萬豪國際 (MAR) 2006 Q3 法說會逐字稿

Good day and welcome to this Marriott International third quarter 2006 earnings conference call.

Today's call is being recorded.

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, Kristi.

Joining me on the call today is Carl Berquist, Executive Vice President of Financial Information and Enterprise Risk Management.

Our Investor Relations team, Donna Blackman, and Laura Paugh is sitting out this quarter.

Donna is on maternity leave having delivered a beautiful baby boy in late August.

Laura is having some surgery this week.

She'll be back answering your questions before you know it and Donna will return in early January.

In their absence, Sarah Hays, Vice President of Financial Planning and Analysis, Nancy Harper, Senior Vice President of Financial Reporting and Analysis, and Betsy Dom, Director of Financial Planning and Analysis are with us today and will be available to answer your follow-up questions from today's release and conference call.

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

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

Forward-looking statements in the press release that we issued earlier this morning along with our comments today are effective only today, October 5, 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/investor.

As we always try to do with our third quarter earnings release, after talking about our third quarter results and fourth quarter guidance, we will give you a first glimpse into our thinking for next year.

Doing so reminds me of a story about Oliver Wendell Holmes, who was a Justice of the U.S.

Supreme Court.

It seems one day Justice Holmes boarded a train in Washington.

When the conductor asked for his ticket, Justice Holmes had discovered he had left it in chambers.

The conductor, recognizing the Justice, told His Honor not to worry about the fare, as the railroad would be pleased to carry such a distinguished man free of charge.

Where upon Justice Holmes is reported to have said, "my good man, I'm not worried about the fare, it's just that without my ticket, I have no idea where I'm going."

So let's start the trip with what we know for sure.

Great third quarter results.

Earnings per share totaled $0.34 which is up 21% from the year ago quarter, excluding our Synthetic Fuel operations and the 2005 impact of a $17 million charge for an aircraft leverage lease.

Strong group and business transient customers drove worldwide, systemwide comparable revenue per available room, or REVPAR, 9% higher in constant dollars, with room rates driving most of the increase.

Adjusted EBITDA totaled $300 million, a 12% increase over the prior year.

During the third quarter, around the world, demand for our brands was strong with very few exceptions.

Our flagship Marriott hotels and resorts brand and our Renaissance brand reported domestic systemwide REVPAR up 8.5% and 8.4% respectively over the 2005 third quarter, while our Courtyard, Residence Inn, TownePlace Suites, SpringHill Suites, and Fairfield Inn brands together reported domestic systemwide REVPAR gains of 8.7% over the prior year quarter.

In the U.S., continued buoyancy in the group and business transient segments drove great performance in all regions of the country except Washington, D.C.

New York, Boston, Chicago, and the West Coast were strong.

In fact, in New York, demand is so strong that business continues to be referred out of the city.

In the West, the technology sector was a fuel injector for the San Francisco Bay area.

Company operated Marriott hotels and resorts showed tremendous strength with REVPAR up 16%.

We talked last quarter of some travel softness in southern California while we continued to see some softness but just in the localized area of Anaheim in Orange County.

The Washington, D.C. area, where we have strong distribution, saw softer demand in both group and transient business during the quarter.

There have been fewer citywide conventions in D.C. so far this year, and there was one convention that drew only approximately 50% of its expected attendance.

Also, as we said last quarter, in this midterm election year, Congress has been out of session more days than last year.

Other than the weakness in D.C., the rest of the nation remains strong.

In fact, if we excluded the D.C. market, REVPAR for our full-service managed North American hotels would have been a full point higher in our third quarter than what we reported this morning.

Also in North America, this summer we launched an industry first automated pricing model to optimize group rates throughout our full-service hotels.

The industry has been using yield management for transient business for some time, but this is a first for group business.

The new system uses pricing science and extensive customer data to provide very targeted pricing.

It's doing quite well for us.

Outside of North America, international systemwide REVPAR rose 10.6% in constant dollars driven by strong demand and higher rates across all regions.

Demand was strong in Mexico where all three of our Cancun hotels are now open again and in the Caribbean.

Europe is also doing well, especially London, Brussels and Paris.

Germany is doing better, in part benefiting from the World Cup, which ended in early July.

Russia also is prospering for us, particularly Moscow where we have five hotels open with a Ritz-Carlton slated for opening in June of next year.

In London, two of our hotels that have redeployed our redesigned rooms and restaurants had a phenomenal quarter with REVPAR gains approaching 20%.

I wanted to spend just a moment on France.

We will be hosting an analyst conference in Paris on October 19th.

We're pleased at the number of you that can come.

The meeting will involve tours of some great additions to our portfolio there, the Renaissance Plaza Vendome and our just opened European Courtyard prototype in Colombes in the Paris suburbs, as well as the 750-room Rive Gauche hotel on the Left Bank we acquired earlier this year.

