萬豪國際 (MAR) 2005 Q3 法說會逐字稿

Welcome to this Marriott International third 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.

Please go ahead, sir.

Thank you.

Good morning, everyone.

Welcome to our third quarter 2005 earnings conference call.

Joining me today are 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 our comments today are not historical facts and are considered forward-looking statements under federal securities laws.

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

Forward-looking statements in the press release that we issued earlier this morning, along with our comments today are effective only today October 6, 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.

First, let me say that despite considerable operating challenges from the Gulf Coast our third quarter results were fantastic.

Worldwide, systemwide REVPAR for our fiscal quarter increased 9%.

Worldwide house profit margins improved 1.9 percentage points and lodging operating income increased 30%.

Diluted earnings per share from continuing operations reached record levels, increasing 18% to $0.65.

Excluding the impact of a $0.05 charge for an aircraft leverage lease, EPS totaled $0.70, up 27% from last year.

Before I go into detail about the quarter, though, let me say a few words about the hurricanes.

The tragedy in New Orleans and the Gulf Coast just five weeks ago demonstrated Charles Dickens paradox that we can experience simultaneously the best of times and the worst of times.

Property damage was enormous and the human suffering immeasurable, but at the same time we saw an unprecedented outpouring of generosity and graciousness as Americans opened their homes and checkbooks, and we saw a determination that New Orleans and the Gulf Coast will overcome this terrible event.

Marriott is the largest operator in New Orleans with 16 hotels including two Ritz-Carltons, two Renaissance hotels, and three Marriotts. 12 hotels are already opened or about to open and another two should be open by first quarter 2006.

We are aggressively working with planners who had meetings scheduled at New Orleans area hotels for 2005 and 2006.

Group business totaling nearly $13 million in revenue has already been relocated in other hotels in our system.

Major markets like Philadelphia, Washington, Orlando, Atlanta, and Chicago have picked up business, but smaller markets are also pitching in including Detroit, St. Louis, Kansas City, and San Jose.

In the third quarter, we estimate the P&L impact from the hurricanes was about $1 million in loss management fee income and about $1 million for a donation we made to hurricane relief.

Our fourth quarter results also are likely to be modestly impaired by lower fees in New Orleans.

Business interruption insurance should cover foregone profits, although typically such payments can take quite a while to be reflected in the P&L.

In the meantime our associates in New Orleans are serving those who are serving others.

Open hotels are filled with emergency response and reconstruction personnel as well as our own associates.

We are working closely with the Convention and Tourism Bureau authorities and other leaders of the industry to do everything we can to bring this market back as quickly as possible.

In virtually every other market in the U.S. and around the world demand was strong during the quarter.

Leisure demand, business demand, and group demand all showed vibrancy and strength.

In contrast, U.S. lodging supply growth remains very modest, and with the rebuilding of the Gulf Coast just getting underway, there are significant questions about costs for new hotel construction nationwide this is likely to create an incremental delay in new hotel supply.

Interestingly, in several ways our strong REVPAR stats for the third quarter actually understate the strength of our results.

First, the large number of property renovations and maturing new hotels continues to be very favorable for our business but are not captured in our comparable REVPAR hotel stats.

During the quarter, 50 full-service hotels and 135 limited service hotels were noncomparable due to renovations or rebranding.

If we calculate REVPAR growth on a same-store basis rather than on a comparable hotel basis, North American systemwide REVPAR would have been three-tenths of a point higher.

Second, our REVPAR stats include only room revenue.

In a full-service hotel food and beverage and other revenue often total one-third or more of total property level revenue.

In the third quarter, group catering revenue alone increased nearly 14% for our comparable managed full-service hotels.

And last, compared to our competitors, our quarter does not reflect the favorable impact of a shift in holidays.

In 2004, the Jewish holidays Rosh Hashana and Yom Kippur occurred in September.

This year the holidays are in October.

Travel tends to decline around these holidays, so the impact of the calendar shift will be favorable for operators who report results on a calendar quarter basis.

As this year's third quarter ended on September 6, for Marriott, our REVPAR stats did not reflect the favorable impact of the shift in holidays.

While reported REVPAR growth for North American full-service hotels was 9.2% it would have been 1.6 points higher, or nearly 11%, if we calculated REVPAR on a calendar quarter.

Just about any way it's measured, the fundamentals of the business are good, and they appear to be staying strong.

The East and West Coast of the U.S. did very well last year, but in the third quarter, middle America moved up, too.

The strongest U.S. market was the western region with 11% REVPAR growth.

Anaheim, Los Angeles, and the resorts in Arizona were particularly robust.

Even properties in the Silicon Valley showed pricing strength, albeit off a low base.

The south-central region dominated by Texas was a laggard in 2004 but showed 9% REVPAR growth as Houston demand turned up.

Similarly, in the Midwest REVPAR rose 6.5% as Chicago, Minneapolis, and Detroit showed better than expected REVPAR growth during the third quarter.

Our hotels in Florida also showed continued strong REVPAR in their off-season quarter, especially Miami where international guests continue to help results.

In any given market, as the most preferred hotels sell out, pricing strengthens and neighboring hotels flourish as well.

In our system nearly one-half million room nights were sold in the third quarter by referring guests from a sold-out property to one that still had availability.

