basis , Germany increased RevPAR over 6%, The Netherlands increased 7%, and hotels in Eastern Europe increased RevPAR nearly 9%.

Earlier this month we announced our purchase of our newest hotel in Paris, the Hotel Paris Vendome, an elegant 97-room property now flying the Renaissance flag.

It is within walking distance of the Louvre and the opera.

It is our 200th hotel in Europe, Middle East and Africa.

And . its introductory pricing started at 460 euros a night.

The Hotel Place Van Dome is an excellent example of our selective and temporary investment in attractive real estate projects.

This transaction provides a great addition to the Renaissance brand and also adds to our distribution in one of the most attractive tourist destinations of the world.

We expect to sell the hotel, subject to a long-term management contract, in the near term.

Now, let's talk about margins.

We have seen dramatic top-line growth from our managed hotels,, most of it coming from room rates.

As a result, operating margins are improving.

Yet operating costs continue to rise, especially in North America.

The most significant cost in our hotels is labor, making up about 1/2 of the operating cost of a full-service hotel.

During the quarter, hourly wages increased about 3%, healthcare expense rose 7 to 8%, and the cost of state unemployment insurance increased about 5%.

To be sure, our associates are doing a terrific job on productivity.

First quarter 2005 man-hours per occupied room were 12% lower than in the year 2000.

But while we continue to look for opportunities to improve productivity, the clearly the easiest gains in productivity already have been captured.

One cost area that was challenging during the quarter was heat, light and power.

In the Washington, D.C. market, deregulation of the local electric utility allowed prices to rise 55 to 60%, while the average increase in the rest of the U.S. was approximately 10% during the quarter.

Outside the U.S., energy costs rose 15%.

Energy expense makes up about 4% of sales in the typical full-service hotel, so a 10% increase in energy prices moves our house profit margin by roughly 4/10 of a point, all other things being equal.

Despite the impact of cost increases, northern American house profit per available room rose 11%.

You may recall that 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 managed hotel results comparable to our competitors' owned hotels, across all our brands in North America property level EBITDA margins increased 160 basis points during the quarter, compared to our 100 basis point house profit margin increase.

International hotel incentive fees are more sensitive to changes in house profit margins than domestic hotels, since international hotels frequently have no owner's priority.

Outside the U.S., house profit per available room rose 18% during the quarter, and house profit margins improved 230 basis points.

We expect to discuss margins in much greater detail at our security analyst meeting in early June.

With improvements in house profit, incentive management fees increased dramatically during the quarter primarily from markets such as Phoenix, Miami and Hong Kong.

U.S. incentive fees, alone, increased 52% during the quarter.

We recorded approximately $8 million in incentive fees that were related to prior periods but received and recognized in the first quarter.

Approximately 28% of our managed hotels booked incentive fees in the first quarter of 2005, compared to only 20% of our hotels in the first quarter of 2004.

The increase was largely due to a portfolio of Courtyard hotels that paid incentive fees in the 2005 quarter but not in the prior year.

For the full year 2005, we expect, approximately 35% of our managed properties will may incentive fees.

Timeshare contract sales, including sales made by our timeshare joint venture projects, declined 5% during the first quarter, reflecting lower contract sales from our Ritz Carlton Club business.

Customer interest in our Ritz Carlton products has been so high over the past 12 months that first quarter inventory levels were lower than last year.

Projects in Jupiter, Florida, St. Thomas and Bachelor Gulch, Colorado are at or nearing sell-out.

We expect contract sales to turn up in the third and fourth quarter when we add inventory at the Carlton St. Thomas and roll out a new Ritz Carlton project in San Francisco.

Timeshare integral sales and services revenue increased 9% in the first quarter, reflecting strong financially reportable development revenue growth in Hawaii, South Carolina, and Aruba.

RevPAR of our rental units increased 13%.

We sold proportionately more Marriott timeshare and fewer fractional projects.

Margins improved due to the favorable mix of projects sold.

Total G&A and other expenses declined 6%, or $8 million, during the quarter largely due to lower litigation expense.

