萬豪國際 (MAR) 2006 Q1 法說會逐字稿

Good day , everyone and welcome to this Marriott International first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] At this time, for opening remarks and introductions, I'd like to turn the call over to the Executive Vice President, Chief Financial Officer, and President of Continental European Lodging, Mr. Arne Sorenson.

Please go ahead, sir.

Thank you.

Good morning, everyone.

Welcome to our first quarter 2006 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, April 20, 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 website at www.marriott.com/investor.

First quarter results were simply fabulous.

Excluding our synthetic fuel operation and the one-time charge for the change in time-share accounting, EPS totaled $0.76 in the first quarter, compared to $0.53 in the prior year, a 43% increase.

Adjusted EBITDA increased 17% to nearly $324 million.

North American systemwide RevPAR rose nearly 11% during the fiscal quarter, with average daily rates up 8.5%.

For those of you who compare our RevPAR improvement to others in the U.S. industry, for the calendar quarter, our North American systemwide RevPAR was even better.

It rose an impressive 11.7%.

Manhattan continued to be a stellar market, with RevPAR up 13% during the quarter, but good performance is spreading across the country.

San Francisco was up 10%, Los Angeles up 12%, San Diego rose 15% and Chicago was up an even 20%.

D.C. was one of the few soft markets.

With a tough comparison to last year's inaugural, fewer first quarter city-wide, Congress in session for six fewer days and the lobbying business in disarray, lodging demand in Washington was unusually soft during the quarter.

We were encouraged to see group bookings looking good for the second half of the year in D.C., and trends in business is expected to turn up.

New Orleans is slowly recovering.

Nearly 90% of our 4,300 rooms in New Orleans are open and operating.

The first large city-wide conventions since Katrina is expected in June, as the American Librarians Association lets their hair down by bringing 9,000 room nights into the Big Easy.

Across the U.S. demand strengthened in many smaller city and suburban markets during the quarter.

Courtyard, systemwide RevPAR increased 11.3%.

Our franchise full-service hotels improved RevPAR over 13%.

Systemwide, full-service hotels in airport and suburban markets experienced 12% higher RevPAR in the quarter.

We believe the widespread upturn is due to several factors.

First, product improvements, particularly bedding and renovations, have contributed to an improvement in demand for our products.

Secondly, some full-service hotels are limiting group business in favor of higher-rated transient business.

One large hotel, for example, pushed their transient business from 62% of room nights to 70% of room nights, year-over-year.

Third, in some urban markets, new demand is so high and new supply so low that heads are landing in beds in outlying areas.

And lastly, we have raised rates.

Marriott Hotel and Resort special corporate rates increased 10% during the quarter, ahead of our seven to 9% expectation.

While lagging the transient business, group revenue at our full-service comp hotels turned in a respectable 6% growth rate during the quarter.

In Florida, group business was weak, but second quarter bookings are very strong.

Third quartof -- third quarter Florida bookings are likely to dip again around the hurricane season, while fourth quarter bookings are expected again to be extremely strong.

For the total U.S., for the remainder of 2006 overall group room revenue on the books is up 10%, compared to this time last year.

Food and beverage revenue at our large group hotels is up 23% for the rest of the year.

Outside North America, systemwide RevPAR increased nearly 7% during the quarter.

A strengthening euro and British pound depressed international results, as systemwide RevPAR rose 10% on a constant dollar basis.

Asia was particularly strong, as RevPAR in China increased 11%.

Caribbean demand was outstanding, as leisure business bounced back from a tough hurricane season.

Our new Ritz-Carlton in Grand Cayman opened in December, and achieved nearly a $565 average daily rate in its first three months of operation.

The U.K. is showing considerable strength, particularly business travel to London.

Performance in continental Europe remains mixed, with strength in Eastern Europe and only modest RevPAR improvement in Germany and France.

On the margin front, utility costs rose 15 to 20% in the quarter, reducing property margins by about 30 basis points.

We were proud to be recognized during the quarter by the U.S.

EPA as an Energy Star partner of the year, for the second straight year, for our implementation of programs that save more than 83 million-kilowatt hours of electricity consumption, and reduced greenhouse gas emissions by 68,000 tons annually.

Marriott was the only lodging company to be so recognized.

This is more than just good business.

Hourly wages increased roughly 4% during the quarter.

Despite these increases, however, house profit margins in North America increased 210 basis points during the quarter, and property level EBITDA margins, calculated as if wholly owned, rose 230 basis points.

For our full-service brands, margin performance was even better than this North American average.

The Marriott brand portfolio saw house profit margin increase by 230 basis points and Renaissance, with its stronger RevPAR growth, saw margins improve 360 basis points.

Higher room rates accounted for much of the house margin improvement, but we also reduced management headcount at some hotels, increased fees for certain other services at hotels, and improved systemwide productivity.

We increased restaurant and catering prices, and realized greater efficiencies in the costs of some of our systemwide programs.

By the way, for the Marriott-managed portfolio in the U.S., our first quarter house profit margins are now just less than two percentage points lower than those from the first quarter of the peak year of 2000.

While domestic margins showed a 210 basis-point improvement, our guest satisfaction scores rose even more.

We saw meaningful improvement in measures for bed comfort, in-room technology, room upkeep, and overall guest satisfaction.