Our wide distribution of locations and brands make this possible.

Special corporate rate negotiations for 2006 are underway.

As we mentioned in last quarter's call, we are planning to shift more business to higher rate categories in 2006.

For high-volume customers we will continue to offer attractive pricing but we still believe 2006 special corporate rates are likely to be 7 to 9% higher than those in 2005.

Group room rates from comparable domestic full-service hotels rose 5% during the quarter.

Meeting attendance exceeded expectations for many meeting planners and recently booked group business showed even stronger pricing.

Yet group revenue growth is held back by older group business still on the books.

For new groups, booking in the third quarter in the year for the year room rates increased 12%.

For groups that booked in the quarter for the quarter, room rates rose 10%.

We estimate that 55 to 60% of our 2005 group room nights were booked in prior years.

This old business will represent only 30 to 35% of our expected room nights in 2006.

As we replace this older, less lucrative business with the stronger demand we are seeing today, group REVPAR should continue to improve.

Outside the U.S., lodging demand was strong during the quarter, especially Asia and the Middle East, while continental Europe remains soft.

While we didn't see a stampede of cancelations following the tragic London bombings in July, new bookings for that city were relatively slow during the quarter.

U.K.

REVPAR increased 5% during the quarter.

Elsewhere in the world, demand in most of the Middle East is very strong, especially Cairo and Dubai.

Asia also remains strong led by China where REVPAR was up 10% during on a constant dollar basis largely due to strong room rate improvement.

Now let's talk about margins.

With the continued dramatic top-line growth from our managed hotels operating margins are improving.

The most significant cost in our hotels is labor, making up about one-half of the operating costs of a full-service hotel.

With significant improvement in our group catering business this quarter, our typical measurement of productivity, hours per occupied room, is less meaningful, but we are obviously keeping a strong eye on costs nevertheless.

During the quarter, hourly wages per occupied room rose 4.1%, and healthcare expenses rose 6.6%.

Heat, light, and power expense increased 14% during the quarter, and are expected to increase 10 to 15% in the fourth quarter and at comparable levels in 2006.

On average, heat, light, and power accounts for 4% of property level sales.

Our margins would have been 20 basis points higher in the quarter if these costs had been flat to last year.

Despite cost increases North American house profit margins rose 180 basis points, largely due to strong room rate improvement.

On a property level EBITDA basis, assuming the hotels were company-owned, margins of our managed North American hotels would have increased about 220 basis points during the quarter.

For our full-service brands in North America, house profit margins rose 220 basis points and property level EBITDA margins rose roughly 250 basis points in the quarter.

With improvements in house profit incentive management fees increased substantially during the quarter as a result of the sale of two of our managed hotels we recorded approximately $6 million in incentive fees that were related to prior periods but received and recognized in the third quarter.

Worldwide, approximately 44% of our managed hotels booked incentive fees in the third quarter, including those hotels in our Courtyard joint venture.

For the full year 2005 we expect approximately 45% of all managed properties will pay incentive fees compared to 27% of managed hotels last year.

Base management and franchise fees combined increased 9% during the quarter reflecting REVPAR improvement and unit growth.

The transfer of the 46 Whitbread hotels from franchise to management contracts caused management fees to grow at a faster rate than franchise fees while the purchase of 13 properties from CTF reduced our base fees in favor of owned and leased by $3 million.

The sale of our Ramada franchise business reduced franchise fees by a comparable amount.

Revenues and profits from owned, leased, corporate housing, and other increased dramatically during the quarter as a result of the mentioned acquisition of 13 CTF properties.

In addition, strong REVPAR and margins at company-owned or leased properties improved profits during the quarter.

We hope to sell many of those owned hotels in the near term.

Timeshare Interval sales and services revenue increased 31% due to strong results at several reportable projects, including HiltonHead, Aruba, and Hawaii.

Timeshare contract sales, including sales made by our time-share joint venture projects, were flat during the third quarter reflecting 10% higher contract sales from our Marriott Vacation Club brand but fewer Ritz-Carlton fractional weeks sold.

Our Marriott Vacation Club in Las Vegas is doing very well but Ritz-Carlton projects in St. Thomas and Bachelor Gulch, Colorado, are at or nearing sell-out.

They will be replaced by new Ritz-Carlton fractional projects in 2006.

In the fourth quarter we expect contract sales of timeshare, fractional, and whole ownership resorts to increase 15 to 20%.

General, administrative and other expenses increased to $149 million during the quarter, including $6 million for the settlement of an old lawsuit, $2 million for systems initiatives, a $1 million donation for hurricane Katrina relief, and approximately $1 million in owner incentives for bedding.

We estimate approximately 95% of the hotels will have the new bedding by year end 2005, and all properties should be complete by year end 2006.

Bedding incentive program expenses have been less than anticipated as in many cases the cost is being included in owner funded renovation programs.

While G&A is running a bit higher than normal in the third quarter we expect G&A costs to decline in the fourth quarter to approximately $185 million.

Gains and other income during the quarter totaled $39 million, including a preferred return on our Whitbread joint venture and $21 million in net earnout payments associated with our synthetic fuel business.

Interest income declined substantially as our portfolio of property mezzanine loans declined about $130 million during the quarter, and $550 million since the year-ago quarter.