We expect favorable litigation comparisons through the second quarter.

Revenues from owned, leased corporate housing and other improved 7% during the quarter, while operating income declined 8%.

Our Shellbird Hotel in Dublin, Ireland temporarily closed for renovation during the quarter.

We agreed to pay the nearly $6 million in severance and costs associated with the closing during the first quarter, but will be reimbursed the entire $6 million by the owner over the 18-month renovation period.

This quarter the gain line is an expense, largely due to $9 million of net earn-out payments we made related to the synthetic fuel business, partially offset by the gain on sale of three land parcels for roughly $4 million.

Last year the synthetic fuel earn-out payments were reflect in our synthetic fuel equity loss line.

Other equity joint ventures generated a $5 million loss during the quarter, compared to a $2 million in the year-ago quarter.

The difference is largely due to the sale of our Ramada Two Flags joint venture in the 2004 second quarter.

That joint venture contributed $6 million in joint venture earnings in the year-ago quarter.

Recently we announced two exciting exciting transactions.

On March 14 we announced the formation of a joint venture with Whitbred PLC, the current owner and operator of 46 Marriott branded hotels, with approximately 8,000 rooms in the UK.

Under the terms of the joint venture, which we we expect to close in early May, Marriott will take over management of the hotels and will continue to operate the hotels after their on sale to third parties.

Our total investment in the venture is expected to total approximately 90 million pounds, which we expect to get back over the last two years, as the venture sells the hotel to long-term investors.

This is an example of using our balance sheet to strategically grow our management business, while structuring the investment to provide for recycling the invested cash over the near term.

On March 30th, Seraphim Realty Advisers, representing an institutional investor, completed their acquisition of a 75% interest in the Courtyard joint venture.

Not only did Seraphim provide approximately $270 million to us in the form of a loan repayment, it recapitalized the partnership, resulting in low carrying costs.

Together with a new $129 million Marriott loan, the joint venture will accelerate the completion of the reinvention of this portfolio.

As I mentioned, the results of the reinventions to date have been very impressive.

During the quarter we opened 4,500 new rooms around the world.

At quarter end our worldwide pipeline of rooms yet to open totaled about 350 hotels and more that 55,000 rooms.

Looking at our current pipeline, over 40% of the rooms are high value, full-service rooms, and for the first time over half of those are outside the U.S. 55% of our pipeline is already under construction or is pending conversion from other brands.

Our business model continues to generate strong cash flow, giving us the ability to invest in our business and to continue to buy back shares.

In the first quarter we repurchased 5.1 million shares, and since quarter end we have repurchased another 1.5 million shares.

Now, let's turn to our outlook for 2005.

Before we layout the details of our guidance for the balance of the year, let me take a moment to characterize the changes from the guidance we offered you a quarter ago.

With respect to the full year numbers, our new guidance bakes into our forecast the roughly $40 million or $0.11 a share impact of the bedding program.

It increases our total fees by roughly $25 million, about half of which came in the first quarter, and the balance is expected in quarters two through four.

It increases each of our timeshare and owned leased lines in the P&L by roughly $0.005 per share per quarter.

There is about a nickel or so of upside in interest gains and joint venture earnings net, mostly driven by hotel transactions that will benefit us upon closing.

Our new RevPAR guidance of 8 to 10% is 1 point higher than what we told you to expect a quarter ago, and margin guidance is unchanged.

As such, we would characterize our guidance as a modest increase in our core earnings expectations, which previously had assumed tremendous growth versus last year.

With strengthening group and transient business we have increased our forecast systemwide North American RevPAR growth to 8 to 10% for full year 2005, 9 to 11% in the second quarter, and 7 to 9% in the third and fourth quarters.

Domestic house profit margins are expected to increase 1.5 to 2percentage points for the full year 2005.

We 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 25,000 to 30,000 new rooms in 2005.

We also expect 4,000 rooms to leave the system during the year, mostly first generation Fairfield Inns.