And those who can attend can look forward to a fabulous evening at the L'ouvre.

As we've done in the past, we expect to provide a comprehensive and detailed look at the next three-year period through 2009.

We hope we'll see you in Paris.

During the quarter, Paris delivered strong growth.

The Renaissance Vendome increased its REVPAR 28%, just a year and a half after it entered our system, and the Paris Marriott on the Champes Ellysee, our headquarters hotel, also did well.

In France, we have four Courtyards in the pipeline, demonstrating the growing vibrancy of this brand in Europe and we have a Renaissance in Paris' Wagram district in the pipeline.

The deal is telling because the owner saw the REVPAR power we brought to Vendome and selected us.

We've got a great story to tell in France.

In Asia, our hotels in Singapore and Hong Kong were particularly strong and Australia delivered double-digit REVPAR growth.

Hawaii did fairly well with 7.7% REVPAR growth, even after tough comparisons to last year when that destination benefited from the unsettled weather in the Gulf of Mexico and the Caribbean.

India also did well during the quarter.

On the cost side, our domestic hotels benefited from slowing growth in energy expenditures.

While still up, increases are in the single-digits for heat, power, and light.

We expect this trend will continue in the fourth quarter.

Many of our markets continue to focus on optimizing profits relying on our shared service programs for accounting, human resources and other back office functions which also freeze more hotel space to sell.

Strong REVPAR and success with profit optimization resulted in continued solid margin improvement.

For the third quarter, domestic managed comparable Marriott hotels and resorts grew house profit margins 250 basis points on a REVPAR increase of 7.9%.

In all this, strong performance drove significant fee improvements.

During the third quarter, base fees rose 10% to $119 million and franchise fees increased 21% to $94 million.

Incentive fees were up significantly at 63%.

The 2006 quarter included a one-time $10 million payment, calculated based on prior period earnings, but not earned and due until 2006 and the 2005 quarter included similar payments of $6 million.

The percentage of our hotels contributing incentive fees continues to increase in the quarter.

Nearly 50% of our managed hotels paid incentive fees, up 6 percentage points from the year ago quarter.

During the quarter, we added about 6300 rooms to our system, roughly a fifth of which were international full-service hotels and Courtyards in such locations at Colombes and Zurich.

And our prospects are fabulous.

With nearly 150 approved deals, Courtyard makes up more than 25% of our pipeline.

Our pipeline of hotels under construction, contract, or committed, rose to more than 85,000 rooms during the quarter and includes the strongest global pipeline ever for our limited service and extended stay brands.

Lodging demand continues to increase and owners continually are demonstrating strong preference for our brands.

While their appetite for new hotels is healthy, project development times have lengthened as owners seek to value engineer their projects in order to reduce costs.

At the same time, the rate of increase in the cost of construction has also slowed a bit.

A full quarter of our total pipeline is for hotels outside of the U.S., including 17 properties alone in China.

Our development group has also signed a significant number of hotels in India, Europe, and in the Caribbean and Latin America.

Our Ritz-Carlton brand continues to enjoy strong worldwide demand, especially in Asia.

Both Singapore and Hong Kong had a very good quarter.

In Europe, Berlin did very well.

We're anticipating strong rate growth in the first quarter of next year based on preliminary bookings.

The brand has 30 hotels under development and Ritz-Carlton has also begun to capitalize on the pre-eminence and stature of the brand, capturing branding fees for Residences.

Across our brands we are opening up spectacular new hotels and resorts.

The Schaumburg Renaissance opened outside of Chicago and is the epitome of our new Renaissance style.

The Renaissance Times Square in New York will complete a dramatic renovation next year.

The hotel will serve as a prototype of a cool, new urban look for many of our Renaissance hotels.

Also under development are the Renaissance Boston Waterfront, which will capitalize on strong demand in that market and the Renaissance M Street in Washington which is a conversion and will also have the new urban style.

We opened our second spectacular Bulgari Hotel two weeks ago, the 59-room Bulgari Hotel and Resort in Bali.

And during the quarter the J.W.

Marriott brand was recognized by J.D.

Power as the third in luxury hotel ranking behind only our own Ritz-Carlton and Four Seasons.

We've seen much success with our renovation and reinvention strategy.

Our new bedding initiative is virtually complete.

By the end of the year, 170 of almost 200 Courtyards built before 1991 will complete their reinventions.

The remaining 27 are either on track for reinvention or will exit our system by 2009.

And so far, 100 of 125 of the earliest Residence Inns have been refreshed.

Our prudent plant strategy with Fairfield Inn is remaking the brand.

Over 40 Fairfield Inns have exited the system in the past two years and we have 99 newly designed Fairfield Inn hotels in our pipeline.

