萬豪國際 (MAR) 2005 Q4 法說會逐字稿

Good day everyone. Welcome to the Marriott fourth quarter 2005 earnings conference call. Today's conference 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.

Good morning, everyone. Welcome to our year-end 2005 earnings conference call. Joining me Laura Paugh, Senior Vice President, Investor Relations, Donna Blackman, Senior Director, Investor Relations, and Carl Berquist, Executive Vice President, Financial Information and Enterprise Risk Management. Before I get into the discussion of our results, let me first remind everyone that many of 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, February 9, 2006 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.

I know that most of your interest today is in our fourth quarter performance and our outlook for 2006, but I would be remiss if I didn't take a few minutes to talk about the outstanding year just completed. In short, overall, 2005 was a great year. Earnings per share from continuing operations rose 17%, excluding the CTF charge, the Delta lease writeoff, and ignoring altogether our synthetic fuel operations, EPS rose 32%. Adjusted EBITDA increased 15% to nearly $1.3 billion, and our management and franchise fees exceeded $1 billion for the first time ever. U.S. system-wide RevPAR rose 9.5% during the year with nearly 80% of the growth coming from stronger pricing. Demand for our products continued to increase across the board, including among corporate customers, group meeting attendees, leisure guests, and international travelers. Outside the U.S., system wide RevPAR increased 11.9%. In our MidEast and Africa region, system-wide constant dollar RevPAR rose nearly 30%.

Demand was very strong in Cairo, Doha, and Dubai. RevPar in the Caribbean and Latin America region rose 13% during 2005. Our Asia Pacific region's RevPAR increased 15% for the year with particular strength in Hong Kong, Shanghai, and Singapore. Demand in continental Europe and the UK continues to lag the rest of the world, but their RevPAR increased at a single-digit growth rate during the year.

Margins also improved in 2005. For the full year, North American house profit margins rose 160 basis points across all our brands, largely due to strong pricing and continued productivity improvements, despite higher fuel costs. Healthcare expense rose only 6%, the lowest growth rate in more than six -- five years. Property level EBITDA margins, calculated as if the hotels were wholly owned, increased 200 basis points for the full year. And for our full-service hotels, such EBITDA margins grew by more than 270 basis points.

During 2005, we also drove substantial improvements on the product side. In addition to a historic level of renovation activity, roughly 95% of our system purchased our new bedding package, and with an exciting new room line-up, we look forward to seeing more product enhancements in 2006. We added 134 hotels and 22,000 rooms to our system. One quarter of the room additions were conversions from other brands, and roughly 40% were highly valuable full-service rooms. In 2005, we removed approximately 5000 rooms from our system. Nearly half were older Fairfield Inns.

While deletions in recent years have slightly reduced Fairfield Inns' footprint, RevPAR and guest-satisfaction scores have improved dramatically, and franchisees are showing growing interest in new development of Fairfield Inns. We recycled considerable capital in 2005. Dispositions and note sales totaled over $1.4 billion, including our share of timeshare notes and our sale of the Courtyard land. Our focus on recycling capital, along with strong business fundamentals, continues to improve our return on invested capital. Excluding our synthetic business, our pre-tax return on invested capital increased from 14% in 2004 to 16% in 2005. We continue to make great progress toward our 20% goal.

Return on equity was even more impressive with $1.65 billion in share repurchases in 2005 and strong top line growth. ROE increased from 15% in 2004 to 18% in 2005. While the full year 2005 was outstanding, our recent quarterly results also deserve some discussion. Fourth quarter North American system-wide RevPAR increased 11%, a bit ahead of our 8% to 10% RevPAR growth guidance. For the Marriott Hotels and Resorts brand, transient room revenue for managed hotels in North America improved 11.4% during the quarter, while group revenue increased 10.1%. RevPar at suburban, company-managed hotels improved 10.7% during the quarter, while RevPAR at airport hotels increased 12.2%. With the strong RevPAR, margin performance was also impressive in the fourth quarter.

Our fourth quarter North American house profit margins improved by 210 basis points, and our property level EBITDA margins, again calculated as if the hotels were wholly owned, improved 250 basis points. Catering sales increased 13% during the fourth quarter, which also improved property margins. On a per-occupied-room basis, North American energy costs increased 24%, and wage costs increased 3% to 5%. Allocated costs for above-property programs such as reservations, national sales and advertising, and our shared services center declined modestly on a per-occupied-room basis, as we enjoyed economies at scale with growing distribution. Revenue booked on the Internet increased 49%, which also reduced our costs. Over 16% of reservations were made online in 2005, up from 14% in 2004, and approximately 85% of the Internet revenue was booked on Marriott.com. The Marriott.com reservations costs much less than an 800 telephone reservation.

As a result of our strong RevPAR and margin performance, incentive management fees increased 33% during the quarter. The growth in incentive fees was especially impressive given the impact of the hurricanes. With four hotels still closed, fourth quarter incentive fees in New Orleans and Cancun declined $4 million from the prior year. Our Ritz-Carlton hotel in New Orleans is expected to reopen around year end 2006 while the JW Marriott Cancun Resort and Spa, the adjoining Casa Magna Marriott Cancun Resort, and the Ritz-Carlton in Cancun are expected to start accepting guests again late spring or early summer.