Nearly half of our room additions are expected to be high value full-service rooms.

With RevPAR growth and unit expansions in 2005, we expect combined base management and franchise fees should increase at a low double-digit rate.

Incentive management fees are expected to total 200 million to 210 million for the full year.

Timeshare interval shares and sales revenue, net of direct expenses, is expected to total 255 to 260 million for the full year 2005, reflecting strong financially reportable revenue.

We've talked a great deal about our product initiatives over the past couple years, including our Courtyard reinventions, Resident's Inn reinventions and most recently our owner incentives for new bedding.

While new bedding will be a brand standard by year end 2005, to accelerate its rollout, Marriott will provide a 20% incentive for owners who purchase bedding by June 2005. 31 hotels have already installed the new bedding.

Based on customer testing, we believe this initiative will provide upside to RevPAR, guest satisfaction and hotel profitability.

For the full year we expect the one-time bedding incentives to cost us roughly $40 million, pretax, mostly in the second quarter.

Unlike last quarter, this one-time cost is included in our operating income and EPS guidance.

Overall we expect lodge and operating income could total about 79 million to 820 million in 2005, compared to 575 million in 2004, a roughly 40% year-over-year growth rate.

With the refinancing of debt on Grand Lakes and the completed recapitalization of the Courtyard joint venture, our interest income we continue to expect to climb 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 have retained meaningful equity participation we will benefit from both the lower cost of debt and more rapid rollout of renovations.

We are very excited about the prospects to reinvest this cash in other attractive opportunities, including share repurchases.

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

For the full year, with few lodging assets available to sell, we don't expect gains to be as meaningful as they have been in the last few years, and they should perhaps total approximately $85 million, excluding the synthetic fuel business.

The other result of our successful cash flow recycling is much lower interest income.

All and all, we expect a combination of interest income, interest expense an loan loss provision to total a 20 to $30 million expense in 2005, compared to an income item of 55 million in 2004.

Given these assumptions and those outlined in the press release, we believe earnings per share for the full 2005 year will likely total between $2.80 and $2.90 per share.

This estimate includes the impact of our Whitbred transaction, the Seraphim transaction, roughly 40 million of pretax owner incentives on bedding, and $0.42 to $0.46 coming from synthetic fuel.

In the second quarter 2005 we respect strong RevPAR to continue to drive management and franchise fees, with total fees expect to be 245 to $255 million.

Timeshare interval sales and service revenue, net of direct expenses, is expected to total approximately 60 to 65 million, reflecting strong financially reportable revenue.

On the G&A line we should see the impact of the bedding incentives, offset somewhat by lower litigation expense.

Lodging operating income should total between 165 and 175 million.

With several loans expected to repay -- be repaid in the next few months, we expect substantially lower interest income in the second quarter.

On the other hand, we also expect loan repayments and our timeshare mortgage note sale to generate approximately $50 million in gains during the quarter.

In total, we expect earnings per share should increase to $0.74 to $0.76, with approximately $0.13 coming from synthetic fuel.

For the third quarter we expect earnings per share should total $0.57 to $0.61, with approximately $0.11 to $0.13 cents coming from synthetic fuel.

And for the fourth quarter, we expect earnings per share should increase to $0.90 to $0.94, with approximately $0.11 to $0.13 cents coming from synthetic fuel.

While we expect our synthetic fuel business will be discontinued when the program expires at the end of 2007, today it remains a meaningful source of cash flow for the company.

Recent increases in oil prices have raised questions regarding the potential phase-out of synthetic fuel credit in the event oil prices continue to rise.

A little background on this issue.

Synthetic fuel credits were established by Congress in 1980 to encourage the development of alternative domestic energy sources.

At that time Congress deemed that the incentives provided by Section 29 credits would not be necessary if the price of oil increased beyond certain thresholds, as prices would then provide a natural market for these alternative fuels.

The oil price defined in Section 29 is the average annual wellhead price per barrel of domestic crude oil.

This somewhat obscure price measure is referred to in the law as the reference price.