These loans were made to fuel unit growth over the past five years and we are delighted to receive our principal and redeploy our capital.

In total, corporate interest expense in the third quarter reflects higher debt balances, largely driven by share repurchases, the CTF hotel purchase, and the Whitbread joint venture, offset by lower interest rates on refinanced long term debt.

Provision for loan losses totaled $17 million during the quarter entirely due to a 1994 investment in an aircraft leverage lease.

The write-down was triggered by Delta's bankruptcy and request to restructure the lease agreement.

This is the only leveraged lease investment on Marriott's balance sheet.

Our synthetic fuel business earned $0.13 per share during the quarter, flat with the prior year.

While we feel very good about our $0.12 per share synthetic fuel estimate for fourth quarter, recent increases and volatility in oil prices have raised questions regarding the potential phase-out of synthetic fuel credits generated during 2006.

The calculations around the potential phase out of the tax credits are complex, so we've provided considerable detail in the 10-Q which we recommend all investors read.

To supplement that, though, we thought today we would outline the issues we face around this topic.

In 1980 when synthetic fuel tax credits were established by Congress the lawmakers decided that the tax incentives to produce alternative fuels would not be necessary if the price of oil increased beyond certain thresholds.

So the law provides for a graduated phase-out of the tax credits based on the price of oil.

Today we estimate that in 2005 our synthetic fuel tax credits would likely start to be reduced if the price for the NYMEX futures contract for light sweet crude exceeded about $58 per barrel, and those credits would be eliminated if the 2005 average price exceeded approximately $73 per barrel.

That price is the average price for the full year.

Of course, since there are only three months remaining in the year, and oil has been below that threshold for most of the year to date, we estimate that the price of oil would have to exceed $70 for the last three months of 2005, before we would lose the first $1 of credits.

So, at the moment, we see little risk in the earnings estimates we've provided for our synthetic fuel business for the fourth quarter and for 2005 full year.

So what can we do about 2006?

Hedging is very costly, and today selling the business may not deliver incremental value beyond simply ceasing production at year end, given the volatility around oil prices and the short time left under the program.

While we would prefer to provide you with meaningful earnings guidance, at this point we cannot predict the amount of synthetic fuel production and sales for next year.

As a result, we are not making any earnings guidance for synthetic fuels tax credits for 2006.

As you know, the synthetic fuel tax credit program ends in 2007.

Today we estimate the $60 million investment has over its life to date for Marriott produced $370 million in incremental net income.

Our outlook for our lodging business is more clear.

During the quarter we opened 5,000 new rooms around the world.

At quarter end our worldwide pipeline of rooms yet to open totaled nearly 400 hotels and over 60,000 rooms.

The pipeline includes 17 Ritz-Carlton hotels with nearly 5,000 rooms, 12 of those Ritz-Carlton hotels are already under construction.

Investor demand for existing hotel real estate has been very strong over the past three or four years with the very favorable supply-demand characteristics of the U.S. lodging industry, readily available capital, high relative construction costs, and a very strong residential market taking some hotels out of service, investor demand for existing hotels continues to build.

We have benefited from this trend in two ways.

First, when hotels change owners, they frequently change brands as well, as the new owner looks for ways to improve the profitability of an underperforming asset.

Nearly half of our new full-service hotels opening in 2005 year to date were conversions from other brands.

Further, many of our existing managed and franchised hotels have also changed hands, which often involves renovation.

If a franchisee, for example, sells a hotel along with the Marriott flag, a property improvement CapEx plan is often involved in the sale.

This has the effect of accelerating product renovations.

We estimate new and existing owners will invest over $1.5 billion in property improvements in our hotels in 2005.

We have also been buyers of hotels in 2005.

We invested $370 million to purchase 13 CTF properties in a transaction which also extended the term of our management agreements and accelerated reinvestment in the Renaissance brand.

In May we invested approximately $170 million in a joint venture with Whitbread which increased our fee stream and opened up development opportunities in the U.K.

In both cases we are selling hotels to recoup our investment.

To date we have seen considerable investor interest in our portfolio of owned Renaissance properties as well as our joint ventures portfolio of the former Whitbread U.K. properties.

We expect to monetize these investments in the near term.

We have also been buyers of our stock.

In fact, in the last nine months we have invested $1.4 billion to repurchase over 21 million shares.

Our business continues to throw off considerable cash flow, and our business model requires little ongoing capital spending.

In addition to stock repurchases, we have reduced our usage of options over the past few years.

So in addition to a meaningful decline in shares outstanding, fully diluted shares are also down considerably from year-ago levels.

Our stock is a very good investment, and we are very bullish about the future.

For the fourth quarter we expect North American systemwide comparable REVPAR to increase 8 to 10% consistent with year-to-date performance.

We anticipate international constant dollar REVPAR to increase 7 to 9%.

We also expect to see North American house profit margins improve about 150 basis points, somewhat constrained by energy cost increases.

Base franchise and incentive fee revenue should total approximately $320 million combined.

We are likely to see a slower growth rate in incentive fees in the fourth quarter, given the likely partial reversal of incentive fees from our Courtyard joint venture, as well as temporarily lower earnings from the large number of managed hotels currently undergoing renovation, as well as hotels in New Orleans.