Across our system for the full year, 50% of our managed hotels earned incentive fees compared to 32% in the full year of 2004. While our Courtyard brand reported minimal incentive fees for the fourth quarter as expected, the brand contributed $16 million in incentive fees for the full year, $9 million more than in 2004 and far exceeding our expectations from the beginning of the year. The Courtyard reinvention program has really jump-started the brand over the past 12 months.

Let me take a moment to talk about new unit development. Largely as a result of construction-related issues, our 2005 rooms openings of 22,000 were a bit shy of our target of 25,000 rooms. Nevertheless, as far as we can tell from all the data available, we added more high-value, full-service rooms to our portfolio than any lodging company in the world, again, and with continued high demand for our products, our pipeline of rooms under development increased by more than 10,000 rooms, reaching over 70,000 rooms at year end.

Turning to timeshare, timeshare interval sales and services revenue increased 18% during the quarter, while net of direct expenses profits were flat at $56 million. Results reflected a $7 million charge associated with the writeoff of previously capitalized costs for one-timeshare project. Overall, contract sales increased 6% during the quarter, reflecting the sellout of several projects.

We expect to start seven new projects in 2006, including Ritz-Carlton projects in San Francisco, Miami Beach, and Hawaii. Our timeshare segment results show the overall profitability of the business, including the contribution from joint ventures, gains, and base fees. For those of you unfamiliar with timeshare segment results, you can find them on pages 3 and 4 of the earnings press release tables. Timeshare segment profits rose 15% during the quarter, reflecting strong based fee growth associated with a steadily growing number of timeshare and fractional owners, as well as stronger joint venture income. Over time, you should expect to see a greater portion of our timeshare earnings appearing in the joint venture line as we attract additional capital and partners into this business.

Developing new projects as joint ventures can dramatically reduce the capital intensity of the timesharing business. You may recall in June that we set a target of 14$ to 15% ROIC for our timeshare business. In 2005, by reason of joint venture contributions and a more mature resort mix, the ROIC of our timeshare business jumped to 14% from 11% in 2004. Our synthetic fuel business generated earnings per share of $0.15 in the fourth quarter compared to $0.14 in the prior year quarter. As we've discussed on prior conference calls, the tax credits associated with our synthetic fuel business are gradually phased out if oil prices exceed a certain threshold.

Today, we estimate that in 2006 our synthetic fuel tax credits would likely start to be reduced if the average price during 2006 were the NYMEX futures contract for light sweep crude exceeded about $60 per barrel, and those credits would be entirely eliminated if the 2006 average price exceeded approximately $75 per barrel. That price is the average price for the full year. Given the recent trend in oil prices, we decided in January to suspend production of synthetic fuel.

In a worst-case scenario, should we not recommence operations, we estimate that costs associated with the final termination of this investment, including the writeoff of the remaining book value of the synthetic fuel plants, could represent roughly $0.08 per share. We anticipate being able to give you much greater clarity a quarter from now. Of course, for now, we continue to exclude the business from our earnings guidance.

Before turning to our 2006 guidance, let me take a moment to compare our fourth quarter results with the guidance we gave you for the fourth quarter, a quarter ago. Fourth quarter earnings per share totaled $1.07 compared to a guidance of $0.95 to $0.98 per share. Bottom line, therefore, our earnings were $0.09 to $0.12 better than guidance. Breaking that down, from our lodging business, we saw about $0.02 upside from fee revenue primarily stronger than expected incentive management fees. Further strong results from our owned and leased hotels generated about $0.01 more than expected. Our fees would have driven another $0.02 of earnings upside but for the impact of Hurricane Wilma, particularly on our hotels in Cancun. There was another penny or so of impact from Hurricane Katrina in the quarter, but that impact was already built into our guidance of a quarter ago. So combined, that's about $0.03 per share of outperformance directly from stronger RevPAR and margin performance.

Additional upside during the quarter was driven really by transactions. We earned about $0.07 to $0.09 more than expected as a result of hotels and notes that we or our joint ventures sold during the quarter. The outperformance appears on the gains and other income line as well as the equity and earnings line of our P&L. This good news was somewhat offset by a roughly $0.02 charge in connection with the writeoff of previously capitalized cost for one timeshare project. Net-net, transactions yielded about $0.05 to $0.07 of outperformance.

G&A spending was about $0.03 worse than expected, largely due to higher spending on hotel development, brand initiatives, and efficiency improvements during the quarter. On the other hand, our synthetic fuel business generated about $0.03 more than expected performance. Finally, our diluted share account continues to decline both due to share repurchases as well as a declining balance of outstanding stock options. This contributed another penny or so to the quarter compared to our guidance.

Now, let's turn to our outlook for 2006. We expect 2006 first quarter and full year North American company-operated hotel RevPAR to increase 8% to 10%. Our results through January are consistent with this expectation. We expect property level house profit margins to increase 150 to 200 basis points. With an increased pipeline of hotels under development or pending conversion, we forecast approximately 25,000 new rooms will open into our system in 2006. Over 40% of these room additions are expected to be in the higher-value, full-service segment. With RevPAR growth, margin improvement, and unit expansion in 2005, we expect reported management and franchise fees to increase roughly 13% to 15% and the flow-through to lodging operating income should be strong.

You might ask, given the strong RevPAR, why wouldn't we expect fee revenue to be even higher? There are really two things. In 2005, we earned $14 million in incentive fees that were related to prior periods and are not likely to be repeated in 2006. We also expect our fees from hotels in Cancun and New Orleans to be approximately $8 million less than normal in 2006. While we expect our Cancun hotels to reopen in late spring or early summer, the impact of missing much of the high season, and the inevitable challenges of rebuilding a good book of business will likely leave our fees dramatically short of their potential.