Nearly one half of our managed hotels paid incentive fees in the first quarter, compared to only 28% in the 2005 quarter.

Incentive fees from our Courtyard and Renaissance brands both more than doubled year-over-year.

In the 2005 quarter, total incentive fees included $8 million that were calculated based on prior-year results, but not earned and due until the first quarter of 2005.

In the first quarter of 2006, the base fee line included an unusual $5 million in fees that were similarly calculated based upon prior-period results.

Excluding both the impact of the $5 million of base fees recognized in 2006 and the $8 million of incentive fees recognized in 2005, base and franchise fees increased 13% and incentive fees increased 40% in the first quarter of 2006.

Owned, leased, corporate housing and other revenue increased over 50%, and net of direct costs, results more than doubled.

This was largely due to the Renaissance hotels we purchased last year.

We remain highly confident that our portfolio of owned Renaissance hotels will be sold this year, and expect lower owned-lease earnings, as those transactions are completed.

Last year we took a $6 million severance charge for a hotel closed for renovation.

In the 2006 first quarter, we received a $4 million fee for the termination of a hotel management agreement, but earned $4 million in lower lease income, as a result of the sale of Courtyard land at the end of 2005.

We opened 6,800 rooms during the first quarter.

Over half of the rooms were conversions from competitor hotels.

Owners and franchisees have agreed to invest substantial sums in these hotels to meet our product standards.

Our development pipeline increased to over 75,000 rooms, largely due to increases at our franchised limited-service development in the U.S., international expansion of the Courtyard brand, and worldwide growth in Ritz-Carlton, especially around mixed use projects.

Today, internat -- international development makes up a quarter of our development pipeline.

We expect conversions to account for roughly 30% of our 25,000 gross room additions in 2006.

Time-share interval sales and services revenue declined 12% during the quarter, while net of expenses, profits declined a similar amount.

Overall contract sales declined 10% during the quarter, reflecting the sellout of several projects.

We expect to start sales at six new projects later this year, including Ritz-Carlton fractional projects in San Francisco, Miami Beach, and Hawaii.

Our synthetic fuel business contribi -- contributed approximately $0.01 to earnings per share in the first quarter, compared to $0.08 per share in the prior year.

The decline in earnings was due to much lower production of synthetic fuel, combined with an assumed 20% phaseout of tax credits.

The tax credits are gradually phased out, as oil prices rise over a benchmark level.

In the first quarter, we entered into an oil price hedge, to cover a portion of operating losses that could occur at high levels of tax credit phaseout.

We do not have a hedge in place to support second quarter production, so we shut down the plants early this month.

With the recent spike in oil prices, we can't be certain when or whether we will turn the machines back on.

As you know, synthetic fuel credits cannot be earned beyond 2007, in any event.

We continue to exclude this business from our earnings guidance.

Let me take a moment to compare our first quarter results with the guidance we provided for the quarter in February.

First quarter earnings per share, excluding our synthetic fuel business and the one-time time-share charge, totalled $0.76 compared to guidance of $0.67 to $0.73 per share.

In other words, our earnings were $0.06 better than the midpoint of our guidance.

On the fee line, we earned about $0.01 more in franchise fees, due to very strong franchise RevPAR growth.

Our managed hotels earned $0.03 more than expected in higher incentive and base fees, including the $0.01 unusual base fee I mentioned earlier.

G&A was higher than expected by about $0.02, due to a $4 million cure payment for one managed hotel, and about $5 million, due to higher deferred compensation expense.

Tax advantages from the deferred compensation program helped reduce our tax rate to 33.9%, yielding about $0.01 favorable on the toc -- tax line, offsetting that higher deferred compensation expense.

On an ongoing basis, our tax rate should continue to run at about 34.5%.

Gains from asset sales, net of equity losses, were $0.01 better than expected, and net interest, including the reversal of loan loss reserves, generated roughly another $0.02 of favorable news.

Overall, our results reflect the continued strong business environment for lodging.

We recycled some capital in the first quarter, receiving approximately $77 million from the sale of one hotel, and another $87 million from the receipt of cash from two joint ventures, which had sold hotels.

We are on track to receive approximately $1 billion in proceeds from asset sales and loan refinancings in 2006.

And, with great top line growth and continued capital recycling, it looks like our return on invested capital is on track to be up another two points in 2006.

Our 20% target is getting closer.

Now, let's turn to our outlook for the full year.

We continue to expect 2006 second quarter and full-year North American Company-operated hotel RevPAR to increase eight to 10%, and we expect property level house profit margins to increase 150 to 200 basis points.

We are on track to open approximately 25,000 new rooms in 2006.

With RevPAR growth, margin improvement, and unit expansions in 2006, we expect reported management and franchise fees to increase roughly 14 to 16% to $1.17 to $1.19 billion.

For those of you interested in sensitivities for 2006, we estimate that one point of RevPAR up or down will impact total fees by about $12 million on a full-year basis.

In the second quarter of 2006, we expect fee revenue to increase to $290 to $295 million.

Our second quarter guidance presumes RevPAR and margins at the high end of our eight to 10% forecasted RevPAR growth, and at the high end of our 150 to 200 basis point forecasted improvement in house profit margins.