As a result of these impacts, company-wide incentive fees are likely to grow 20 to 25% in the fourth quarter.

Profits from owned and leased hotels should remain strong in the fourth quarter as a meaningful number of property sales are not likely until year end at the earliest.

In addition, strong REVPAR and margins, as well as the roll out of Marriott systems, are improving profitability.

Profits from our timeshare business are expected to grow albeit at a slower rate than the year-to-date results.

Reported timeshare earnings have been strong this year as projects reached percentage completion thresholds and profits became reportable.

On the other hand, inventory shortages, particularly of the very popular Ritz-Carlton fractional product, have constrained contract sales growth in 2005.

In the fourth quarter and in 2006, contract sales should accelerate as greater inventory becomes available.

On the other hand, reported revenue will slow as a result of this year's contract sales pace.

In addition, joint venture results, a growing part of our timeshare business, will be booked below the line on the equity in earnings line.

In fact, most of the 2006 joint venture earnings are likely to be related to the timeshare business.

Overall the timeshare business is in great shape.

Demand is strong, long-term profitability is outstanding, and we remain delighted with the business.

We expect to complete a timeshare mortgage note sale during the fourth quarter and combined with real-estate gains, total gains are expected to reach approximately $55 million.

General and administrative expenses are expected to decline meaningfully in the fourth quarter.

The year-ago quarter included a $13 million noncash charge associated with the write-off of our investment in the Courtyard joint venture.

We expect owner incentives for our bedding program to be immaterial in the fourth quarter 2005.

For full-year 2006, we expect North American systemwide comparable REVPAR to increase 7 to 9% with most of the increase coming from rate.

For the full year, we expect North American house profit margins to improve about 1.5 to 2 percentage points.

Again, constrained by energy cost increases.

We look forward to welcoming 25,000 to 30,000 new rooms worldwide to our system in 2006.

Based on our projected REVPAR, house profit margin and rooms expansions, we expect 2006 base franchise and incentive fee revenue to total 1.165 to $1.185 billion.

Timeshare Interval sales and services net of direct expense should approximate 265 million, and G&A should decline to roughly 600 to 610 million.

Owned and leased earnings are expected to total approximately 150 to 155 million in 2006, reflecting the earnings from our portfolio of owned Renaissance hotels.

If owned properties are sold in 2005 or early 2006, these 2006 earnings could be lower than expected, but we would be in a position to redeploy the asset sales proceeds more quickly.

In addition our management income would rise modestly.

Overall we expect gains including timeshare mortgage note sales gains to total approximately $100 million, and we believe net interest should total an expense of approximately $80 million.

With these assumptions, 2006 EPS is expected to total $3 to $3.10 per share, excluding the one-time noncash impact of accounting changes for the timeshare business and equity-based compensation, as well as ignoring any impact from our synthetic fuel business.

Our 2006 estimate does not include the impact of FASB 123R which requires the expensing of all share-based compensation including options.

Today, we estimate the 2006 impact of adopting 123R of about $45 million pretax, or $0.13 per share.

Our estimate of the impact is higher than we projected a few months ago, largely due to recent clarifications of the new rules as they relate to the pace of expensing equity and options grants to retirement eligible executives.

The FASB also issued new accounting rules for the timeshare industry to take effect in our 2006 fiscal year.

The new rules will change the timing of our recognition of revenues, selling and product costs, reacquiring inventory, and maintenance fees for unsold inventory.

We estimate that the one-time noncash impact to 2006 first quarter earnings will be a charge of approximately 150 to $175 million pretax, which will be reflected below the line, similar to discontinued operations.

The accounting change does not alter the attractive economics of our timeshare business.

Before closing, let me make a few editorial comments about our 2006 forecast.

We are forecasting REVPAR growth of 7 to 9%. 2006 group revenue on the books is already up over 6% year-over-year, and short-term bookings are expected to take that number higher.

Negotiations this fall are expected to yield 7 to 9% rate improvement in 2006 special corporate rates.

We expect that markets that had been relatively slow, such as Chicago and Boston, will perform much better in 2006 as city-wides return to those markets.

Hot markets like New York show no sign of slowing down.

Companies in the financial services industry, consumer goods, the defense industry, pharmaceuticals, and technology were all strong in the third quarter.

Only telecom and the auto industry seem to be cautious about travel.

Overall today's snapshot of 2006 demand looks very favorable. 2006 should also be another strong year for capital recycling.

In 2004 and 2005 year to date, we recovered over $1.6 billion in recycled capital from loan repayments, refinancings, or asset sales, and we anticipate another $1 billion in the next 12 to 24 months.

And we remain active in repurchasing our stock.

This also leaves us bullish about 2006.

Still, we are just beginning our bottoms-up budgeting process for next year, and there are always changes that come out of that effort.

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

We feel good about these forecasts now but ultimately the actual results will depend mightily on the state of the economy globally which from our vantage point still looks pretty good.

We would be pleased to take your questions at this time.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll take our first question today from Jeff Donnelly with Wachovia Securities.

Good morning, guys.

Actually, Arne, I just had a question for you concerning the synthetic fuel in 2006.