Similarly, in New Orleans, our biggest fee earners, which are the hotels most reliant on group business and higher-end travelers, will be impacted throughout much of 2006. By the way, we have not included any business-interruption insurance payments in our forecast. For those of you interested in sensitivities for 2006, we estimate that one point of RevPAR up or down will impact fees by about $12 million on a full-year basis.

In the first quarter of 2006, we expect fee revenue to increase to $250 million to $260 million. The first quarter is a seasonally slower period, particularly for the recognition of incentive fees and the impact of our hurricane-damaged hotels will be most significant at that time. In 2005, owned, leased, corporate housing, and other revenue, net of direct expenses totaled $166 million, 64% higher than 2004. Since much of this improvement was associated with the purchase of hotels that should be resold soon, you should expect our owned and leased earnings to decline on a full year basis.

2005 also included almost $20 million in Courtyard land rent which we won't see in 2006. On the other hand, strong fundamentals should increase our results from prior expectations. Net-net, we estimate owned and leased earnings should total approximately $45 million in the first quarter and approximately $150 million for the full year 2006. Obviously, as we anticipate completion of hotel sales early in the year, we will see stronger owned hotel profits earlier in the year rather than later.

Overall, the timeshare business is in great shape. Demand is strong. Long-term cash flow and profitability are outstanding. And we have superb new products in the offing. Contract sales were flat in 2005 because we simply did not have the inventory to keep up with demand. In 2006, in contrast, we expect contract sales growth to ramp back up, albeit with much of the growth in the second half.

The bulk of our Marriott Vacation Club contract sales are likely to come from highly successful projects like Newport Coast, Aruba Surf Club, Las Vegas Chateau, and Hawaii's Ko Olina and Maui projects. We are also introducing new and exciting projects including several Ritz-Carltons. Most of the Ritz-Carlton projects will begin sales in the second half of 2006.

As we mentioned on our last call, since financially reportable results typically lag contract sales, our flattish contract sales in 2005 will translate into flattish segment results in 2006, at approximately $270 million. Translating this performance to the income statement, we expect timeshare interval sales and services revenues, net of direct expense will decline 3% to 5%, offset by stronger joint venture earnings in 2006. While reported earnings will be constrained, the cash flow of the business is expected to increase again this year. In 2006, we expect NBCI's contribution to net cash provided by operating activities to increase substantially. For the first quarter, we expect contract sales to decline approximately 15%, again largely due to limited available inventory of Ritz-Carlton Club fractional product.

On the income statement, timeshare interval sales and services revenues net of direct expenses are expected to decline 5% to 12%. We expect general, administrative, and other costs will decline from $753 million in 2005 to a range of $650 million to $660 million in 2006, including roughly $44 million in noncash costs associated with the new accounting rules for share-based compensation.

We expect to continue to focus on recycling capital by selling hotels and mortgage notes as conditions warrant. In fact, asset sales over the next 12 months are likely to approximate $1 billion. As a result, we expect to report gains and lower interest expense as these transactions close. Gains are expected to total approximately $130 million in 2006, including the gains from our sale of timeshare mortgage notes in the second and fourth quarters. On a full year basis, we expect net interest to be an expense of approximately $75 million, $20 million of which should occur in the first quarter.

Equity in earnings is expected to total approximately $15 million in 2006, a decline from 2005, reflecting the sale of several joint venture hotels in 2005 and the likely sale of the Whitbread joint venture hotels in early 2006. At the same time, we expect stronger profits for our timeshare and Courtyard joint ventures. The FASB 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. We acquired 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 $110 million to $115 million after tax, which will be reflected below the line, similar in format to discontinued operations.

Given these assumptions and those outlined in the press release, we believe earnings per share for the full year 2006 will likely total between $2.95 and $3.05 per share. This forecast excludes the one-time, noncash impact of accounting changes for the timeshare business and ignores our synthetic fuel business but includes a $0.13 EPS impact of FAS 123R, recognizing equity-based compensation expense.

So how do we bridge our new 2006 guidance from our last earnings release? A quarter ago, we estimated 2006 EPS at $3 to $3.10 per share excluding FAS 123R or $2.87 to $2.97 after FAS 123R. Our current guidance of $2.95 to $3.05 after FAS 123R is therefore almost $0.08 a share better. On an apples-to-apples basis with both estimates including the impact from FAS 123R, our outlook for business fundamentals are about the same, but our expectations around redeploying capital have become more bullish.

First, our fee guidance is the same. While we pushed our RevPAR expectations up slightly, the fee impact was offset by the negative fee impact from New Orleans and Cancun in 2006. If we received business interruption insurance proceeds in 2006, we could see some upside. We have brought down guidance for owned and leased hotels, corporate living, and other very, very modestly. The biggest impact here is the loss of roughly $20 million of lease income on the Courtyard land which we sold in December, largely offset by stronger performance from other areas.

EPS associated with timeshare sales and services declined about $0.03 per share versus prior guidance, primarily reflecting the impact of inventory shortages in 2005. In addition to FAS 123 R, G&A and other also includes about $0.02 for product initiatives and development spending. The gains and other income forecast has been fine-tuned as we expect to sell over $1 billion in assets in 2006. We expect to pick up about $0.09 per share of earnings from these transactions.