Guest satisfaction scores have risen significantly, along with our partner's interest in the brand.

Market share premiums for the Fairfield Inn brand have steadily increased, posting 25 straight months of REVPAR index increases.

And of course, we have more plans to expand the appeal, style, and profitability of our hotels.

We are now moving to reinvent the lobbies of select hotels.

Our new great room concept is a revolutionary change to the hotel lobby and is targeted to that new breed of business traveler who wants to mix work and relaxation throughout the day.

We are also using multiple tools to increase brand preference through multiple connections to our guests, including new high-tech tools like the pre-arrival e-mails to help guests with trip planning, the virtual concierge to make dinner reservations and e-folio allowing guests who hate paper receipts to track their bills online.

Speaking of online, Marriott.com continues to be the pre-eminent e-channel.

Marriott.com generated 40% higher revenue during the third quarter than a year ago and had a record-breaking day with more than 50,000 reservations booked.

Our proprietary sites now accounts for approximately 85% of our reservations made online and represents approximately 20% of total room revenue.

We continue to enhance the Marriott.com experience for our guests.

During the quarter owned, leased corporate housing and other income net of expenses declined slightly, largely due to the sale of eight hotels, six of which are now under long-term management contracts and one under a franchise agreement as well as lower land lease income.

Termination fees totaling $13 million in 2006, primarily associated with the termination of one management agreement and two franchise agreements, virtually offset these declines.

Timeshare sales and services revenue declined 5% during the quarter while net of expenses profits increased by $13 million.

Third quarter results included the reversal of a contingency reserve established several years ago relating to marketing incentives totaling $15 million.

Contract sales in the quarter grew modestly over 2005 with strong sales from new projects including in St. Kitts, San Francisco and our Sequel project in Maui.

However, these increases were partially offset by projects at or nearing sell-out.

Reported revenue in the 2006 quarter was also constrained by projects in early stages of development that either did not reach revenue reporting thresholds or are in the early phase of revenue recognition, offset somewhat by higher revenues from villa rentals.

In contrast, the 2005 quarter reflected very strong financially reportable sales at projects at or nearing sell-out.

Moving to our balance sheet story, we remain committed to recycling capital.

Asset sales and note collections were nearly $90 million during the quarter.

As we discussed during the second quarter call, we had already completed the bulk of our asset dispositions for the year at that time.

We simply don't have much more to sell.

Interest income declined about $2 million during the quarter, primarily due to loans that were paid off in the last year.

Interest expense during the quarter was about $5 million higher than the year-ago quarter, primarily due to higher interest rates.

Year-to-date we have completed over $1 billion in note collections and real estate joint venture and note sales, including our timeshare note sale in the second quarter.

On the P&L gains and other income, excluding synthetic fuel and timeshare note sales, have totaled $53 million year-to-date.

During the third quarter, the appropriate presentation for timeshare note sale gains was clarified for the timeshare industry.

As a result, we reclassified timeshare note sale gains of $40 million recognized in the 2006 second quarter from below operating income, within the gains and other income caption, to the timeshare sales and services revenue caption in the year-to-date numbers and in our earnings guidance.

Of course, there is no bottom line impact to net income from this change in geography.

With the excellent progress on asset sales and very strong cash flow from operations, during the quarter we bought back 12.4 million shares of stock for $450 million and in the fourth quarter to date, we have purchased roughly another 1.4 million shares.

So year-to-date we have purchased 31.6 million shares for $1.1 billion.

Now, let me take a moment to compare our overall third quarter results with the guidance we provided back in July.

Excluding our Synthetic Fuel business, third quarter EPS guidance was 28 to $0.30.

Actual EPS, excluding our Synthetic Fuel business was $0.34.

In other words, our earnings were $0.05 better than the midpoint of our guidance.

Roughly $0.04 of the upside came from the two unusual items we have mentioned, that is the timeshare contingency reversal and the incentive management fee upside from prior periods.

G&A was lower than expected by about one penny due to lower G&A spending and a guarantee reserve reversal.

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

Now let's turn to our outlook for the fourth quarter.

In the fourth quarter we expect REVPAR to increase 7.5 to 8.5% over the prior year quarter.

Reflecting the strong performance in the first half, we expect 2006 full-year REVPAR to be 9 to 10% over 2005.

Property level house profit margins should increase 225 to 275 basis points for the full-year.

We anticipate that slightly fewer than 25,000 rooms will enter into our system in 2006 as construction cycles discussed earlier continue to lengthen and a few openings are pushed into the first quarter of 2007.

With REVPAR growth, margin improvement, and unit expansions, we expect reported management and franchise fees for the full-year to increase roughly 17 to 18% to just over $1.2 billion.

In the fourth quarter of 2006 we expect total fee revenue to increase to 370 to $380 million.