Fortunately for all of us, the Secretary of the Treasury publishes the prior year's reference price by April 1st of each year.

But since the "Wall Street Journal" doesn't track the Section 29 reference price, most of us follow the more readily available NYMEX futures contract for light sweet crude oil, as we attempt to estimate the average annual reference price for the prior year -- for the current year, excuse me.

Over the past few years the reference price has been $3 to $5per barrel lower than the average NYMEX measure.

For example, in 2004 the average price of the benchmark NYMEX futures contract for light sweet crude was roughly 41.50 per barrel.

The reference price published by the Secretary of the Treasury was approximately $37 per barrel.

And the 2004 phase-out range, also published by the Secretary of the Treasury and inflation adjusted, ranged from roughly $ 51 to $65 per barrel.

Since the $37 reference price was lower than the phrase-out range, we were able to retain all the synthetic fuel tax credits that we produced and sold in 2004.

Needless to say, we cannot predict with any accuracy the future price of a barrel of oil, especially since domestic oil prices are highly volatile today.

Still, if the reference price of a barrel of oil exceeds the phase-out threshold, the tax credits generated by our synthetic fuel facilities could be reduced or conceivably eliminated.

Assuming that oil prices remain below the phase-out range in 2005, we continue to expect roughly $0.42 to $0.46 of after-tax earning per share from that investment.

With regard to the IRS's challenge to the placed-in-service date of three of our four synthetic fuel facilities, that matter has not yet been resolved, although we continue to be confident of the outcome.

As a result, our partner in our synthetic fuel venture has the right until April 30, 2005 to return its ownership interest in those facilities to us, effective as of April 1, 2005.

Our partner has not yet exercised that right.

In the event our partner exercises this right, we will have the flexibility to reduce production and/or sell that interest to another party, which could impact our EPS forecast by a few pennies.

We've had a pretty active quarter on the investment front with the addition of the 90 million pounds in the Whitbred joint venture, as well as up to $130 million in a new Courtyard reinvention loan and $100 million we expect to invest in a Las Vegas timeshare project.

We have taken our 2005 capital spending plan to $1 billion.

We continue to expect share repurchases in 2005 as well.

Given the company's strong cash flow, we continue to look for attractive investments that will enhance our brand portfolio, consistent with our cash recycling strategy.

Our 2005 security analyst meeting is scheduled for June 1st and 2nd in South Beach in Miami.

We expect to discuss our capital investments, recent product initiatives, sales and marketing opportunities, unit growth, and RevPAR and margin upside.

We encourage you to register for this event.

With continued unit growth, steady margin improvement and record RevPAR increases, the first quarter reminds us of the words of that great philosopher, Mae West, who said too much of a good thing is one wonderful.

Rufus, you can open the line for questions.

Thank you, sir.

Ladies and gentlemen, our question and answer session will be conducted electronically. [ OPERATOR INSTRUCTIONS ] For our first question we go to Jay Cogan with Banc of America Securities.

Thanks a lot and good morning Arnie and Laurie and whoever else is there.

Thank you.

I have a question just to talk about the RevPAR environment.

You have obviously talked a lot about the drivers in your remarks.

Is there anything else you want to add in regards to just what gives you the confidence to take it up at this point, given the Street's general concerns about the economy and interest rates and rising fuel prices?

Anything else on that front?

We're obviously watching the same news that you are and seeing the skittishness in the market.

We are modestly better in the first quarter than we anticipated, obviously the statistics show great RevPAR growth and great rate growth.

We, in listening to the field across the country, there is no indication that we're picking up from our system of any weakness.

In fact, the second quarter has started very strong for us, I think over the last three weeks RevPAR in the U.S.

Is up roughly 20% in our system.

There is some funkiness about the spring holiday, Easter holiday in that, but there is great strong growth and we just don't see any reason to believe that weakness is going to show up real soon.

Having said that, to state the obvious, if the skittishness in the market ultimately proves to be well-founded and there's a significant slowing of the economy, it will ultimately have effect in demand for lodging.