That was a helpful explanation you gave but just concerning the accounting for it, considering that the Federal Government does not release the average wellhead prices used in that mechanism to adjust the credits well into the year should we assume that you folks might produce but not recognize any benefit of syn fuel credits until maybe later in the year when it becomes apparent whether or not you'd qualify?

I don't think you should assume that necessarily, Jeff.

Obviously we're not giving guidance, so we're not telling you which of a whole number of alternatives we might pick.

They range -- and obviously they will be influenced by oil prices, as probably the most significant factor, from continuing to run and recognize the credits as the year goes along, to taking the approach that you've identified to, at the other extreme, shutting down and not operating.

None of those decisions we've made yet we have -- well, we're not providing guidance.

I should state that we certainly have not given up on this and we are exploring a number of alternatives to maximize the value out of this investment but at this point we can't tell you which of those alternatives we'll be pursuing because we won't make the decision about it until we get probably right at year end.

Just one quick follow-up.

Can you repeat for us again, which cities you saw were the beneficiaries of business from Katrina, and then just looking forward what are you guys hearing from groups, perhaps as bookings in that area of the country, or New Orleans that have maybe group events on the books for late '06 and early '07?

Are you seeing them pulling out now?

No, we're not seeing -- I think generally we are working with our group customers through the first quarter or so of 2006 and for later periods in 2006 we're continuing to be a bit fluid.

Obviously as we mentioned we've got many of the hotels already opened, or shortly opening.

Significant parts of New Orleans, including the Quarter, could obviously be in business by sometime in 2006.

We'll have to see how that develops.

We listed a lot of cities that have benefited so far from business that formally was booked in New Orleans, including cities you'd expect like Orlando and Atlanta, which , are not that far in some respects, at least in terms of big group markets, but even cities like Philadelphia and Washington and Chicago, which seem to be a longer distance away, I suspect most of the business, if you drew a semicircle from Phoenix around to Atlanta, I suppose, over New Orleans would be booked in that semicircle.

Just one last question.

Could you give us a sense for where you see your IMS fees in 2006?

Probably up in the, oh, I don't know, mid 20s maybe, low 20s to mid 20s percent increase.

Thanks.

You bet.

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

Good morning, Arne and everybody else, Laura.

Couple questions for you.

We'll need to follow up on that last question about the REVPAR environment.

I was wondering, can you tell us, last couple years you started low, third quarter, kind of built expectations as we've gone in the fourth quarter, first quarter, the next year, second quarter, and so on.

You're taking a pretty big swing here.

Obviously you have a lot of visibility in terms of what's on the books and what you expect in terms of negotiated corporate rates.

Should we expect that same kind of building, so do you think that REVPAR could really be in the double digits next year across the country?

And how does the net effect of Katrina and Rita, how does that change the outlook if at all on macro basis?

And I have a quick one on the margins.

Okay.

Let's see.

It would be great to see that kind of upside over the forecast we're providing today for 2006.

But I wouldn't expect it.

I know there are a few of you that think we are hard wired to be conservative, and we start with conservative forecasts at the beginning of the year.

That's not the way we approach the guidance that we give.

The way we approach the guidance that we give is to look at the data that's coming out of our system, listen to our sales and marketing experts and our operators, and come up with the best guidance that we could provide, and this is the best most accurate guidance we could provide.

It is not, in our view, a particularly conservative or a particularly robust guidance.

So what we're telling you is we expect 7 to 9% growth next year, period.

Impact of Katrina and Rita, we really are -- we're obviously not economists, and we are not building a model at this point which has any specific assumption about the economy or the impact of Rita and Katrina on the economy.

We think that obviously the impact so far, as it relates to our fee business, is very, very modest.

Some marginal negative impact in Q3, which we talked about, there will be some impact in Q4 as incentive fees that we had anticipated earning out of New Orleans hotels on a full-year basis but recognized in Q4, we think now we will not recognize but the fee impact is very, very modest, and we're obviously picking up business in other hotels which should go a long way to replacing whatever base fee loss that we had in New Orleans.

Broader impacts, it's a question of what happens with -- what is the impact of high gas prices and high fuel due to the economy.

We think there's very little direct impact to us from those things.

We're obviously more dependent on the corporate market than we are on the leisure market but even when you look at our core leisure business, which is timeshare, there's no sign yet that that's having any impact on the pace of that business.

And so the risk to us is going to be driven by, really, whether that oil and gas price rise has an increase on the economy generally in the United States.

Because we don't see that yet coming out of our business.

Then on the margins, you obviously talked about energy prices in general and how they're affecting current trends into the fourth quarter and how you see next year.

Can you talk a little bit about other parts of the cost side of the equation, where you might be seeing some pressures, where you may be seeing some relief?

I know you're not exactly a union hotel brand per se, but could you maybe talk a little bit about how you see that whole situation affecting the outlook for margins?

Yes.

Let's see.

There are a lot of moving pieces here.

We talked about year-over-year labor cost per occupied room up 4.1% in the quarter.

Let me kind of start with the union question at the back end.

We are not heavily unionized.

I think about 7% of our hotels are union, if I remember correctly, but it's certainly a single-digit number.

And really the union issues to us are not about associate compensation.

We are paying competitive rates in our hotels, even those hotels which are not unionized, so instead those issues are really not about compensation but they're about other issues relating to the ability to create careers for our associates and have some flexible staffing, and we'll just to have see how those things develop next year.