In the first quarter, owned, leased, corporate housing and other revenue, net of direct expenses, more than doubled over the 2005 quarter.

Much of this improvement was associated with the purchase of hotels that should be resold soon, so you should expect our owned and leased earnings to decline.

The first quarter also reflected the absence of Courtyard land ramp, which will continue to hurt comparables through the year.

On the other hand, strong business fundamentals should continue.

Net-net we estimate owned and leased earnings should total approximately $40 million in the second quarter, and approximately $160 million for the full-year 2006.

Turning to the time-share business, demand is strong, long-term cash flow and profitability are outstanding, and we have superb new products coming to market.

In the second quarter, we expect contract sales to increase sharply, up roughly 50% from last year.

Six new projects are expected to begin sales later in 2006, with four rolling out in the second quarter.

Of course, it can take some time for contract sales to be reflected in financially reportable revenue, as much as 18 to 24 months in some circumstances, but we are excited about the economics of the new projects.

In fact, our San Francisco whole ownership and fractional project, which will begin sales next month, has already lined up approximately $120 million in presale reservation volume, nearly one half of the project's inventory.

As we mentioned on our last call, since financially reportable results initially lag contract sales, our flattish contract sales pace in 2005 implies soft profits for the 2006 full year.

We anticipate time-share interval sales and service revenue, net of direct expenses, will decline very modestly to approximately $255 million in 2006.

Time-share segment results are expected to be flattish, at approximately $270 million for the full year.

While reported time-share earnings will be constrained, the cash flow of the business is expected to increase again this year.

In 2006, we expect MVCI's contribution to net cash provided by operating activities to increase substantially.

If the second quarter, time-share interval sales and services revenue, net of direct expenses, is expected to decline to approximately $45 million.

With the introduction of so much new product in the second quarter, sales and marketing expenses will increase.

Today, they are largely expensed on a cash basis.

Late in the year, as financially reportable development revenue improves, we expect the profit line to strengthen considerably.

You will notice that the second quarter guidance is materially lower than consensus estimates for time-share, but our full-year numbers are consistent with our prior guidance and with most external estimates.

As a consequence, you modelers will have to shift some of you're time-share earnings from the second quarter to the third and fourth quarter.

We expect general and administrative and other costs will decline from $753 million in 2005 to a range of $660 to $670 million for the full year 2006, including roughly $37 million in noncash costs associated with FAS 123, the new accounting rule for share-based compensation.

You may note that the cost of FAS 123 is lower than we estimated last quarter.

We continue to make progress reducing our use of options for compensation,, replacing them with fewer shares of restricted stock.

So while our option expense is lower than forecasted, our total share-based compensation expense, including the expensing of restricted stock, is consistent with our prior forecasts.

Bottom line, there is no G&A savings in this area compared to our prior guidance.

Second quarter G&A is expected to total $153 million to $158 million, reflecting the ongoing impact of share-based compensation expense.

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

In fact, asset sales over the course of 2006 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 time-share mortgage notes in the second and fourth quarters.

On a fuel basis we expect net interest to be an expense of approximately $75 million, with $15 million in the second quarter.

Equity and 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 later this year.

At the same time, we expect stronger profits from our time-share and Courtyard joint ventures.

Given these assumptions and those outlined in the press release, we believe earnings per share for the full-year 2006 will likely total between $2.99 and $3.08 per share, or about $0.04 more than our last forecast.

This forecast excludes the one-time noncash impact of accounting changes for the time-share business, and ignores our synthetic fuel business.

So how do we bridge our new 2006 guidance from our last forecast?

Our fundamental outlook is slightly more positive, especially with the strong RevPAR growth in the first quarter.

We remain very bullish about managed hotel fundamentals and our prospects around asset sales.

Compared to last quarter, our 2006 fee guidance is about $0.01 to $0.02 higher, largely related to very strong franchise fee growth.

You may ask why we haven't moved our total fee forecast up more aggressively?

As I mentioned earlier, approximately $5 million of the strong first quarter base fee result was associated with hotel performance in earlier periods.

Additionally, modest delays in sales of owned hotels mean that 2006 management fees may be less than otherwise would be expected.

On the other hand, on the owned and leased line, we've moved up our forecast to $160 million, an increase of about $0.03 per share, reflecting both a modest delay in closing transactions, as well as stronger performance from the hotels.

As last time, this forecast reflects the loss of roughly $20 million of annual lease income on the Courtyard land, which we sold in December.

Our guidance for time-share financially reportable results is unchanged, although contract sales are expected to increase over 40%, year-over-year.

Our general and administrative expense forecast totals $660 to $670 million.

Simply rolling the first quarter results forward increases the full-year G&A number by about $0.02 to $0.03, versus our last forecast.

Our expectation for G&A for the next three-quarters are unchanged from the guidance we gave you in February.

We continue to estimate gains for the full year at $130 million, consistent with our prior forecast.

The second quarter guidance includes $45 to $50 million in gains, including $35 to $40 million in time-share mortgage note gains.

There's another $0.01 or so of improvement from guidance we gave you in February arising from roundings and other minor adjustments.

In short, the first quarter was terrific.

Since Sep -- December 31, nearly 4,000 rooms converted to Marriott brands, a single quarter record. 8,000 rooms converted to our brands in the last 12 months.