Maybe as a follow-on to that, might be a little bit early, but over the next couple months I'm sure some of us are going to start thinking about 2006.

Understanding your visibility but also just trying to better understanding what you are seeing from a group booking pace or any long-term future bookings, can you gives us a sense as to how you think next year might shape up?

We are not going to give you any forecasts yet, but I'll answer is maybe indirectly this way.

I think , singularly, the best news in the first quarter was the increase in group rate for business booked during the quarter, both for business showing up during the quarter, which was relatively lower rate growth but also for business booked in the first quarter to show up during the year, which had rate growth of plus 9%.

And that's just an excellent development.

I think it confirms what we have been anticipating, which is group tends to lag transient a bit.

But as we see that group demand and good, strong dynamics in rate negotiations in that business, I think that speaks well for opportunities for us, particularly with respect to the big box Marriott hotels as we head into next year

Thanks a lot.

We go next to Joe Greff with Bear Stearns.

Good to Joe Greff with Bear Stearns.

Good morning, everyone.

Arne, you mentioned before that there was very little customer sensitivity to room rate increases.

Were you talking about just the Northeast in New York city or can you just talk about what you are seeing with respect to that sensitivity or at least elasticity across North America?

We were really -- the comments really were focused on New York, although as you can tell from the statistic as a whole, when you look at average across the United States the way they roll up for us, there is great rate growth there.

That is not all like-for-like rate growth.

I wish I could give you a percentage.

I can't today.

But clearly we are seeing a favorable mix in business towards transient, reduction of deep discounted business, probably a shift away from some of the weaker rated association groups toward more corporate groups.

All of that is helping to drive that average rate increase as well.

But even in like-for-like, we're seeing in many more markets than not, good firmness in rate and ability to raise rates.

Great.

And then can you provide balance sheet items, cash and debt, at the end of the quarter?

Yes, our net debt is up about $400 million from year end, 393 I think is the number I am working with internally.

Debt levels at about 1.3 billion are the same, and net cash has gone from 700 and change, almost 800 and change to 300 and change.

And really think about that as being just about entirely driven by the share repurchase program in the quarter.

Thank you, guys.

You bet.

By the way, the numbers I just gave you are obviously as of quarter end.

The Courtyard transaction, including the Mez [ph] loan payoff immediately follows that and will be in our second quarter numbers.

For our next question, we go to Jeff Donnelly with Wachovia Securities.

Good morning.

Arne, I don't know if you have this at your hand, but you mentioned that bookings for the year in the year were up 10%.

Do you have data on what bookings are in this year for 2006 in terms of the rate increase you are seeing?

I do not.

But let me see if I can -- I am not sure we have that in the room , actually.

If we can find it, I will throw it out in a few minutes.

A few other quick questions.

One is, do the 25,000 to 30,000 new rooms that you expect to come online in '05 include the 8,000 rooms from Whitbred?

No, those are not new rooms to the system.

OK, I just want to be clear.

And then in Q1 '05, your IMF revenue was about $10 million more than you had estimated but I saw that about $8 million of it was from a prior period.

For comparability, can you tell us how much of that was in Q1 '04 that came from a prior period?

Nothing like that.

In fact, as far as I know there would have been an immaterial amount, if any, in the first quarter of '04.

By the way, I don't have the statistic quite the way you have asked it.

The rate information I have got for group business in 2006 is up sort of mid-single digits, low to mid- single digits, 3 to 4% but that includes not just business put on the books in 2005 in the first quarter, but includes essentially all business on the books.

So that's not a very helpful statistic.

Clearly, it means the business we are putting on the books is at that rate growth , if not significantly higher.

Right.

Much of the rate improvement you are going to see on the group business is just that.

It is going to be this old business burning off and replaced with new business at much higher rates.

So over time, these big convention hotels are going to see accelerating better performance.

I guess one last question on that.

You mentioned in your comments that Atlanta was having difficulties in the group business side, do you believe that Atlanta could effectively emerge as maybe the next New Orleans or Chicago we saw in 2004?