Equity and earnings has declined about $0.03 per share due to the assumed accelerated timing of the Whitbread asset sales, offset by about $0.02 favorable interest savings. Our tax rate is expected to decline about half a percentage point from 2006 -- 2005, excuse me, due to a greater proportion of our income coming from foreign countries with lower tax rates, so we picked up about $0.02 here. And finally a lower share count associated with our 2005 share repurchase adds about $0.03 more of earnings. And we expect to remain aggressive buyers of our stock in 2006.

The most common question we receive from many investors these days concerns how long can this stage of the business cycle last. Often the question is asked in terms of a baseball game with nine innings. We would typically say that we are probably in the third or maybe the top of the fourth in answering this question. However, recently I came across some interesting baseball trivia. Seems that on May 1st, 1920, the Boston Braves played the Brooklyn Robins in Boston. A game that lasted over eight hours went 26 innings. By the way, it was finally called a draw at a score of one to one. Well, the way this ball game is going right now, we're hoping for at least 26 innings. It's been a great year. Jessica, we'd be happy to take any questions at this time.

Thank you, Mr. Sorenson. [OPERATOR INSTRUCTIONS] We'll take our first question from William Truelove of UBS. Go ahead, please.

Hi. Thanks for the quarter, guys. In terms of the stock option expensing, I know a few years ago Marriott changed the way you were granting and who was receiving stock options. So as you start amortizing those vesting periods going forward, is it still going to remain roughly $44 million going forward in '07 and beyond or do you expect that number would come down based upon the changes made in prior years?

It will be about the same. Actually, in that $44 million, it's all driven by the new accounting standards, but about half of it is technically options expense and about half of it is expense associated with the way we charge -- the way we've accelerated, in effect, the charge for retirement-eligible employees' receipt of restricted stock units. We may see some mix over the next few years in options usage versus stock usage, but now that they will both be expensed on essentially the same schedule, we think that expense is essentially a current run rate of what will be added on an annual basis.

So, just to be clear, that other portion, the retirement acceleration, vesting or whatever, that's new for Marriott this year?

The way the rules work for retirement-eligible executives is -- is essentially new, yes.

Okay. I thought it was a little higher than normal. All right, thanks.

You bet.

We'll take our next question from Joe Cogan with Banc of America Securities. Go ahead. Please. Excuse me, J. Cogan.

Hi. good morning.

Wondered if you'd changed your name, Jay.

Well, you know, it's a new year, right? So, keep it -- keep it fresh. I got a couple questions, one on timeshare and then one on just your exposure to the union issues and just general thoughts. On time share, understanding some of the issues relates to timing and accounting and all, can you give us any sense, Arne, as to what your thoughts on reported timeshare results for '07 might look like both on a wholly owned or consolidated basis as well as on a joint venture basis? Even growth rates?

Obviously we do not have a budget for 2007, and most people here would be relieved to hear we're not starting that for some time, given what we've been through over the last few months. It's hard to give you much of a guidance -- much guidance there. I would guess that we would revert in 2007 to more or less normal, reported segment results. Normal in terms of the growth rate. So probably a mid-teens growth versus 2006, but that's a very rough swag, and I can't really give you any guidance on precisely how much will show up in a joint venture line versus others. Although, as we said in the prepared remarks, we expect to see joint venture become an increasingly important part of that business.

Right. Understood. On the Union issue, if you would just remind us your exposure in some of these key markets as we move through 2006 and just your general thoughts as we enter this year as to how this may or may not shake out?

Union issues are a lot on people's minds. I may frustrate you all a little bit by not saying a whole lot about that this morning. Obviously, we care a great deal about our associates. We spend an awful lot of time building careers for our associates and dealing with total compensation packages, cash, and benefits, and the like, and we expect to continue to be focused on that not just this year but forever. We are, as a company, significantly less unionized than a number of our other competitors, with the union workforce and the 5%, 6%, 7% range I suppose of our total employees. And, given our model as a management and franchise company, to some extent, much of this is a question about unit level profitability as opposed to an impact on our fees. Having said all that, there is clearly activity out there. I will not talk in this call about what we anticipate in negotiations that really have not started or, if they've started, they've barely started. And so as a consequence we'll just have to see how this develops over the course of the year. Financial impact to Marriott should not be significant.

Okay, thanks a lot.

You bet.

We have a question from Harry Curtis with J.P. Morgan. Go ahead, please.

Good morning.

Hi, Harry.

If you could address your share count, where it was on a fully diluted basis at the end of the third quarter and now at the end of the fourth quarter, and how much did you buy back so far in the first quarter?

We've bought back about a million, maybe just shy of a million and a half shares, something like that, in 2006. So I'll answer your last question first. I'm not sure I've got the third quarter number that you asked for, but I'd invite you to look at the first table in our earnings release, and you can see from year end '04 -- excuse me. For the fourth quarter of '04, our fully diluted share count was 239 million shares and change.

And that was on average for the quarter.

That's the weighted average for the quarter. That's right. And 2005 fourth quarter fully diluted share just kind of just shy of 221 million shares. So the fully diluted count is down about 18 million shares. That's probably the best indication of your run rate, if you will, going into 2006.

Okay. So you were somewhere probably in the high teens as you exited 2005?