Over 36,000 rooms converted in the last five years.

So the good news continues.

Owners of these hotels select our brands again and again because we deliver results.

Not in just one corner -- quarter, but day in and day out.

This was a great quarter.

A few great quarters here, a few great quarters there, and pretty soon you're talking about a whole dollar.

Well, over the past few years we've again demonstrated the strength of our model.

We are reminded that, in the long term, what really matters in the lodging business is creating consistent shareholder value.

We are focused on doing just that.

Abe, please open up the lines for questions.

Very good, thank you. [OPERATOR INSTRUCTIONS ] We'll go first to Will Truelove at UBS.

Hey, guys, very good quarter.

Thanks, Will.

About time-share for 2006, when you talk about the run out of inventory in 2005, and that's slowing down your sales in '06, because you're adding so much this year, does that mean that time-share sales growth will be quite expensive in 2007?

We don't have any forecast to give you for 2007, but generally, yes.

That logic works.

Yes.

And then the second question is, how many more hotels do you have left to sell in Europe?

In terms of closing, definitive and funding, we probably have six or seven, not counting any of the former Whitbread hotels.

Obviously, the Whitbread hotels are held in joint venture.

Okay.

And that's 50ish, I suppose, in that joint venture.

Alright, so six or seven hotels.

About how many rooms, roughly, if you have that offhand?

If you give us a buzz back, we'll be happy to get that for you.

Okay, no problem.

Thanks so much, guys.

Good quarter.

Yes, you bet.

Next we'll go to Steven Kent at Goldman Sachs.

Good morning.

Hey, Steve.

Could you talk a little bit more approximate the recycling cash program?

It seems, so far, that you're in place for the rest of this year to get some of that cash out of some of those assets.

But I guess my question is, where does that go?

Is this is a cycle?

Is this a circle, where you're going to plow cash back into [sliver] equity, MES loans, or is it going to go back to share buyback, and how should we think about that, or time-share?

The second thing is, I see the Paris purchase of that hotel, it sounds terrific.

Arne, are you starting to feel that this is one of the ways you're going to have to get into this market is by buying these assets, in order to get in, and then flipping them, eventually, to another real estate developer?

What kind of pricing are you seeing?

Because, certainly, we see pretty high multiples on that kind of stuff.

How do you work your way through this?

Obviously, let me take the second question first, which is really sort of triggered by the announcement we recently made of a purchase of a 750-room hotel in Paris, which we purchased from [Acore].

It was formerly a [sofitel].

After a really very significant renovation. it will be rebranded as a Marriott.

We bought that hotel on an off-market transaction.

With the cost of renovation, we'll be in that hotel for right around $200,000 euros a room, maybe a little less, which in Paris, given the amount of meeting space in this hotel, we thought was a deal we couldn't pass up.

It -- in a sense, it's not a unique kind of transaction to Europe.

I think if we see a hotel which is available on the market, particularly if it's not one which is sort of a broadly marketed transaction and we think the values are compelling, we have in occasion in the past, and will occasion in the future, take it down and present a simpler transaction partner, if you will, to the seller of that hotel, than we would be if we tried to bring in one of our partners up front, and structured a deal up front.

I think in Europe we've gotten more comfortable with our ability to underwrite assets like that.

Similarly, what we've learned over time is that often, when we try and bring in one of our partners up front, we end up putting in value through MES loans, or some other key money or some other enhancement to our partners' deals.

We think, arguably, we can come up with a better economic proposition for us by simply buying the hotel, reselling it, retaining the management contract, and having no exposure and no net capital invested in it, which is what we anticipate happening with the Paris asset.

Obviously we're in a market where pricing for broadly-marketed assets is very, very high.

We're seldom going to be successful in competing for those kinds of assets, and many of our partners are already in the process of competing for them.

So, for those kinds of transactions, I think you're unlikely to see us very frequently be a participant in them.

In terms of capital recycling generally, I'd refer you back, Steve, to the sort of detailed information we used at our analyst conference in Miami last -- roughly May 1st., for sort of the long-term sense of how that works, or mid-term sense of how that works.

Generally, we want to invest capital in our business, if we can create value with it.

Generally, we think that the amount we invest will not likely exceed the steady state basis, the amount we're pulling back out of our business through capital recycling.

Which should leave, basically, the bulk of our annual cash flow and whatever incremental borrowing capacity we have on our balance sheet for share repurchases.

Whether that plays itself out in any given quarter or year, obviously is going to depend by -- depend on both the pace of capital recycling and the pace of capital investment in that shorter-term period of time.

Okay, thank you.

You bet.

Next we'll go to Jeremy Cogan at Banc of America.

You can't keep a secret, can you?

[LAUGHTER] Hey, Jay.

Just to kind of follow up on that question, your borrowing capacity and your free cash flow generation you think would be well over a few hundred million dollars in the quarter.

Was there anything specific that held you back a little bit on the buyback, relative to what we saw kind of on an average basis, quarterly basis, throughout 2005?

Just given what your stock was and how aggressive you were last year and how good things are right now, the tone of the conversation in your earlier comments, I would have thought that number might have been a little bit stronger.

No, not really.

I mean, we've seen some of the notes that have come out already this morning commenting on our share repurchases.