We estimate owned, leased, corporate housing and other earnings should total approximately $45 million to $50 million in the fourth quarter.

The decline from the prior year is largely due to the successful sale of hotels which we continue to manage.

Turning to the timeshare business, demand is strong, long-term cash flow and profitability are outstanding, and we have exciting new projects coming to market.

In the fourth quarter, we expect contract sales to increase approximately 20% from last year, and that growth may be meaningfully higher if final government approval is received for one of our Hawaiian projects before year-end, which will allow reservations on hand to be converted into binding contracts.

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.

For the fourth quarter, timeshare sales and services revenue net of direct expenses is expected to increase 40 to 50%, ranging from 79 to $84 million, excluding an approximate $35 million gain expected on timeshare note sales.

Fourth quarter financially reportable development revenue should be strong as we expect to achieve higher reportability thresholds, which will allow us to recognize revenue from previously deferred sales.

As the majority of the marketing and selling costs are now expensed as incurred, the development profit associated with this sales volume will drive strong year-over-year growth in the fourth quarter.

Fourth quarter G&A is expected to total 215 to $220 million, including approximately $12 million in pretax FAS 123R impact.

Equity and earnings is expected to total approximately $5 million in the fourth quarter, a decline from 2005 reflecting the sale of several joint venture hotels in 2005 and early 2006.

Results have also been constrained by start-up costs associated with our timeshare joint ventures.

With little real estate remaining to sell we expect gains and other incomes to total only about $10 million in the fourth quarter.

For the full year, we expect proceeds to total $1.6 billion, including proceeds from timeshare mortgage note sales.

Given these assumptions and those outlined in the press release, we believe earnings per share for the fourth quarter will likely total between 46 and $0.51 cents per share.

Once again, this forecast does not include any impact from our Synthetic Fuel business.

Now let's turn to our outlook for next year.

We expect lodging demand to remain strong.

We anticipate REVPAR to increase by 7 to 8% with house profit margins increasing 150 to 200 basis points over 2006.

By the end of 2007 we believe that our continued success over the past ten quarters in expanding hotel profitability will enable us to exceed house profit margins last reached in 2000.

We also expect to add another 25,000 to 30,000 rooms to our system next year.

Based on our projected REVPAR, house profit margin and rooms expansions, we expect 2007 base, franchise and incentive fee revenue to total 1.36 to $1.38 billion.

In fact, our 2007 incentive fees should exceed their year 2000 peak.

Our intense focus on expanding our system size, driving reinvention and renovation of our system and controlling costs is truly paying off.

We project timeshare sales and services net of direct expenses should range from $305 million to $320 million.

This includes note sales gains of roughly $60 million, which is down $15 million or so from 2006 based on higher interest rates and other assumptions.

It also excludes joint venture income that is reported on the equity and earnings line.

Owned, leased, corporate housing and other income is expected to deliver $155 million to $160 million in 2007, again, reflecting the sale of hotels in 2006.

Net interest should increase to approximately $125 million, largely due to higher debt balances related to our share repurchases.

Since the beginning of 2003 we have repurchased 131 million shares for $3.8 billion.

We should be able to repurchase another 1.25 to $1.5 billion worth of our shares in 2007.

We expect gains in 2007 of approximately $20 million.

As for G&A, we anticipate 2007 to total $665 million to $675 million as we continue to leverage the scale of our organization.

Equity and earnings is expected to total approximately $45 million to $55 million next year due to the expected contribution from several new timeshare joint ventures.

With these assumptions, 2007 EPS is expected to total $1.78 to $1.88 per share, excluding any impact from our Synthetic Fuel business.

Still, as is typical for this time of year, we are just beginning our bottom-up budgeting process for next year, and there are always changes that come out of that effort.

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

So, how do we summarize where we are?

Our guidance remains largely on track, our brands continue to demonstrate strong guest and owner preference, and our pipeline of committed hotels is the strongest in the industry.

The fourth quarter looks compellingly strong.

Finally, with few assets to sell on the books, we expect our return on invested capital, excluding the one-time timeshare SOP charge, to exceed 20% in 2006, which is better than we anticipated at the beginning of the year, and it will go still higher in 2007.

There's a lot of excitement at Marriott these days, certainly strong business fundamentals and demand, increasingly powerful brands with plenty of global growth opportunities, and a refreshed, and in some cases, reinvented system.

Noted computer scientist, researcher and visionary, Allan Kay, has said, "the best way to predict the future is to invent it."

Well, that's what we're doing, and as always, we appreciate your interest and support.

We look forward to seeing you in Paris.

Now, Kristi, we'd be happy to take any questions.

Thank you.

[OPERATOR INSTRUCTIONS] And our first question will be from Steve Kent with Goldman Sachs.