I don't think we would predict that, no.

Okay.

Thank you, guys.

We go next to Bill Crow with Raymond James.

Good morning, congratulations.

Nice quarter.

Thank you.

We are all watching the consumer here, and there's clearly been some shift out of consumer cyclical stocks.

Is the decline in sales at timeshare, which you know you talked about the inventory, lack of inventory and sell-through last year, any indication that that's a weakening customer or you anticipate that strengthening as the year goes on?

There's no relationship between the contract sales figures and consumer sentiment.

In fact what we are picking up in the resorts that have got inventory is just tremendous demand.

We mention Aruba and Hawaii as a couple of markets where it is very strong.

Las Vegas is selling extremely well.

There is no really no indication from lodging or the timeshare side yet that there is any squeamishness that's entered into demand for our products.

I know you don't want to give any details on '06 but would you anticipate, we would looking back historically, a pick up in the pace of margin recovery next year?

I don't think I've got an answer for that this morning.

I think if you break it down into pieces, we should continue to see wages grow at about the rate they are growing at this year.

So we'll have -- we'll need some RevPAR to overcome that.

I don't know what we would forecast for health, medical insurance issues for next year, which obviously we need to know in order to come up with a margin expectation, and similarly, heat, light, and power.

If you get really rosey and think heat, light, and power is about as expensive as it's going to get and maybe we see some soft ending that will help meaningfully margins next year.

Great.

Thank you.

Without those sorts of assumption i think it would be a little hazardous to come up with any margin forecast for next year.

Thank you.

You bet.

As a reminder, ladies and gentlemen that is star one to ask a question.

We go next to David Anders with Merrill Lynch.

Arne, I just missed the percentage of your hotels generating incentive fees for the quarter and the prior quarter.

And if you happen to have the prior quarter handy, that would be great.

What was it, it was 28 versus 20 last year.

And our guidance for the full year is 35%.

Obviously there is seasonality in each quarter that can impact that number.

Did you have the fourth quarter there, though?

I believe it was 31%.

We think it was 31% of the fourth quarter.

Again, the seasonality will impact it and you could end up with a higher number for the full year than what you experience in any individual quarter.

The better experience is the 28 Q1 versus 20 Q1 last year.

We go next to William Truelove with UBS

Hey guys, very good quarter.

In terms of the $8 million of incentive fees recognized in the first quarter but earned in prior periods, can you sort of give color of how that happens and if we should expect something like that to continue?

Go to your second question first.

I would not expect that kind of prior period incentive fee contribution in future quarters.

But essentially what happens there is we've got, as we talked about before, the incentive fee formula is probably the least standard of our management fees there.

They are quite negotiated and depending on the financial structure of the deals when they were put in place, there could be significantly different formulas.

Some of the formulas have essentially no owners priority and have the manager, Marriott, earning incentive fees from, you know, either the first dollar of profit or from a -- nearly the first dollar of the profit, but not being paid those fees unless there is sufficient cash flow to meet that sort of debt service threshold or something else of the sort.

So, what we are really talking about is in prior years, the owner may accrue the liability to us because they've got that obligation to pay us incentive fees.

We don't recognize it unless we receive it in cash, because we are really never certain if that hotel is going to exceed the deferral thresholds.

But if and when they get to the point where they exceed those thresholds, we get those fees that were paid in the past.

That is a piece of what happened in the quarter.

I think a piece also what happened in the quarter, at least with respect to one hotel, is the hotel changed hands.

And when the hotel changed hands it became obligatory for the selling owner to clean out that deferred incentive fee and so they paid us back the balance.

Thank you for that explanation.

That's clear.

One last thing then, i terms of your 2005 guidance, trying to do a little back-of- the envelope free cash flow analysis.

I mean if you do 290 in EPS, that's includes the 40 million, so add 240 million shares, that's roughly $700 million.

You throw on the depreciation of 200 million roughly, you get about 900 million.

Then you have dispositions of about 400 million, bringing you total cash flow of about 1.3 billion for the year.