We're about a quarter of a billion dollars through our quarter, which ended March 23rd, 24th, and about $300 million year-to-date.

Obviously, we're not in the market now.

And so we're on a pace of someplace between, what, $1 billion and $1.25 billion for full-year purchases.

Put it in context, you -- I think our balance sheet will show an increase in debt of about $150 million from quarter end.

So we put about $150 million more into buying back stock than we received from operating cash flow and recycled capital.

In context, you know, last year we did about $1.7 billion in share repurchases.

You should not expect that we'll do $1.7 billion in share repurchases this year, unless we see a particularly compelling reasons to do that or more -- more money coming in through capital recycling than we anticipate.

I suspect we will not see our debt levels decline.

We may see them continue to go up a bit,.

But, you know, we think what we're doing now is a pretty healthy pace, and we ought to continue to see our share count decline meaningfully.

Quarter-over-quarter, from the first quarter of 2005, you can see our fully diluted share count is down 8%, even with some offsetting pressure from increasing -- an increase in share price and the impact that that has on options, dilutions, and the exercise of some options, particularly options that were expiring.

So you want the run rate leverage ratios for Marriott to kind of stay at roughly current levels, then, and not, given your very cheap cost of capital, take them a little bit higher?

Well, I think they could inch a bit higher.

I think all we'll say is they should not go lower.

Okay.

We're not going to publish a target about how much higher we can take them.

Okay, thanks.

You bet.

We'll go to Jeff Donnelly, Wachovia Securities.

Good morning, Arne.

Good morning, Jeff.

I've been hearing that insurance costs have been rising pretty dramatically in the industry, as much as 100% or more, if you're within even as far as 25 to 50 miles of a coast.

Any experiences you can share there, what you've been hearing from your owners?

Yes, I would -- in terms of property insurance, 100% is light.

Our recent experience is that property insurance costs are generally trebling.

It's not a huge cost item in most hotels.

What that average really doesn't tell you is what's happening from market-to-market,, and the comparisons are going to be overwhelming.

New Orleans hotels will see property insurance expenses this year versus last year increase, I don't know, ten times, something like that.

And you'll see it's basically all driven by the natural disaster risk, which, obviously, came home to roost last year in a big way.

And I think the adjusters that are out there and weather forecasts are saying we're going to continue to see more volatility in weather, and that's causing a pretty dramatic increase in property insurance.

Much less significant increases relevant to assets outside of the coastal areas.

But the numbers are big.

Does that coastal area extend as far north as the Northeast and are any -- how far inland, would you guess?

You're beyond my level of expertise here, Jeff.

I think, generally, it's going to be around the Caribbean area and other island destinations.

It's going to be much less -- including Florida, obviously.

It will be much less relevant to the Northeast.

Okay.

And just one last question is I've just been hearing from a bunch of owners of Marriott product that you guys are considering maybe changing your accounting presentation from a 40 period to 52-week format at some point.

Are you thinking about such a change, and have you guys estimated in what the financial costs for Marriott would be for that changeover?

We don't have an estimate of financial costs, and we don't have an estimate of the time to change.

You may not all be familiar with this, but. really. due to our history as a restaurant company, where it was particularly important that we had four equal periods, or four weeks in each period, so that we weren't really really getting twisted by shifting of weekends from month to month -- obviously, weekend business is much stronger in the restaurant trade -- we have had, for a long time, 13 four-week accounting periods in our fiscal year.

That is a bit more of a historical anomaly, as we've exited the restaurant business and now find ourself really only in the lodging and time-share business.

And so we would, in fact, like to shift towards a traditional calendar quarter.

The transition there is really all about systems, and the time associated with translating sort of prior period-based results to calendar quarters.

I wouldn't expect it, obviously, this year, and probably not in 2007.

We won't make a forecast yet, but it's a direction we certainly want to get to.

I don't think -- there will be some costs associated with it, but, hopefully, one thing we can do with some planning, and if we time this right, is have those costs be relatively less incremental and more about the system costs that otherwise would need to be spent for financial reporting, anyway.

Okay, great.

Thanks.

Yes.

Next we'll go to Harry Curtis at JPMorgan.

Morning, Arne.

A couple of quick questions.

With respect to the syn fuel business, is there any exit strategy, other than shutting it down?

Is there any market to sell those assets?

No.

All right, that takes care of that.

And the second is, if you could give us an update on the pace of the lodging recovery in Europe, please?

Actually, in the prepared remarks you heard a few different things.

Europe is a big place.

I had a fascinating trip about a week ago to the east.

We have hotels open in Russia, Kazakhstan, Armenia and Georgia, which is where my trip was about a week ago, And, generally, those markets are all screaming, just doing fabulously well.

Moscow is a very, very strong market.

Great for profitability.

You've got a wonderful confluence of strong occupancy and rate, but also relatively low operating expenses, and it makes those markets wonderful.

U.K., London has rebounded doing reasonably well.

U.K. provencial is less strong.

Germany and France are not nearly as strong as the United States, with its 10%-ish RevPAR growth.

But, actually, based on where we've been the last couple of years, we're showing great improvement, so four, five, 6% RevPAR growth.

It varies a little bit month-to-month and week-to-week, obviously, but we're seeing some building strength in those markets.