We talked a little about FNB growth, particularly group catering, up significantly in the third quarter.

It's worth noting that while that is good profitable business that creates incremental profits to the bottom line, because FNB tends to have lower margins than the rooms business, that probably when you look at margins in percentage terms, as opposed to dollars or profits, has a negative impact on margins.

In the quarter, probably 10 to 20 basis points would be our estimate.

The other thing I think we're looking at carefully besides energy costs is insurance.

Obviously with the insurance losses coming out of the two hurricanes, we expect that there will be some pressure on certain categories of insurance, although we have recently just reupped one of our programs with essentially flat rates to last year, so we were pleased with that but we'll continue to watch as every other company in our industry and in corporate America does, what happens with insurance rates over the next number of months.

Great.

Thanks a lot.

You bet.

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

Good morning Arne and Laura, nice quarter.

Two questions for you, please.

First of all you mentioned, and we've written this, that we believe that higher construction costs and the flow of labor to the Gulf might slow down the overall development pipeline.

Have you seen that within your own pipeline as you look out to '07, '08 whether projects that once pencilled out, don't pencil out any more?

Not yet, we haven't.

We are getting some anecdotes from some of our partners that they've had, some pressure on costs immediately after the hurricanes hit and people started to head back into New Orleans.

We've also obviously spent a bunch of time with the experts and some say that this is a pressure point that's going to build a bit over time that obviously you had some construction going on in New Orleans which stopped with the hurricanes and heavy construction may not start in New Orleans for a number of months yet, as folks figure out what needs to be done before they start actually doing it.

But we would anticipate that ultimately sometime next year there will be a bit more construction resources and construction demand for materials coming out of New Orleans, which will have some impact to construction costs and maybe pace elsewhere in the country but we don't know what that will amount to.

I'd add that construction costs were pretty high even prior to the hurricane and you saw in the last year prices for steel and concrete move up quite sharply, so I think that the pipeline already reflects an environment where the construction costs are pretty high.

Right.

Finally on the syn fuel, not to beat a dead horse, but is there any way that it could be dilutive to the $3 to $3.10 range next year, or you think you can manage it so that you're not surprised by the end of year fuel price spike or something that would eliminate your profits to date?

In theory it could be dilutive, and I can't sit here and promise you that there's no way that will happen, but we feel pretty good that -- we're not going to run this thing at a loss, and we ought to be able to do better than that.

I suppose if we shut down, and closed this thing out, we could have both a write-off of a modest investment left on our balance sheet which is probably about 20, maybe give or take a million or two, at year end it'd probably be a few million dollars lower than that.

That's obviously being amortized between now and the end of 2007.

That would be noncash.

That could conceivably, if we made the decision on the first of the year to shut it down, create a book loss, but I think beyond that risk the chance of a -- sort of operating loss from syn fall is very, very slight.

Thank you.

You bet.

We'll go next to David Katz with CIBC World Markets.

Good morning.

Good morning.

Hi, David.

Just to follow up on the timeshare issue a little bit, it seems that demand for the product is so strong that its growth from your perspective is a function of capital invested in it.

And when I look at sort of what you have for '06, obviously nothing grows to the sky, but could you provide just a little more color on how we should be thinking about that business?

How interest rate-sensitive is it?

And will it become a smaller piece of your total business over time, or are we seeing something that's shifting from one line item to another?

Well, I think we're seeing a number of shifts that are under way in the business.

I don't think any of them are real fundamental.

We've seen our timeshare business and the timeshare industry grow in the mid teens percentage rate, so 13, 14, 15% I suppose, year-over-year growth in sales by us and sales by the industry in the United States for a long, long period of time.

And we see that kind of growth rate continuing.

Now, so that's the real good news and the real, if will you, the steady state sort of performance of the business.

The shifts that are happening for us in the business have more to do with two things.

One, a shift of a bit more product towards the higher end fractional product.

I think Ritz-Carlton and we're doing a few Grand Residences projects, which get a little bit closer to the residential market in some respects, a little farther away from the vacation market, which is where the Marriott vacation club product has traditionally been, but it's still quite a timeshare -- quite consistent with the timeshare product that we've done.

And we've been a little bit surprised how fast the Ritz-Carlton projects that we had locked up have sold out.

And so one of the big impacts that we've got in the next year or so, maybe three quarters, maybe not a year, we'll see how the pace goes, is that we're going to have lower gains coming in, lower financially reported development profits coming in from fractional sales.

The second shift that's impacting our business is a shift towards more joint venture projects, and this is something we've talked with all of you about over the last couple of years.

It started with us as an effort to pursue this business in a way that was a little less capital intensive for us.

And we still think that's a suitable reason all by itself to do a bit more in the joint venture area.

I think it's accelerated a bit because as we've gotten more high end towards more fractional product, towards more Ritz-Carlton branded product, we've also seen more projects that also make sense to have some branded whole residential, and those projects for a number of additional reasons we think make much more sense to do in the joint venture scenario than in the wholly owned Marriott scenario.

So I think there's a lot of good news but there is some changes that are under way there.

I think the only last point I'd make is, we shared sort of long-term numbers with you all at that the Company-sponsored analyst conference in Miami this spring.