Hi, good morning.

Just two quick things.

One, Arne, you said that your contract sales on timeshare only grew [inaudible] and I just was wondering, but then you said it was picking up in the fourth quarter.

Contract sales is current, it has nothing to do with the percentage of accounting or any of those things so, I think, so was there a change in the tenor of that business and maybe why you think fourth quarter is going to be better?

And then just one, just housekeeping thing.

In your press release, you say that there's $275 million in equity and other investments, that's the forecast for, I think, it's for '06, and that's down from where it used to be and I think it used to say 375 to 390 and I was just wondering if there was a change in the makeup of that Cap Ex, or, I'm sorry, equity and other investments?

I think that's the timeshare opportunity.

You're talking about the cash investing on the second question, right?

Yes.

Not the P&L implications.

Okay.

Let's take that, two questions there.

The timeshare one first.

The primary difference for the growth rates between Q3 and Q4 is the ability to actually close reservations into contract sales, which will be enhanced in the fourth quarter with a couple of significant resources that we expect to get sort of final regulatory approval on sales, so we can actually close those sales.

It is not a difference in business conditions in any significant respect between Q3 and Q4.

So that's just the, that's the Hawaii, that's not the Hawaii opportunity?

Well that includes, I think, actually, at least two resorts in Hawaii that are now taking reservations, so in a sense, the selling activity is underway, but because final approvals have not been obtained yet, those reservations cannot be closed into sales so none of them are contract sales in the third quarter.

Okay.

As for joint venture investing, in the time, excuse me, in the press release in sort of a backside we provide a full-year 2006 forecast of the investing in our business that we anticipate, which is roughly $900 million on a full-year basis.

I think there's been a bit of a decline in joint venture investing and that's really primarily because some investments that we had anticipated would be funded in 2006 will slip into 2007.

I think there's probably also at least one joint venture investment that, sort of a mixed use project with hotel, fractional, and residential that we thought we'd have a minority equity stake in, but I think now will be a managed deal, in effect, so we will only be a fee earner and service provider, and not an equity investor in that project.

But the bigger reason for this reduction from prior quarter guidance is some shifting into next year.

Okay.

Thank you.

You bet.

And our next question comes from Harry Curtis with JPMorgan.

Hey, good morning, Arne.

Good morning, Harry.

Two quick questions.

First of all on your share count, the average share count was 425 in the quarter.

Can you give me a sense of what the absolute share count was at the end of the quarter?

Yeah.

It was -- we looked at that last night.

Let me make sure I get the right one for you here.

It's about 20 million, let's see, it's about 5 million shares lower.

So the end of quarter number whether you look at basic or fully diluted shares is about 5 million lower than the weighted average for the quarter.

All right.

And the second question speaks to your comment about the strength of the fourth quarter.

With the recent Smith Travel research data looking like it's decelerated a bit more, can you give us a sense of what the possible disconnect is between the Smith Travel data that we've seen so far in the fourth quarter and your comment about the fourth quarter looking compellingly strong?

You're talking about the weekly data coming out of Smith Travel now?

Correct.

Obviously, you've got a shift in the Jewish holidays from October to September this year which have a meaningful impact on the Smith Travel September numbers and the numbers for all of us.

You've also got in August and September at least, we think probably some impact from hurricane hangover around the Gulf so it would be Florida all the way to New Orleans, obviously.

And those two things, I think, would probably be the biggest explanation for why September might look weaker than what we'd anticipate for the quarter as a whole.

And then last question has to do with the forward bookings, particularly on the corporate rate side for 2007.

Are you seeing as much pricing power in 2007 as you did at this point last year?

Yes.

We'd anticipate sort of high single-digits year-over-year rate growth in special corporate negotiations.

Okay.

That's great.

Thanks.

And our next question comes from Joe Greff with Bear Stearns.

Good morning, guys.

Hey, Joe.

Just kind of follow-up up on Harry's question about the corporate negotiations.

Can you just talk about the group pace, the volume and pricing for next year as well?

Volume, group business on the books is up a bit in terms of room nights and so maybe a percent or so over 2006 at the same time.

Rates are up in sort of mid single-digits, mid to high single-digits over the numbers at the same time next year.

So you've got rooms REVPAR up high single-digits over last year for group business on the books for 2007 versus group business on the books for 2006 at the same time last year.

Maybe even better the, what we're forecasting in terms of non-rooms revenue is up even higher year-over-year for the same category of business.

So just at double-digits, very low double-digits, which obviously bodes well for profitability contribution for that business.

Great.

And then a question on the development pipeline.

It seems a little bit incongruous that in this very benign supply growth environment that we're seeing your development pipeline pick up so much and I'm sure a big chunk is the difference between non-business travel top 25 markets and sort of secondary tertiary markets and then the international piece.