Would you say that they're a year or two behind the U.S., in terms of the lodging cycle?

That has been said frequently and I'm not -- you know, it may turn out to be that that's right, but I don't think the cycle is necessarily the same.

Europe was not hit nearly as hard in 2001 and 2002 as the United States was.

But the cycle that's relevant here is not really the lodging cycle independently but the economic cycle, and the economic cycle in Europe is, obviously, very different.

It's not that it's two years behind the United States.

It's simply that the economic growth, particularly in Western Europe, has been anemic, at best.

And it will look, in retrospect, like it tracked us by a year or two in the United States, or three, if economic growth steps up, because that will, indeed, start to deliver better performance.

If economic growth doesn't step up, though, in those markets, it's not simply a lag.

It's that we will not see the kind of strength that we're seeing in the United States.

That's helpful, thank you.

You bet.

And we'll go to Joseph Greff at Bear Stearns.

Good morning everyone.

Hey, Joe.

Arne, can you talk a little bit about pricing you're seeing for different customer segments, particularly on the leisure side?

Are you seeing any kind of pricing push-back for leisure bookings, too, as you see anything for the summer?

Really, significantly, no.

We've looked at, obviously, the first quarter numbers with -- when they turn into actual numbers, they're a bit easier to analyze.

And one thing that's been really gratifying to see and not surprising in many respects, is if you look if he various segments within transient, you've got the highest rated, sort of premium and regular.

Your lowest rated would be forms of special corporate or leisure or discount business.

And while rates are growing within every one of those categories, including on the top end, it's growing less at the top end.

But what we're seeing is volume shifting from the lower-rated transient segments to the higher-rated transient segments.

And with that, that drives a great improvement in average daily rate, average growth for the hotel.

I think in -- you know, so as a consequence, it's always hard to get this data, but when you look at those Smith travel reports or when you see the top-line numbers, that rate growth is not all like-for-like increasing of rate for like-kind business.

But, instead, is often a significant shift of volume in the hotel from weaker rated categories to higher rated categories.

Generally, though, to answer your questions, we're not seeing significant rate pushback in the United States anywhere.

Great, thank you.

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

Good morning, Arne, Laura.

Great quarter.

Thank you.

Three questions if I may.

First of all, are you seeing any changes in cap rates as you're shopping the Renaissance portfolio?

Maybe a change in the level of interest for those assets?

No.

I think -- to comment both on that transaction and transactions in the market ,generally, somewhat surprisingly, maybe, even though interest rates have moved up significantly, I think, generally, like-for-like hotel assets cap rates seem to have, if anything, come down a bit, as more and more capital chases the deal, and probably as buyers get more and more comfortable about the strength of upside, if you will, in operating performance of the assets.

Okay.

And then, you are going to have a time-share note sale in the second quarter, and it may be premature to ask this, but any change there in the appetite for that paper, maybe a reassessment of the credit risk, given the consumers' challenges ahead?

No, I wouldn't think so.

We haven't closed that transaction yet, so we obviously won't know until it happens.

But the -- generally the appetite for this paper far exceeds the amount of this paper that we've got available to sell.

Okay.

Finally, just curious whether the pace of this recovery is surprising you guys?

I think you've beaten consensus, for what it's worth, by about a nickel in eight of the nine last quarters.

Is it just running that much better?

It's running -- we're less surprised, I think today, than we were, I don't know, I suppose a year ago maybe, or a little over a year ago.

We were about a year ago, maybe five quarters ago, stunned by how quickly there was rate power in the industry.

We would have thought we had to see occupancy build a bit more before we started to see rate power.

And really starting in late '04, we started to see rate power build.

It's obviously continuing to build.

It's not very complicated.

It is, you know, simply that there's very little new supply coming out and that, with economic growth, we're seeing strong demand growth really for all categories, particularly that most transient intensive assets, and with that it's driving significant prescribe power.

It's not surprising, but I think one reason we are quite -- I guess quite focussed on making sure we keep looking carefully at this, is we are using forecasts, which are at such historically high levels.

Okay.

Thank you very much.

Next up, Jeff Randall at A.G. Edwards.

Good morning.

Good morning.

Arne, I wondered if you could comment just a little bit on the pipeline.

I know you all upped the total pipeline, but left the '06 pipeline unchanged.

Can you comment a little bit about what you're seeing on the construction cost side, and maybe here in the U.S. and abroad, and how you think that's impacted the pipeline, if at all?

Yes, construction costs have both -- they've come up significantly, obviously, in the last 18 months.

Part of that is just building generally, intensified really by China's and the rest of the Asian tiger's consumption of raw materials, which have made things more expensive.

And then, of course, icing on the cake being Katrina and Wilma, and what that has done to the need for construction services and materials.

And, generally, I think that has caused fewer -- particularly the full-service projects to get green lighted by our partners than otherwise might have been expected by this time.

And those numbers are -- stand very, very low.

Secondly, for the projects that have been started, they are taking longer than they would in normal circumstances, as the developers of those projects are confronted with costs that are often exceeding their initial budget.

And then they're focussed on value engineering, and doing other things to try and make sure that they're optimizing how much they spend in construction.

I think that's likely to continue for the foreseeable future.

The only plays that could give rise to some relief to construction cost when you look just at the U.S. market, would be if you see residential construction slow significantly.