You are saying you are going to spend $1 billion in investments, giving you free cash flow of roughly 300 million.

Is that roughly accurate?

Is that how you look at free cash flow for 2005?

You are not far off.

You are not far off.

The --

I have what, cash taxes of maybe like 70 million or something like that?

Yeah, cash taxes obviously shouldn't be too high.

You are in the ball park.

I mean, another way of thinking about that is buying $300 or $400 million in stock based upon our present assumptions about investment activity should leaveus with the same net debt level that we had at year end, which was just $500 to $600 million.

I think it gets us to about the same place.

Thank you so much.

Good quarter.

As a final reminder, ladies and gentlemen, that is star one to ask a question.

Again, if you are on a speakerphone, please make sure that your mute button is disengaged so that your signal can reach our equipment.

That is star one to ask a question.

We go next to Steve Kent with Goldman Sachs.

Good morning.

Just two quick questions.

One, I guess the full service Marriott RevPAR of 6.1%, if you could just give us a little bit of detail on that.

I know you mentioned some of the product could come in and out.

But I still thought that was a little bit lighter than the broader trends and, given some of the strength you are seeing.

And so i just wanted to know if there was a little bit more color on that.

Also, on the 35% of your new rooms were conversions, where do you think you are taking share from or are you just getting smaller chains or independents or do you think there is something more significant there from one of your major competitors?

Let's see.

Let's take the second question first.

The conversions are coming from a broad number of different sources, and we are not going to identify a single brand that contributes the most, in part because there is no one that tributes a huge share of that.

It wouldn't surprise you to see.

I think as you looked at the prior brands, that it tends to be the best hotels from the weaker brands that have the most upside by converting to the stronger brand.

That's where we are getting most of it.

For obvious reasons, we are not going to publicly finger necessarily who we think the weaker brands are and who aren't, but it is broadly disbursed.

In terms of the Marriott brand itself, with RevPAR up 6.1, I think managed in the first quarter, we look very carefully at the Smith travel data in terms of RevPAR index, and we are doing just fine on that score.

As we look at the details of it, it tells us that basically it is the geographic mix and the preponderance of big group hotels which makes that number a bit lower than some of our other brands, which are obviously more dependent on transient travel.

We go next to Harry Curtis with J.P. Morgan.

A quick question on expenses.

You gave us a sense of where your costs are going up.

Are there any line items where you are having success cutting your costs?

And the follow up is, in the second quarter you've guided towards G&A up 10%, is that -- it seems conservative, given maybe the trends in the last several quarters.

Let's see, the -- I wdon't accept the conservative characterization of G&A in Q2.

We are seeing -- you are talking about Marriott's G&A in this instance, right?

Correct.

We have obviously got the bedding coming through in that, which is a significant expense.

We've got some benefit in the second quarter because we'll spend much less on lawyers in the quarter than we spent last year when we were basically in one trial and I think heavily involved in preparing for another.

In terms of hotel level cost areas, there are a couple of areas that are better.

I think the -- we mentioned labor productivity versus a few years ago, getting a lot of benefit from that.

Other than medical benefits, medical insurance I think other forms of insurance are starting to come down.

Our property program is sort of a mid-year calendar and so we'll get more bet fit from that.

Obviously for most hotels that's not a huge portion of their expense.

Our procurement has gotten better in terms of compliance with heavily negotiated supply contracts that I think are reducing costs, although some categories of product prices are being increased.

The growth in Marriott.com reservation, which we talked about, of surplus of 40% in the quarter continues to be also another area where I think we are seeing cost benefit.

Those would be the ones I'd mention.

With respect to the Marriott.com, are you reduced head count in some of your call centers?

Sure.

Yeah.

Absolutely.

Obviously, total volume is up huge.

What we've done, I think we have consolidated a couple centers, telecom technology gets better and better.

So I think the efficiencies are tremendous in terms of being able to move the call to the one person almost globally who happens at that second to be free to answer the call.