We still are on track to meet those numbers in the timeshare business as well as we think in the other businesses that we've laid out for 2008, and the forecast we're giving for 2006 we think is quite consistent with that.

Great.

And if I could just follow up on Jay's question regarding sort of the union labor issue, obviously nobody knows at this point sort of how that shakes out.

But if you could agree that a likely scenario is that for unionized labor, the costs could conceivably go up as a part of this negotiating process, how much of a difference is there sort of out there in the environment between the cost of unionized labor versus nonunion?

Presumably there's a labor market out there, and that that cost could conceivably impact your business.

Is that a fair way to think about it?

Yes, and again, there's probably not a material difference in the cost of wages and benefits for union versus nonunion associates, at least not in our system, and that's one reason I think we're not heavily unionized as we pay competitive rates.

The cost, if you will, comes more from questions about flexibility and staffing models and whether or not certain employees are, in effect, prohibited from doing tasks, even though they have time and capacity to do something else other than their defined, union defined tasks, and those are what the issues are all about.

The impact of those rules kind of changing, if you will, on nonunionized hotels, I couldn't give you an estimate on today.

There should not be a significant incremental impact for the hotels that are already unionized, because they're already presumably dealing with most of those rules.

Great.

Thanks so much.

You bet.

We'll take our next question from Steven Kent with Goldman Sachs.

Two quick questions.

One, historically you said that 25% of room nights are booked within the year, for the year, and then roughly 50% are booked in the prior year.

I think those were the rough numbers you gave at one point.

Are you seeing any change there, or are you beginning to see -- are you holding back some inventory to get more transient, and how does that sort of affect your forecast?

In fact, is there greater risk in your REVPAR forecast for '06 because you're expecting a greater percentage coming from transient?

And just one more question on the synthetic fuel.

Have you factored in how much you would have to reimburse your syn fuel partner for any of these changes, Arne, and sort of how should we think about that part of the equation?

I don't think you should think about that issue at all.

By and large our payments to both the outfit that sold us the plants and the providers are overwhelmingly dependent on the synthetic fuel credits that are produced and so there's no real incremental risk there.

But aren't you in the JV with some -- you sold some of the credits to another entity.

Yes, we did sell some of the credits.

They still hold half.

They have the right to put back to us between now and the end of the year.

I wouldn't be surprised if they put back to us their stake given the uncertainty that surround it but they'll make a decision on that.

We'll obviously probably all wait until the deadlines before decisions get made so we get more and better information but there is no incremental sort of rearward looking exposure on that front either.

The question on sort of the pace of bookings and where they -- what year they occur in.

Let's see.

The year they occur in, it's going to depend a bit on the size of the hotel.

We gave you some average numbers in the prepared remarks for sort of full-service hotels, which is the, oh, 55 to 60% of business, group business staying in the Marriott Hotels in 2005 would have been booked in prior years.

That leaves you an average of sort of 35 to 40%, 40 to 45%, I suppose, booked in the year for the year.

That number is going to vary dramatically by hotel.

Generally the more you get to the tanker with a couple of thousand rules, the more you're going to see that there's a higher percentage of books that -- a higher percentage of group business on the books from prior years, because the lead time for booking is that much longer for the really big association and group meetings, and sometimes they're booked five, six, seven, eight years in advance.

The smaller hotels you'll see a higher percentage booked in the year, for the year.

As we look at group bookings for next year, while individual hotels will make different decisions based on their market dynamics and the information they're getting from the yield management system, by and large what we're doing is not grouping up and it is not grouping down, if you will, it is simply being more aggressive about pricing group.

So we would not say there's any greater risk today looking at 2006 as it relates to group business than there was in a year ago at this time.

Okay.

Thanks.

You bet.

We'll go next to Will Truelove with UBS.

Good quarter guys.

In terms of timeshare two, questions about that.

Do you have sort of a long-term strategy in terms of how much earnings you want to come out of timeshare, and then two, can you tell us what percentage of the PP&E on your balance sheet is related to timeshare?

As to the first question, the answer is really no.

We don't solve for either capping timeshare earnings at a certain percentage of our total earnings, nor do we buck it up to meet some sort of minimum level of earnings.

Instead what we're doing is deals that create value for our shareholders.

So we're looking at individual transactions and whether or not the return on the capital that we have to put in is such to create value for our shareholders.

Having -- and basically what we've seen if you look back over the last decade or so, is timeshare tends to grow as a percentage of our earnings when lodging is weakest, because the lodging growth rate is lower than the timeshare growth rates.

I suspect the stronger lodging is, the more we'll see that lodging grows relatively stronger than timeshare, and therefore timeshare will decline.

There's more risk of that I think probably in the next couple of years, than there is risk that the timeshare business will grow and become a bigger portion.

But we're not really running the business to hit any sort of predetermined percentage targets of total earnings.

How much in the balance sheet?

Balance sheet total today is about 2 billion, 2.2 billion maybe total.

That includes inventory which is maybe about two-thirds of that and the balance would be noninventory items ranging from customer relationship, management's technology that's been used for that business, timeshare notes that we've issued and have not yet sold, land that we've not yet developed, sales centers, the divisional offices, all of those sorts of things.