Maybe that could have some impact.

But even in that environment, everybody would have presumed that the rest of the world is going to be fighting to acquire concrete and steel and all the other things that they need to build, so I would expect there to be significant continued cost pressure in the construction area.

Do you think that pressure will translate into year-over-year gains similar to what was present in '05?

Year-over-year gains in terms of our pipeline?

In terms of construction costs.

Oh, I hope it's not that high, but I don't have a forecast for you on that.

Sorry.

That's all right.

Thank you.

We'll go next to will Will Marks at JMP Securities.

Yes, since Ned asked the labor question, and I realize your exposure's different than others, but with Hawaii and New York and Chicago coming up soon, can you just -- your thoughts on the labor situation?

Really not much new to report.

One of the members of our team here has a daughter who's a fabulous fencer -- not much of an expert in fencing -- but I think in fencing they talk about the parry between opponents early, which is I guess sort of scoping each other out and sizing the playing field and that sort of thing.

The earliest part of sort of parry has begun in New York, but, generally, these fencers have not yet engaged, and we'll have to see what happens over the course of the next few months.

Okay.

And do you have -- you obviously have a certain degree of wage increases in your projections.

Are you comfortable?

Does it take into account any suspension of work at all, or probably not?

Well, we have not built into our model and -- the impact of strikes or lockouts or anything of that sort.

It's hard to predict, A, whether that will occur; and if it occurs, whether we're talking about it occurring in one city, or something more than that.

Obviously, the impact of a strike or lockout in an individual hotel, and even for us, really, even in an individual city, is not terribly significant.

But still, that's a hard thing to factor into any model, and we've not made an attempt to factor it into ours.

In terms of wage rates, we don't -- we don't think that the outcome of these negotiations is likely to result in a different -- a materially different increase in wages or benefits than what we essentially are assuming in our models.

Okay, great.

Just ask to you one other unrelated question.

You mentioned, I think in your remarks, weakness in Florida.

Can you give a little bit of detail on market?

How specific is that to Orlando, if at all?

Orlando group bookings were, for us, a bit weak in January and February, particularly.

As we dug into it, that seemed maybe to be a little bit about the market, but more the haphazard impact of a couple of folks that -- a couple of groups that had been in our hotels -- or been booked in our hotels, but later cancelled.

It won't surprise you to know that at least one of those was a big auto company that had something planned and, I think, given the pressure that they're under, ultimately decided not to do that.

Great.

Thank you very much, Arne.

You bet.

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

Great.

Two questions.

First, Arne, could you maybe comment -- I think you said your house margin's about 200 BPS below peak.

Initially in the cycle -- early in the cycle had rates that will never get back to peak margins.

Could you address, are we going to get back there?

And then, number 2, could you maybe give us a little more color on Florida?

You did say 3Q was a little weak for you, as you look forward in your group bookings, because of hurricanes.

I mean, is it meaningful, or how should we think about Florida in Q3?

Yes, I don't have the Florida Q3 alone numbers in front of us, but given -- obviously, given the hurricane history in the last couple of years, what we are anticipating is a bit of group weakness.

Certainly not the kind of growth we're having in other segments and in other months and other markets.

You know, not the sort of 10% kind of growth, if you will, but something that's going to look more flattish.

How it ultimately comes out is going to depend, obviously, on weather, as we get closer to it.

We would expect we'll enter the hurricane season with a flatter kind of group business on the books in the hurricane belt.

Having said that, what's happened is that you're getting a more pronounced seasonality in Florida than you once had, so the second quarter's very strong and the fourth quarter's extremely strong.

Got it.

You asked something else, David, I'm sorry.

Just stress peak margins, can we get back to them or not?

Yes, we'll get back to them.

Certainly we'll get back to them if we continue to see the kind of RevPAR growth at anywhere near these levels.

We feel great about the progress we're making on margins.

We are less than, but just less than two points worse in Marriott Hotel and Resort margins in the first quarter of '06 versus the first quarter of '00, and that's coming along great.

If we see this kind of rate in RevPAR performance run here for a period of time, there's no reason we can't get back to peak margins.

Great, thank you.

Go to Adam Cohen at CreditSights Investments.

Good morning, thanks for taking my question.

Just wondering if you guys reported the balance sheet with a debt number for quarter end?

I think we've got in our press release.

The debt number is --

The debt number.

We [inaudible] up about $150 million from year-end.

Okay.

And -- so that number you'll find in the press release.

We don't have a balance sheet yet, but we'll be filing our Q shortly, next few days.

Great.

Thank you very much.

You bet.

And we'll go to David Katz, CIBC World Markets.

Good morning, congrats on a great quarter.

Thank you.

If we could just talk a bit more about the pipeline.

Part of what I'm trying to balance is the -- is two things: One, the growing and robust pipelines that, not only Marriott but several of the other larger companies are reporting.

Firstly, are you capturing share away from others, and who would those people be?

I mean, is there sort of a flight to stronger brands at this point?

And then second, just following up on the prior question about construction costs, how do we sort of balance this growing pipeline that may, to some degree, be mitigated or slowed down by the rising construction costs?

Can some of this -- how do we factor an attrition rate, where some of these fall out or don't come to fruition, because of the costs?

Those are all good questions.