But increasingly as we see reservations move to Marriott.com, it will displace higher cost business channels, whether that be our reservation centers or calls to the hotels or other sources, travel agents and other Websites and the like.

Thank you.

You bet.

For our next question, we go to Mike McCarthy with the Bank of Nova Scotia.

Good morning, Arne.

Do you foresee a continued growth of the Marriott timeshare product and Ritz Carlton fractional ownership product over the next few years in the U.S and abroad?

Yes.

Absolutely.

It is a broadly desired product today.

Where do you think the onus is going to be, on the Marriott product or Ritz Carlton?

I think it will be both.

I think Ritz Carlton, we talked about this a little before, but I think the Ritz Carlton product you should think of as being a variant of the second home phenomena or trends that are underway in the market.

Buyers of the Ritz Carlton fractional are going to be buying four to 12 weeks worth of usage.

They view it as being something as an alternative of owning a second home or third home.

You can see the wealth demographics aging demongraphs and what is happening in the housing industry.

And I think we ought to continue to benefit from that as a very attractive alternative to it.

Timeshare remains more of a vacation alternative.

You ought to think about the demographics of consumer demand for travel as being the reference point for that business.

Both of them, I think, will gross meaningfully.

I think demand will remain strong.

I think the locations will continue to be beach and desert and occasional ski.

Thank you very much.

Yep.

And 2ith a follow-up question, we return to David Anders with Merrill Lynch.

Arne, could you give us a little more color just on the growth progression?

Looks like the third quarter, and maybe it's just something last year, I can't recall.

Third third quarter earnings growth not quite as robust as the fourth quarter.

It looks like you are looking for a big Q4.

Can you just help us understand that?

I am sure that's something if the third quarter of last year comparability.

There maybe a little seasonality in there because the third quarter tends to be the lowest time.

But of course, the third quarter was the same season last year as it is this year.

If you think about the seasonality in the third quarter, given that much of our upside we have been seeing through incentive fees, you don't earn that much in incentive fees in the third quarter anyway.

So whatever upside you are going to get is not going to have as meaningful an impact for the full year.

Okay.

I am trying to remember what there was in the third quarter last year.

I apologize I don't have it on the top of my head.

I don't see anything in the income statement last year but there could be something buried.

That's fine.

If you want to give us a call, we might be able to - we can go back and look at the third quarter disclosures.

Thank you, bye.

With a follow-up question, we return to Joe Greff with Bear Stearns.

Hey guys, It essentially follows onto Dave's question.

Gains for the year, can you talk about the seasonality of that?

I am looking at the schedule I have in front of me.

Gains in interest are going to be the biggest drivers of Q3.

And obviously, that's something we've talked about, particularly with respect to interest.

The interest numbers in Q1 really were not that impacted by the trends we are seeing out there because the biggest Courtyard loan, obviously, which is a low double-digit interest rate for us, was paid off after the first quarter ended.

When you look at year-over-year comparisons, for example, last year we had in the third quarter, net interest was a positive 10 million bucks.

And interest will be an expense in this year's third quarter.

Similarly, gains will be down significantly in the third quarter versus where they were last year.

You have it to 15 million in gains for the second quarter, just third quarter and fourth quarter?

Third quarter and fourth quarter we would say gains would be in the-- roughly $5 million each quarter.

Great.

That's it.

Thank you.

You bet.

If I could add, the gains on the timeshare business where we sell our mortgage notes will typically hit in Q2 and Q4.

Yeah, the 5 million I just gave you does not include either the timeshare impact from the fourth quarter from tax-shared note sales, nor any impact from synthetic fuels.

With that, ladies and gentlemen, we have no further questions on our roster at this time.

Therefore, Mr. Sorenson, I will turn the conference back to you for any closing remarks.

Okay thank you all very much for your attention.

We appreciate your interest and your travel.

We look forward to welcoming you in all of our hotels.

Thanks.

Bye.

Ladies and gentlemen this does conclude today's Marriott International first quarter 2005 earnings conference call.

We do appreciate your participation and you may disconnect at this time.