Yeah. I mean, we don't do a calculation. We don't do a sort of midnight New Year's Eve calculation if you will. We do a weighted average share count. But clearly what we bought in the fourth quarter by itself will tend to further reduce that from the average we had in the fourth quarter. But again, with -- you -- you've got a whole bunch of things going into the sausage grinder, including some greater dilution from options with incremental grants but also some greater dilution as the stock price moves up.

And then a follow-up. Your sequential debt declined from the third quarter to the fourth quarter to $1.74 billion. Over the next, say, 6 to 12 months, would you expect that a similar kind of decline in your gross debt balance?

Probably not. I would -- I'd encourage you just to think now that that will stay relatively steady in the next -- you know -- call it in 2006. That should not be viewed as a forecast or necessarily even really a philosophical statement about the financing of the company, but simply that share repurchases and investing in incremental value enhancing growth for the business should consume essentially all the capital we receive from cash flow from operations and from asset sales.

That's terrific. Thank you.

Harry, I can add one thing to your first question. Common shares outstanding at the end of the quarter, the total share count was 205.9. Average for the quarter the dilution factors totaled 13.5 million shares. If you wanted to add those together, you'd get an approximation of where we were.

Again, the 205 is basic, not fully diluted.

It's basic shares.

Okay. That's helpful. Thank you.

We'll now go to Jeff Donnelly with Wachovia. Go ahead, please.

Good morning, folks.Arne, I'm disappointed to hear that Boston didn't win that game you referenced, but some of my neighbors would probably see the silver lining in that New York didn't win.

It's only 85 years ago, so maybe in another few years, you won't sore anymore.

We'll have to wait another 80, I guess. First question, actually, on just supply growth. A couple people have been citing that growth in the hotel construction pipeline is accelerating, and we've heard that, as well, but we're also heard that many projects are entering planning and fewer are getting shoveled in the ground because of rising construction costs. Do you have any comment on that?

Clearly supply growth, looking backward a year, has been very, very low. Actually, if you factor in some of the hotels lost through these storms, you arguably have no supply growth in 2006. And even if you adjust for those, your supply growth is probably sub 1%. Where it's going from here -- you know -- the better data and better source of this stuff is not Marriott. We do not make any attempt to score the industry as a whole. We obviously look keenly at our own pipeline and work with our partners on it. And what we see is the higher-end supply growth, so Ritz-Carlton, Marriott, and Renaissance, is mostly resort focused, mostly has got mixed-use elements to larger developments. That might be residential. It might be fractional or timeshare. Probably always will include a spa, usually will include golf. But in the U.S. at least, that's very much a resort-focused effort.

There are a few urban projects in the pipeline. Those tend to be convention center related, I guess. I think both Boston and D.C. in that regard, and clearly there are some other cities in the country that are looking a little bit at convention hotels. We are seeing still good appetite on the limited service side. The Courtyard, Residence Inns, Spring Hill Suites are all in good strong demand, and as we see performance of those assets types step up, we'll see a bit of supply growth in that area. Clearly that will be the leading edge of supply growth as the strong economic trend continues. Then obviously for us tends to be less top of mind, to some extent, for U.S. investors, but the supply dynamics and development dynamics in the rest of the world are very different from region to region. Asia, particularly China and India remain very strong, great development pace in those markets, and they continue to get to be bigger and bigger markets, and we continue to make more and more money from those markets. MidEast is very strong. We mentioned Doha and Dubai in the prepared remarks, and those are great, great markets that show tremendous future growth in it. And, even in Europe, while there's less supply growth to the industry, there continues to be a shift of existing product and a dramatically disproportionate share being taken by branded companies of what new supply is being developed, which continues to give us good growth prospects there.

Just a follow-up to that. I guess, given that you're seeing the demand in the full-service end in resorts and convention centers, does that stand to reason, then, that effectively, without maybe a condo or timeshare component or maybe municipal support, you really can't justify full-service construction today?

It's not far off. There may be some exceptional deals, but generally that's a fair assumption.

Okay. And then, I was curious. I mean, for you guys, you'll probably be focusing more on conversions than new builds I guess for your unit growth.

Yeah. Well, conversions or working with our partners. We'd obviously love to see our partners build new hotels and bring them to us. That would make economic sense.

As long as we have franchisees building hotels in secondary and tertiary markets.

I mean, it might be a layup of a question, but I guess there's several of your competitors are looking to launch new brands, mainly using newly built units. Do you think that has any implications for your competition or maybe the value of brands?

Well, I think it's unlikely to have much impact to us. Obviously, I'll say this. We watch what our competitors are doing a lot. We're watching what's happening on product innovations a lot. We're listening to our customers a great deal. But when you think about the limited service area -- I'll just pick two brands, Courtyard and Residence Inn have massive RevPAR premiums, great distribution, and, well -- it's -- we shouldn't say anything is true without exceptions. I think generally, it's the case that when the Courtyard brand or Residence Inn brand is available in their markets, they're going to get the call first, and we are very much dedicated to making sure that continues to be the case for a long time to come.

Okay, and just a last few questions. On the syn fuel, you mentioned that you shut down production in mid-January. Are there any costs associated with that we'll see?

Well, the number we gave you in the prepared remarks includes, essentially, writing off whatever's in our -- on our balance sheet plus whatever losses we incurred before we shut down in January, and that total could be about 8%.

Great. Thanks.

Thank you.

Our next question is from Steve Kent with Goldman Sachs.