Can you talk about the top 25,000 increase between the end of the quarter this year versus last year's 3Q '05?

How much of that increase or percentage is related to international opportunities?

Let's see if we can pull the precise numbers as we're talking.

Versus year-end '05 and end of Q3 '06.

Sort of thematically I think what we'd say on this is a couple of things.

Your question refers to some of them.

The 85,000-room pipeline is essentially baked deals.

So it's a very high level of definitiveness, almost always binding contracts before it gets included in that number.

Two, for us, it is a global number and includes rooms that are definitive but across all brands and in every market in the world.

Do we have the year-end 2005?

I'm not sure if we're going to have the 2005 number during the call here.

Okay.

And then lastly, I think, while the pipeline is going up and we're gratified by that, we still, when we look out in the U.S. market, at least, see very little, if any, supply growth in luxury and upper upscale urban markets or established resort destinations.

The supply growth in the United States is limited, primarily limited service brands, primarily suburban and secondary markets, and I think we've got a great supply dynamic for the next couple of years as it relates to the full-service side of the business.

Great.

And then just a question with respect to your full-year '07 guidance.

You mentioned that baked into your EPS guidance is about $1.25, $1.5 billion of share buyback.

Is that how I should interrupt that comment?

Absolutely.

Okay.

And then with respect to the 45 to $55 million equity and earnings contribution in '07, the majority of that I presume is timeshare joint venture activity?

Yes, absolutely.

Great.

Thanks, guys.

See you in Paris.

You bet.

See you in Paris.

Jay Cogan with Banc of America Securities has a question now.

Good morning, Arne.

Hey, Jay.

Got a few questions for you.

I guess a bull would say your 2007 REVPAR guidance of up 7 to 8% is pretty darn good and a bear would say, well, look at third quarter REVPAR on a company operated basis it was 8.1 in the U.S. and that was the very low end of the guidance, so how do you get comfy with '07?

So you've obviously addressed this to some degree with the groups, I mean, negotiated corporate rates, but is there anything else you can add to that in terms of your level of comfort that we don't get a few months into this and say, well, it's really going to be 6 to 7 or something like that?

[Inaudible] state the obvious here.

We haven't done a budget yet, but we have done our three-year plan, which is a pretty detailed planning exercise.

We've got a fabulously talented bunch of folks that forecast demand and forecast rate growth and they're looking at data that's coming out of our system every day in terms of price sensitivity of our customers, not just for group and special corporate rates, but for the transient business that is coming in through online channels and phone channels and everywhere else.

So we do our best to come up with something that we think is realistic and we feel good about what we've put out and we're certainly bulls if were to take one characterization of the other in your question. 7 to 8% REVPAR growth is fabulous and while not the 10% that we got last year and the near 10% we're going to probably get in 2005, it's down a point or two, it's still wonderful growth and we feel great about it.

Having said all that, obviously, the thing that we are least capable of predicting is what happens with the economy generally, and what happens with the economy generally particularly around corporate profits, is going to have an impact on the transient business which books just days or weeks before showing up in our hotels.

I have a couple other questions for you, too, if it's all right.

On the margins, what are you baking in when you kind of get down to the granular level about, let's say, wage and benefit inflation or energy increases or even potentially decreases, et cetera?

What are some of the key things that are kind of baked into that 150 to 250 bip increase in the house profit level because that's a pretty darned good number?

It's a good number and I think it's actually not a -- it's possible we could do a bit better than that.

For example, in that number we've got utilities, heat, light and power growing at 10% over 2006.

There's one area where, obviously, given some relief in oil prices maybe we'll do better than that.

Wages and benefits are in the, probably have a four handle, a little bit over 4% growth.

You've got insurance rates that are up certainly around property insurance, I suspect casualty insurance is down sort of mid single-digits year-over-year.

Those would be the major assumptions which are in there.

There's a lot, we've got a lot underway in terms of shifting towards Marriott.com, which is very cost effective way for us to book rooms, procurement channels continue to work well in compliance with the, negotiated procurement is continually improving in the hotels.

And we've got some other profit optimization tools that we will continue to rollout next year, which will be important to getting those margins.

Got it.

And last one for you, on timeshare, understanding the trickiness of the timing as it relates to accounting rules, when I look at our numbers for 2007, it seems like the only discrepancy between our numbers and yours in the big picture is the timing maybe for timeshare next year, some of those reported profits I guess may be booked into '08, like you were saying, given the lag.

Can you give us any sense of the growth?

Will '08 be just like some spectacular year from a growth standpoint in reported profits in timeshare?

I hope 2008 is a spectacular year.

We're not going to provide you any guidance for 2008 yet.