I refer you to some of the economists and others who independently track our industry. as a whole. for construction data.

As we've said before, we don't invest effort to try and do more than look at and understand our own pipeline and the dynamics of that pipeline.

There is data out there, Lodging Econometrics, and HVS and Smith Travels and others look at this stuff, and do a remarkably good job, I think, trying to assess what's happening in lots of different markets in projects that are often very locally driven.

So they're making some estimates.

It is clear, from that data, that Marriott is continuing to take market share by getting a disproportionately high amount of the development, relative to our current share in terms of number of room in the United States.

And you can look at that data and you'll see that some of the big brands that are relatively older, that are relatively more franchised, are adding some units, but they're probably losing as many units as they add.

And those lost units are sometimes simply scraped and sometimes they're downbranded.

And those are the folks that are generally losing market share.

There is a category of product, which I'm not sure fits fair to categorize generally, or not, but often carried as mid scale, with food and beverage.

And one reason I'm not sure it's a fair category is that it sort of excludes Courtyard and Hilton Garden Inns and a lot of the newer generation product, which is mid scale, but generally doesn't have significant F&B in it.

And so in a sense, you can trancat -- translate mid scale with F^B with old hotels.

And what you'll see is the supply numbers for that segment is declining, and declining materially.

And at the same time, you're seeing that Courtyard, one of the strongest brands in the United States, is continuing to grow, even though it's well-distributed.

As it grows, it helps us continue to take market share.

It does not significantly impact supply/demand statistics in the industry, as a whole.

Great, thanks so much.

Yes.

And we'll go to David Richter at ABP Investments.

Hey, guys, just a quick one.

You mentioned that 50% of your hotels were earning incentive management fees in the quarter.

Could you remind us what that was in the fourth quarter?

And also, I guess as you kind of have a lot of hotels that are always ramping up, so is there kind of like a theoretical maximum number of hotels that are going to -- can pay you incentive fees at any one time?

There probably is a theoretical maximum.

I'm not sure we'll be satisfied until we get to 100%.

Rest assured, we'll never get there.

The year-end number was 28% Not the year number, but the first quarter '05 number was 28%.

The year-end number, I think, was 44, 45.

For the full-year last year, it was 50%.

Was it 50%?

Okay.

So we're about the same as last year's full-year number.

It looks like a big increase over last year, but a lot of that's going to be limited service portfolios that did not trigger the incentive fees last year, particularly the Courtyard 120 hotels owned by [Cerafim], which did not pay in the first quarter of last year, but did in the first quarter of this year.

And the Courtyard hotels us -- I think they started paying about the middle of 2005.

The -- let's see, I think the best reference point for what the sort of theoretical cap is, is probably the percentage of hotels paying incentive fees in 2000, which was just over 70, I think.

About 71, 72%.

Do you have a sense of the hotels that were in your system in 2000, what percent of those are paying incentive fees today?

It's a good question, I don't know.

Yeah, I'm afraid I don't have that either.

Okay, thanks.

You bet.

We have another question.

This is from Ben [Sun] at Canaccord Adams.

Thanks, good morning.

First, congrats on the great performance.

Thank you.

Arne, two quick follow ups on the syn fuel side.

Number 1, I wonder if you can give us some comment regarding the potential Section 29 rule changes that still in discussion in Congress?

And number 2, regarding the April syn fuel production shutdown, I'm just wondering, is this a continuation of the previously-announced shutdown, or it is a reshutdown following a switching back?

For Marriott, you're asking about the second part of that question?

Yes.

Yes.

We had scaled back pretty dramatically at around the beginning of the year, when oil prices dipped to around $60 a barrel.

We jumped on the opportunity to put a hedge in place at very modest cost, to essentially cover operating losses for the first quarter.

And when we did that, we ramped production back up and ran it for, I don't know eight weeks or something like that, maybe not even quite that much.

Even there. though. thinking that with oil prices -- the hedge really just protected the operating loss, so we had nothing to lose from running the plants.

Right.

But even with that, given the way oil prices moved, we expected the credits that we produced would get phased out and, as a consequence, we got very little earnings contribution from this in the first quarter.

As essentially the losses that that hedge covered got incurred, and oil prices continued to move, it is economic to hedge oil at this level.

We've shut down the plants, and we don't really have any basis to predict when we would turn it back on, if ever.

You referred to the possibility of Section 29 rule change.

It's possible that congress could decide to make this program like most other programs, which would essentially have the credit availability determined by the prior-year oil prices, as opposed to something which can't be determined until after the years already passed, which is this year's oil prices.

If that were passed, we could produce credits in 2006, because 2005 oil prices were under that level.

If it's not passed, then we're sort of in the same kettle of fish or bowl of soup, or whatever, that we're in today.

Have no basis to predict whether or not that will happen.

In any event, really have no basis to encourage any of you to build any earnings contribution from synthetic fuels into your models or expectation.

Great, that's really helpful.

Thanks.

Thanks very much.

Abe, I appreciate you handling the call.

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

We're thrilled to be able to come to you and report the kind of results that we've had, and look forward to more good news to come.

Thank you.

Have a good day.

Thank you, Mr. Sorenson.

That does conclude our conference call.

We do appreciate your participation.

At this time you may disconnect.

Thank you.