We've got many years of investment that should support many years of future revenue growth in the business.

Great.

Thanks a bunch, guys.

You bet.

We'll go next to Jeff Randall with A.G. Edwards.

I wanted to touch base on one of the questions, or on one of the data points you brought up.

What was the year-over-year increase in energy prices?

I think you said it was 14% in the third quarter.

Was that right?

Correct.

And then looking at the '06 guidance and you're looking at 1 point -- 1.5 to 2 point improvement in the house profit margin, I think you said what the assumption for energy was for that improvement.

Essentially the same rate of growth next year.

So in the mid teens?

Yes.

Okay.

Then were any assumptions made that you could clarify as far as maybe you mentioned energy, labor, then I was also thinking about property tax.

Is there anything you can add there to assumptions that fed into that 1.5 to 2 point improvement?

Not yet, and actually your question is a nice way for me to repeat something we said before.

This guidance is provided without the benefit of the detailed budgeting process.

So every individual hotel between now and when we talk to you a quarter from now will go through their bottoms-up budgeting process which will look at property taxes and what they think will happen to energy costs in their markets and what's going on with their labor situation and all the other factors that go in, and we'll know a whole lot better some of the detailed assumptions that would be in this.

What we've done now is a much more top down or superficial, if will you, approach to it.

We think this is the ballpark that we're going to end up in.

It's not done without input from our operators, but it's done with a more superficial kind of input from our operators.

And so some of those questions like property taxes we wouldn't be able to give you an answer today even if we wanted to.

And then one last question on the 6 million that related to the lawsuit that was in G&A, what did that relate to, and are there other lawsuits out there that might contribute to that sort of a magnitude increase in G&A over the balance of this year and into next?

We think not is the answer to the second question.

Answer to the first question is it's a lawsuit that concerns facts that are more than ten years old.

Which is really one of a kind and has nothing to do with the kind of issues that were addressed in some of the lawsuits and issues that we've talked with you about over the last two or three years.

But as the lawsuits started, a jury trial in a state court and our lawyers confronted a bit more the risks and benefits of trial and the costs associated with it, we got a recommendation from them to settle it and ultimately did.

Thank you.

You bet.

We'll go next to Harry Curtis with JP Morgan.

Hi.

Our questions have been answered.

Thank you.

You bet.

We'll move next to Will Marks with JMP Securities.

Thanks.

Hello, Arne and Laura.

A quick question.

Just looking at Fairfield Inn and that space, the mid scale without food and beverage has performed extremely well year to date, and seems to be continuing to perform well.

What should we look at through next year?

I gather that's where you're seeing the most supply growth.

Any comments related to that?

Are you talking about our Fairfield business?

Yes.

Our Fairfield business, we have over the last couple of years been very aggressive and proactive in working with our partners to really get rid of the oldest product, and a lot of the generation one Fairfield Inns we have deflagged over the last couple of years.

So I think if you look at our total units, I don't have the schedules in front of me, but if you look at our units in the Fairfield Inn brand over the last couple of years, it's been flat to probably even down a little bit, which basically is that new growth has been a bit less than the hotels that we've deflagged.

I think we're about done with that cleansing process, and we ought to see unit growth begin to move in Fairfield at a rate maybe not quite as fast as what Courtyard and Residence Inn have been doing but a rate that's respectable.

I can't tell you how many rooms precisely in Fairfield we'd anticipate next year.

And that is by and large a franchise business.

Essentially those fees will grow directly proportional with unit growth.

Actually, I'm kind of more interested in the REVPAR growth has, let's say, been 10 to 11%.

And for you guys for the whole industry, and I'm curious on the supply impact that -- what that will do to next year's REVPAR for that particular segment.

It's been leading the industry aside from luxury maybe.

I don't remember any significantly different forecast for Fairfield in terms of REVPAR 2006 than for the other brands.

I'd say it would probably be in the same band.

Okay.

That's great.

Thanks.

You bet.

One more question if there is one

All right.

We'll take our last question from Joe Greff with Bear Stearns.

Good morning, guys.

Hey, Joe.

If we were to look at your '06 guidance a different way, Arne, if we were to look at what's embedded in there from a property level EBITDA margin improvement perspective, what would that range be for margin improvement?

Well, we don't -- we haven't done an EBITDA margin in looking forward.

Obviously at our 150 to 200 basis points of house profit margin the calculations we've done the last couple of quarters, the EBITDA margin, sort of our effort to look at what these hotels would do if we owned them and were reporting EBITDA, were 25 to 30 basis points I think higher than the house profit margin.

I don't see any reason why that kind of relationship wouldn't continue if we did the calculations a year from now.

Great.

Then with respect to the 7 to 9% REVPAR growth for next year, how much of that is sort of Marriott specific from things like the Courtyard reinvention and the next-generation Residence Inn, the new Renaissance prototype, the Marriott bedding product?

I don't know.

I don't think a lot.

I think it's more an indication of kind of run rate in the business today and a little bit the stuff we see on the books for next year.

Okay.

That's fine.

Thanks, guys.

All right.

Thank you all very much.

We appreciate your time.

We're manning -- we're standing by, I should say, the phones, prepared to answer any further questions if you happen to have them.

Thanks very much for your time.

Keep traveling.

And this does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.