Hi. Just two quick questions. One is just on your RevPAR guidance for next year of 8 to 10, could you just talk a little bit about the booking window, whether it's changed, whether it's longer or shorter? And also are you holding back inventory to sort of drive last minute rates? And would you say, Arne, the 8 to 10 is maybe a little bit more risky or maybe even has some more up side than previous years? How would you characterize that? And then secondly, just on your room additions, I think -- I don't know if you commented on this, but I think a quarter ago you said 25 to 30,000 rooms for '06. Now you're saying 25. I don't remember if you commented on that. But why is it now towards the bottom end? Is it this construction costs that you've mentioned just broadly?

Yes. So let's start with the 8% to 10% RevPAR and kind of what's happening in the booking side first. I think it would be foolish to ever describe an 8% to 10% full year RevPAR forecast at the beginning of the year as being conservative. I think, if you look back over decades' worth of forecasting in this industry, you would find very, very few years where anybody has come out with those kinds of forecasts at the beginning of the year. Having said that, as we mentioned in the prepared remarks, we're off to a great start. That's consistent with those forecasts. We've obviously factored in what our budgets are from individual hotels and what our bookings are already on the books, and the pace that's coming out of these various markets, and we think that's the right range. Based on the way things are trending right now, it doesn't depend on a lot of incremental economic strength, if you will. It depends really on our continuing to go on this track. Obviously the biggest risk associated with that is going to be the economic risks associated with the U.S. economy as a whole. If you see weakness in GDP growth, if you see weakness in corporate profits, those things will ultimately have an impact to us. Group booking pace is strong. We look at it by brand. We look at it by type of product. And essentially on all scores, both rooms, bookings as well as F and B bookings are up meaningfully from last year. The booking window maybe has expanded modestly, but it's not dramatically different than it was a year ago.

And as we've talked about before, the decision whether to, in effect, group down, hold fewer groups on the books so that we can leave more rooms open for transient, that's something that is done on a market-by-market basis. We have some significant hotels that are holding more rooms back for transient business to come up, but we've got a number of big hotels which are always going to be big group hotels, and they're trying to book as much as they can, but they're trying to be as aggressive as they can in rates. In terms of the rooms-growth targets, we obviously missed, in terms of openings in 2005, at 22,000 rooms. As we mentioned, I think mostly that's construction-related, driven by high construction costs, a lot of demand for construction services, and I think as our partners have confronted those sorts of issues, projects have slowed down a bit as they've tried to make sure that they do everything they can to keep their costs in hand. But generally those projects are continuing to work their way through our pipeline and will open. I think implicit in this sort of 25,000 room-opening forecast for 2006 is we'll continue to see a little bit of slippage because of those construction-related issues, and so we may open a few thousand fewer rooms in 2006 but should continue to see that pipeline expand.

Okay. Thanks.

You bet.

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

Good morning, Arne and Laura.

Hey, Bill.

Arne, we spent a lot of time talking to investors and trying to convince them that lodging is a business-cyclical industry, not consumer-cyclical, and that argument doesn't hold on timeshare. Are you seeing any changes in trends? Fewer visitations? Fewer conversions? Maybe price sensitivity? That would give you any concerns that the consumer is changing their willingness to invest in timeshare?

Absolutely none.

Okay. Second question. Any hesitation on the part of the owners to continue to put money into upgrading hotels, given some of the other increases in operating costs these days?

Oh, absolutely yes. Just to give you a bit of a contrast between those two answers. I'm not sure -- I would quibble with you a little bit -- I'm not sure I'd use the word "hesitation." I think generally our owner and franchisee community has been actively involved with us in developing the major product enhancements that we have rolled out and announced here in the last year or two. And they're very supportive of taking those kinds of steps for the hotels that are within our brands. We're doing a lot, not just in beds and rooms, but we're doing a lot now in common spaces, and they are very involved in that, and I think generally supportive. At the same time, owners reasonably want returns associated with capital that's going in, and so this is a process that we work through with them. There is a lot of capital entering into these hotels today, and it's both because it's the right thing to do, and because we think, and they think they're good for terms associated with it.

All right. Final question. And that is we've seen a tremendous amount of M&A activity, whether it's Blackstone or some of the other activities, Fairmount. What is your appetite these days to expand your brand portfolio or perhaps go out there and acquire additional properties or brands?

If we can participate in the M&A area in transactions that we think create positive value for our shareholders, we'd love to play.

And you've looked at some of these in the past?

We look at everything.

Okay. Thank you.

You bet.

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

Good morning. I had just a quick clarification question on the shares. So it looks like you repurchased 26 million shares in '05, but did you say the share count dropped by about 18 million?

When you look at the weighted average for Q4, 2004 versus 2005, it's about 18 or 19 million. So basically again, once you got going through that grinder, you got 26 million shares or so disappearing because they'd been purchased back. You've got some issuance of new restricted stock units or options in the employee program. And you've got the impact on dilution of an increase in share price, which for any existing options will tend to increase, in effect, the contribution that goes into the fully diluted sausage grinder.

Okay. And then looking ahead to -- to '06, I think you used the word "run rate" previously. So we should look for something similar?

Well, we're not -- we're not giving you a forecast that we're going to buy 26 million shares in 2006, if that's what you're asking, but I think the run rate I was talking about is, if you look at the fully diluted share count in Q4 '06 -- and Laura jumped in with a little bit more, sort of an end of quarter kinds of numbers -- you ought to view that as sort of a baseline if, if you will, for what the fully diluted share count is going to be in 2006. For all of you modelers out there, then you make some assumptions about how many shares we've purchased back and what's happening with the share price, and you can run some sensitivities. Based on all the guidance we've given you today for 2006, including really all of the principal line items on our external P&L, including EPS, you can back into some assumptions about what we think is the full year 2006 fully diluted share count.