I don't know where your numbers are precisely on timeshare, I don't have them in front of me, but just to think about the year-over-year for a second, we've got, if you take sort of the midpoint of our guidance for 2006, our timeshare line on the external P&L is about $340 million, 342.

The number we gave you for next year same line is 305 to 320.

So that looks like a decline, but really, you've got to add in the equity down below on the JV line.

Once you do that, you've got basically 350, 2006 versus 350 to 370 in 2007, looks like a very modest growth year-over-year.

But there are a couple of other things to keep in mind.

The timeshare note sale gains that you've heard us forecast for 2006, and to some extent are already, our full-year $75 million, for next year, they're roughly $60 million so that's a decline of $15 million.

And as we discussed, we had a $15 million reserve reversal in Q3 this year on marketing.

So if you adjust for those two things, the 2007 numbers that are included in our guidance, are broadly from low-end to high-end, 12 to 19% growth year-over-year.

I think that's a better way to look at it and also probably goes a little bit to what you might anticipate for 2008.

So in other words, 2007 is not being buried under a lack of reportability.

It will, I think, the quarter-by-quarter growth will be better as we get farther into 2007 and we're able to report percentage-wise more of the sales that we've made.

I think 2008 will have good healthy growth, good momentum continuing.

Okay.

Thanks.

And Will Marks now with JMP Securities.

With regards to the percentage of you hotels paying incentive fees, would you be able to break that 50% figure that you gave domestically and internationally?

It's higher international.

In part that's simply because of the difference in incentive fee formula which we've talked about before.

The typical contract outside the U.S., there is no owner's priority, but would get incentive fees essentially from the first dollar of profit.

In the United States, it tends to be the case that the owner's bucket gets filled before we get our first dollar of incentive fees and so international essentially always exceeds and domestically, as long as we're adding hotels, on average, we'll take three or four years from the opening of a new hotel into our system before we will get our first dollar of incentive fees.

I think the international number, we'll double check this as we're talking, is about 70% and the domestic number is probably in the 40s some place, I would guess, number of hotels, 50% was our total, right?

Maybe about 10 points lower than the global average.

Great.

Thank you.

You bet.

Celeste Brown with Morgan Stanley has our next question.

Good morning, Arne.

Good morning, Celeste.

How are you?

Good.

How are you?

A few questions.

In your guidance for next year, the 7 to 8% REVPAR growth, do you reflect any occupancy growth or are you expecting occupancy to decline?

Modest occupancy growth.

I think we're probably 80/20 rate contribution on the REVPAR number.

Okay.

And then in terms of your expectations for margins getting back or going beyond the prior peak, do you still feel like they can perhaps in 2008?

Yeah, I think, again, we ought be, make sure we're very clear here.

We report and track margins by brand internally and when we look at what we think we will achieve for the Marriott brand, for example, in 2007, that margin number on percentage terms, we think is likely to be higher than the margin number we reported in 2000.

To be fair, that number includes a number of Marriott hotels that did not exist in our system in 2000, so it's not entirely apples-to-apples.

I think we suspect that if you look at exactly the same hotels, 2007 to 2000, it is less likely that we will achieve peak margins in percentage terms, but possible and quite likely that we'll achieve them in 2008 at the latest.

Okay.

Great.

And then finally, international obviously had a fantastic quarter.

Do you expect the international REVPAR growth to continue to outpace domestic growth?

It's a big world.

I think parts of the world will continue to see REVPAR growth at higher than U.S. levels, probably particularly the boom markets in China and India.

I think with World Cup comparisons, Germany particularly will be difficult year-over-year, full-year numbers versus this year.

There's some good news in the economies in Germany and France.

GDP growth in those markets is better than we've seen in a good number of years but the GDP numbers are comparable to the U.S. numbers and, generally, I think we'd expect the REVPAR growth to be, in those markets, sort of roughly in line with the United States.

Okay.

Great.

Thank you.

You bet.

Moving on we have a question from Will Truelove with UBS.

Hey, guys, and congratulations on a good quarter.

I have two questions.

The first one starts, again, on timeshare to beat a dead horse, but about the fractionals.

Can you talk about the high-end fractional sale pace because I know with the slowdown in the condo market, you were a little bit nervous about how that might go.

Any comfort now in how fractionals are looking going forward?

Yeah, Will, if I can just add a little [inaudible] to answer a question that's a little broader than the one you asked.

I think it is a great question.

We are selling, either for wholly owned projects or for some joint ventures, three different kinds of product in our timeshare business.

The one-week product, which is typically Marriott branded, the fractional product, which is on average probably four weeks, and most typically Ritz-Carlton branded and a whole residential product, which is usually Ritz-Carlton branded.

We've watched, obviously, a lot of consumer sentiment data.

We've looked at the economic data, we're paying very close attention to what's happening on the demand side.

I think generally we would say we've seen no weakness in the timeshare product.

In the fractional product, we have only about half a dozen resorts that are actively selling fractional product.

Each resort has got a different story, but generally we've been gratified by what we've seen, that fractional sales, in fact, are selling generally at what we would have expected before there were any signs of a weakening consumer.

And that product demand is holding up very, very nicely.

On the whole residential piece, again, there's a handful of projects that we've got which are in residential sales.

Often the individual resort story is more important than the economic data, but it's clear to us that there are at least a resort or two where the weak residential market is having an impact on the pace, and we will sell that residential at slower paces than we anticipated a year ago or 18 months ago.

Generally, we think those investments are still going to be great.

They are, as I said before, I think all of them are joint venture structures, so we have a meaningfully different risk profile for those projects than we would if they were on balance sheet.

But we suspect they'll be a little slower than we would have thought a year ago.

Okay.

And then one final question about your SG&A.

In the third quarter, over third quarter of last year, there's almost no growth in your SG&A, but in the fourth quarter you're anticipating a pretty big increase relative to the fourth quarter of last year.

Anything going on there that we need to know about?

Well in both quarters, obviously, you've got the impact of FAS 123. [As by] $10 million in the third quarter, it will be about a bit more than that in the fourth quarter given the four-week longer size of our fourth quarter.

The other thing I think that explains the difference between those two quarters is we had about $10 million worth of stuff in the third quarter in 2005, the biggest piece was an old lawsuit which I think was settled in the third quarter of 2005, which eased the comparisons year-over-year.

We don't see anything like that in the fourth quarter.

Fair enough.

Good quarter, guys.

Thanks.

Thanks very much.

And our next question is from David Anders with Merrill Lynch.

Great.

Thanks.

Hey, Arne, I might have missed it but did you say what percent of your pipeline is international versus domestic?

Total pipeline, I don't think so.

We talked about by category.

I think it's about 25 or so, but give us a second and we'll get it for you.

Okay.

And then just as a follow-up, your commentary about your developers kind of stretching out the construction cycle, is that, I'm going to assume that's domestic versus international?

You said they were kind of re-engineering and trying to figure out how to get the price, or the cost to work.

Yeah, that's a primarily domestic focus comment.

Okay.

And the international piece is a bit over 25% as of the end of the third quarter.

And that is disproportionately in full-service.

Great.

Thank you.

[OPERATOR INSTRUCTIONS]

Kristi, we'll take one more if you've got one.

Okay.

I do have a few.

Our next question will be from David Katz with CIBC World Markets.

Hi.

Good morning.

Congrats on a great quarter.

Most of mine have been addressed, but just on the incentive fee, which is clearly providing a lot of juice for your business at this point and domestically, I heard you comment earlier about maybe 40 some odd percent, somewhere in the 40s percent are earning incentive fees?

How should we be thinking about the balance of those?

I mean we've had a couple of good years, pretty good years of business.

Are they new or are they challenged in some other way?

What's, I guess, the optimal percentage that you can reach of those getting into incentive fees the next couple of years?

Well, we never give up on shooting for 100%, but it will never happen.

A couple of things here, the high water mark in 2000 was 70, 72%, something like that of all managed hotels.

We've talked about this in the context of margins.

We are not yet back to, at least on the identical hotels, the same percentage margins that we had in 2000.

We are closer to that and probably in many more hotels, we're back to the same profits in dollars, because generally revenues are up 5, 6% probably over 2000 levels when we look at the run rate we have today.

There were always going to be hotels which have entered into our system relatively recently which are not paying incentive fees.

As long as we continue to grow our distribution, we'll always have a meaningful number, maybe that's 20% of managed hotels, I'm just sort of guessing there a little bit, that will be recent entries into the system.

The balance is going to be, there's always going to be some number of hotels where based on the way the owner's priority was set, maybe based on what's happened in the market, maybe the market's moved away from the hotel a bit, maybe the hotel depended more on residential piece up-front and the profitability of the hotel is less likely to produce incentive fees.

There's always sorts of different stories, but there's going to be 10% or so, probably, of managed hotels that essentially have no realistic ability ever to achieve incentive fees.

I suspect as a consequence that our peak level is something like what we saw in 2000, some place in the plus 70%, but probably not 80.

We could go back and look and see how many hotels have entered the system, you know, the last couple of years and assume that they're not going to get there, and I think you said earlier, three or four years before they start to earn.

That's right.

That will give us a good sense plus the 10% that, as you say, don't really have that much of a chance and that will get us to a point.

Yes, exactly.

Perfect.

Thanks very much.

Yeah, you bet.

Okay, Kristi, thank you very much.

We thank you all for your time and interest this morning.

Encourage you to keep traveling.

Thank you very much.

That concludes today's conference.

We thank you for your participation.

Have a wonderful day.