So your earnings guidance obviously includes some degree of share repurchasing.

Yes. It does.

Okay. Great. Thank you. Very helpful.

You bet.

Our next question comes from David Anders of Merrill Lynch.

Thank you very much. Hey, Arne, more of a conceptual question on timeshare. Because as your portfolio has gotten larger and larger, it's obviously become increasingly difficult to grow at the same rate. I mean, will we see the growth rate on timeshare materially decelerate? I know you kind of took a stab at '07 saying growth rate is going to reaccelerate, but if you do a two-year average, obviously, you're going to cut that in half. So how do you think about timeshare and the growth rate, long term?

We actually don't -- I will argue with you a little bit on the predicate of your question. We are not seeing that the growth in our business is making it more challenging to grow our business. What we've seen in 2005 is A, the faster than we anticipated sale of the Ritz-Carlton projects we had, and, B, the competition from a value perspective for the kinds of real estate that could support those projects. So everybody wants those pieces of land. That those two things have made it more difficult than we anticipated to have enough of that inventory to meet our customer demand. And I think that's where the interesting challenge will be. We feel like we're making good progress against that, but depending on what happens with -- you know -- whole residential competition for those resort sites or other sort of impacts to the real estate valuation, that's where the competition is going to be. If we can get that, we think we can continue to profit from a growing demand for timeshare and fractional projects which is, if anything, dramatically enhanced by the demographics associated with the baby boomer generation.

Okay thank you.

You bet.

We'll now go to Joe Greff with Bear Stearns. Go ahead, please.

Good morning, everyone.

Good morning.

Arne, going through your '06 outlook from before, did you break out your fee outlook between base franchise incentives management?

No.

[inaudible] Would you? And more specifically on incentive management fee, it grew 42% year-over-year. What sort of a growth rate are you looking for as you go into '06?

As reported, we mentioned the $14 million or so of 2005 incentive fees that were really from prior years, and then you've got the Wilma thing particularly, particularly the impact on the Cancun hotels. I suspect, as reported, the growth rate is going to -- of incentive fees will be in the 20% range, maybe a few points above that so a bit lower on a reported basis than we saw in 2005 because of those two factors.

Of course that assumes there's no insurance received during 2006.

And then franchise and base ought to grow -- it's going to vary a little bit by quarter. On a full year basis, they ought to grow essentially comparably. You've got, in the first couple of quarters, the structural change of the Whitbread portfolio going from essentially a franchised free contribution to a base fee contribution, so you've got that geographic change. But over the full-year basis, they ought to grow at about the same rates.

Okay. And this might sound like a negative question, but it's really not intended to be. You purchased $334 million worth of stock in the 4Q, which was less than -- than what you did in the first three quarters of '05. Can you sort of just talk about how you -- how you approach share repurchase in the fourth quarter? Are you sort of looking to slow it down given where the share price is? Can you explain that a little bit?

In other words, you're wondering why did we purchase only --

Yeah. Why did you only [inaudible] --

-- [inaudible] dollars' worth of stock last year? There's not really a good answer to that. There are a lot of things that go into our approach to -- to buying back stock. There are technical pieces about board approval and the like. We generally had authorization from the board for the full year, last year. At times our consideration of various transactions or the timing of asset sales will have some relevance to when we are putting that capital out. We've talked about $1billion or so of real estate which is pending in the market. We obviously have both the Whitbread portfolio and the European portfolio, which are working their way through to be sold, and we had a number of transactions with -- which closed in the fourth quarter. So while we are aggressive buyers of our stock, one of the things that will be factored in is we do sensitivities and basically say what happens if we don't sell any of the things we're trying to sell? What does that do to our balance sheet? And we calibrate that into what we're doing on a regular basis.

Okay. Great. Thanks so much.

You bet.

We'll take our next question from Adam Cohen with CreditSights. Go ahead, please.

Good morning. Congratulations on a great year.

Thank you.

I just wanted to get a sense with the timeshare interval sales and services revenue line. Could you just tell us how much of that was reimbursed costs in '04 versus '05?

In timeshare, really none.

None of it is reimbursed?

No. That's unlike the hotel business. Essentially all of that portion of our timeshare business is on balance sheet. The only part of our timeshare business which is not wholly consolidated is the joint venture contribution, which in 2005 was significantly more -- more significant, if you will, than 2004, but still is a relatively small piece of the timeshare overall segment. Those joint ventures have expenses that they incur on their books, which include paying for costs that we incur to sell that product, but none of it shows up as reimbursed costs in the P&L the way it does in the hotel business.

So, really, so $1.48 billion is really -- that's predominantly interval sales?

Yes. Oh, yeah.

That's great. Okay. The last question is I noticed debt went up a little bit from last year. I guess $200 million. I wonder if you could just give us any color on that.

Debt is up actually quite a bit more than $200 million. From year end '04?

Yeah.

Yeah. We're up. Our net debt figure was probably more like $600 million at the end of 2004.

Yes, right. It's $500 million. I apologize.

If I remember right. And so we're up -- we're up a billion-ish or so. And basically there what you've got, we invested a $1.1 billion to $1.2 billion in growing our business this year, plus we bought back $1.6 billion and change of stock, so that's about $2.8 billion going out. And we had coming back in from cash flow from operations and asset dispositions -- you know -- that amount less a billion basically.

Okay. Great. Thank you very much.

We actually feel we're better levered today, more appropriately levered today than we were at the end of '04. So this is not an accident.

Great. Thank you so much.

You bet.

We have a question from Jeff Randall with A.G. Edwards. Please go ahead.

Thanks. Good morning.

Good morning.

Arne,when you talk about comparable company-operated house profit margins being up 180 basis points, what is that up to in terms of an absolute number?

In the fourth -- at the fourth quarter number you gave me --

No, 180 was for the full year.

I've got it here.

And then second question which kind of relates to that, is how would the 32 Marriott operated hotels in China compare to that -- to that absolute margin?

Oh, okay. Well, I think these folks will look it up, but I think we're in the low 30s probably on a full year basis. 33% or so. Now, we use our first measure at Marriott is gross operating profit. That is different from cash flow, and that is different from EBITDA which is often reported by our competitors. So you've got to be very careful about taking that number and saying we're either -- I think the number will be higher than our competitors, but you've got to be very careful about making sure you're on an apples-to-apples basis. In China, the operating margins are probably -- I'll guess a little bit here, but they're probably 50% plus on the same measure.

Wow!

And that is driven really by the cost of labor.

And then in the franchising business model in Asia versus the U.S., what would be sort of the differences in fee income generation or profitability with those business models?

Yeah. It's mostly -- China for us is almost exclusively affected, may be exclusively a managed portfolio as opposed to a franchise portfolio. In the United States, a managed hotel would have 3% or so. It would be higher probably in some circumstances, lower in very, very few but maybe 3% of revenues would be base fees and maybe 20% to 30% of profits after an owner's priority would be incentive fees. In Asia, particularly in China, the base fees percentages have been growing for us over the last couple of years, but would be probably 3% at the high end. Some of them would be a bit lower than in the United States. The incentive fees -- the percentages are smaller, but it's from the first dollar of profit. So we might get 10 points or so. What we've seen over the last few years increasingly is that the value per room to us -- present value per room to us of the fees associated with those contracts, is comparable to the contracts we're getting in the United States.

Okay.

If you think about that margin question you had --

Yeah.

-- margins worldwide for managed hotels, managed comparable hotels were up 180 basis points to approximately 35.5%.

Okay.

House profit margin.

Okay. Thank you. Just lastly, Arne, when you -- what is the year-over-year growth rate in the negotiated corporate rate that's implied in the outlook for '06?

Special corporate, probably in the 7% to 9% range, '06 versus '05 rate.

7 to 9% growth in rate?

Yeah.

Okay. Thank you.

You bet.

We'll now go to Celeste Brown with Morgan Stanley. Go ahead, please.

Good morning.

Good morning. How are you?

Good. How are you? Can you review just in a little more detail what's in the billion of asset sales? Obviously the Whitbread JV, and I think the CTF hotel. Can you discuss a little bit more?

Yeah, the -- I'll do a bit of this. I won't get it exact, Celeste. But the investment we've got in Whitbread was about GBP90 million pounds, I think. It would be $170 million maybe, something like that. The CTF assets that we bought ourselves, obviously excluding what Walton Street and Sunstone and Tarsadia acquired was probably $300 million to $350 million worth. I don't think we'll sell all of those in '06, but we ought to sell -- if it's $350 million, we ought to sell $300 million of it. We've probably got another, oh, I don't know, $200 million to $300 million worth of assets that we've acquired on the open market, mostly in Europe, perhaps all in Europe, which are on the market to be sold today, and I think those three things would represent the bulk of that billion dollars.

Thank you.

You bet. We're going to take one more question if there is any. Jessica, have you got any left in the queue?

We do. We'll take our final question from David Katz with CIBC World Markets. Please go ahead.

Good morning. Just in under the wire.

Yeah. Lucky you.

Congratulations.

Thanks very much.

Obviously most have been asked and answered, but can you just talk quickly about your booking window from the perspective of consumer versus business? And perhaps put that in a little historical perspective. We usually talk about transient versus group, and certainly business is a critical piece. But do you have any statistics along those lines that split sort of consumer booking window versus business?

That's a good question. I bet we have the data, but we don't have it in this room, so you're stumping us with the last question. Clearly, though, you think about a market like New York, we're hearing again -- we have been hearing again over the last few months the kinds of things that we heard a few years ago, which is everybody I've ever met in my life calling to say, can you help me get a room in New York? It seems to be all full.

Me, too.

We know from that that -- you can guess that the booking window for transient business is expanding in that market as a result of it. That's not going to be the dynamic that's in every market, and I think until you get to that kind of dynamic, you might have some expansion in the group area but probably not very dramatic, and we have not seen any -- when you look at the aggregate numbers, we've not seen a material expansion in the group booking window at least yet.

And just quickly, when we ran into each other last, I asked about an update for sort of Las Vegas and a presence there. Are there any further details to talk about?

Nothing we're prepared to announce yet. We still view Las Vegas as an important place for us to be, and we continue to look at a number of opportunities.

Great. Thanks so much.

Thank you all very much for your time and attention this morning. We look forward to seeing you all soon. Keep traveling.

Thank you. Again, that does conclude today's conference call. We appreciate your participation, and you may now disconnect your phone line.