萬豪國際 (MAR) 2006 Q4 法說會逐字稿

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

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, Kim.

Good morning, everyone.

Welcome to our year-end 2006 earnings conference call.

Joining me today is Carl Burquist, Executive Vice President, Financial Information and Enterprise Risk Management.

We are welcoming back Laura Paugh, Senior Vice President Investor Relations, great to have you, Laura, and Donna Blackman, Vice President Investor Relations, with kudos to the outstanding team of Marriott folks that covered Investor Relations during the fourth quarter.

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

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

Forward-looking statements in the press release that we issued earlier this morning, along with our comments today, are effective only today, February 8th, 2007, 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.

By now you have seen our results both for the year and for the fourth quarter, and you know that they were simply terrific.

Fourth quarter earnings per share, excluding results from our synthetic fuel business, totaled $0.52 compared to guidance of $0.46 to $0.51 per share.

From our lodging business we saw about $0.02 up side from fee revenue primarily due to stronger than expected incentive management fees.

Owned, leased, and other profits generated about $0.01 more than expected.

Timeshare net outperformed our expectations by $0.02, driven by favorable financing results and strong financially reportable revenue.

We earned about $0.02 more in gains than anticipated as a result of the sale of a joint venture interest in one of our hotels.

This $0.07 of EPS up side was somewhat offset by G&A spending, which was about $0.03 higher than expected.

Before discussing our fourth quarter results in more detail and our 2007 guidance, let me take a few moments to talk about our 2006 results and some initiatives and trends that span many accounting periods.

For the full year 2006, diluted earnings per share was $1.65, excluding our synthetic fuel business.

Total adjusted EBITDA rose 12% to $1.4 billion.

After breaking the billion dollar mark for the first time in 2005, fee income rose nearly 20% to $1.2 billion in 2006.

North American Company operated comparable RevPAR increased nearly 9%, including the impact of foreign exchange, our International Company operated comparable RevPAR was stellar for the year, growing over 12% with strong performance across the globe.

As proud as we are about our RevPAR results for 2006, we are even prouder of our results with hotel level profitability.

We began a benchmarking initiative during 2006 to improve house profit margins.

Hotels were benchmarked against our own managed hotels as well as hotels managed by others to the extent that data was available to us.

Based on this work we found opportunities to use our global scale to reduce per unit cost for technology and back office activities, and we adjusted staffing models to increase productivity.

We also found some revenue opportunities in our group hotels.

The result of all this work has been impressive.

In North America for the full year 2006 company-operated house profit margins increased 240 basis points.

And we are optimistic that another year of strong RevPAR growth will enable to us reach peak house profit margins in 2007.

To be sure, our margins were helped by strong RevPAR, particularly our emphasis toward rate growth even at the expense of modest occupancy declines.

But our operations deserve special thanks for their focus on delivering industry leading margins.

It's a great team.

Our rooms growth was solid as well, with about 23,000 rooms entering our system during the year, we now have well over 1/2 million rooms across our portfolio.

Almost 30% of our 2006 room additions resulted from conversions, and nearly 7,000 of our new rooms opened outside of the United States.

Our strong preference among owners and customers has paid off as well.

We now have approximately 100,000 rooms in our development pipeline with nearly 40% of them full-service hotels.

Why the increase?

We are, of course, benefiting from more project entering our pipeline but are also seeing some construction delays cause hotels to sit in our pipeline a bit longer.

Using our Courtyard Hotels in North America as an example, the elapsed time between acquiring control over a sight and constructing and opening the hotel has increased by about five months over the past three years.

At the same time we are continuing to see growing franchisee and owner interest in developing our brands, particularly with our recent product enhancements.

The Renaissance brand has become one of our most sought after by openers and franchisees as a result of its rapid RevPAR index increase and dramatically improving product.

Renaissance is in the midst of a great makeover that we expect will fuel continued RevPAR premium growth.

Commencing with our CTF transaction roughly a year ago our owners are investing $2 billion in the brand worldwide over just three years.

And of course, our Marriott Hotels and Resorts and the Ritz-Carlton brands remain premier brands for our development partners in their respective categories.

Last fall we described in Paris how we would grow by 85,000 to 100,000 rooms over the next three years, with nearly 1/3 of those being outside the United States and Canada.

Most of these rooms are already in our pipeline of specifically identified deals.

We just announced three new hotels in India, and we have 17 hotels in the pipeline in China.

We're not slowing down our brand enhancements.

About two weeks ago we launched our repositioned SpringHill Suites, which appeals to customers looking for a style experience in the upper moderate tier.

And SpringHill Suites already has over 150 hotels open and another 100 hotels in the pipeline.

We intend to remain the leader in this segment.

We have our eyes on healthy living, too.

We went smoke-free in every one of our hotels across all our brands throughout North America during the fourth quarter.

Our customers absolutely love the change.

Our food and beverage business is also evolving as we focus on providing guests with great style, taste, and experiences.

In fact, last week we again led the industry in announcing that we're eliminating most trans fats in our North American restaurants as we make dining more healthy as well as enjoyable.

This was a huge hit.

As the industry's undisputed leader in reducing costs and protecting the environment we're certainly dedicated across the Company to reducing energy usage and costs.

We saved over 70,000 tons of green house gas emissions in 2006.

The rough equivalent of pulling more than 10,000 cars off the streets, through aggressive systemwide initiatives.

We have a goal of reducing our property level energy usage by 6% over the next few years.

Because of this and other initiatives we are the only lodging company to have been named an EPA Energy Star Partner for two consecutive years.

You will hear more about this in the coming weeks.

We finished 2006 with another strong quarter of share repurchases.

In the fourth quarter we bought 11 million shares of our stock for $506 million, bringing the full year totals to 42 million shares, for $1.58 billion.

This is the third year of a dramatically increased share repurchase program.

In 2004 we bought $654 million of stock.

At that time, an all-time record for our company.

In 2005, we shattered that record and repurchased another $1.65 billion of our stock.

So in three years, we have purchased nearly $4 billion of our stock.

The impact on our fully diluted share count has been pronounced.

On a split adjusted basis we peaked in 1998 with 546 million fully diluted shares.

In 2006 that count was just 430 million shares, or 21% fewer shares than peak.

We expect our share count will continue to decline due to our ongoing share repurchase program, and as we continue to use less stock for employee compensation programs.

For 2007, an increasing amount of this share repurchase program will be funded with incremental debt, driving our interest expense meaningfully higher.

Our capital investments in 2006 totaled $900 million, including CapEx, loan advances, net timeshare development, and equity and other investments.

Dispositions included 10 hotels and 7 joint venture hotels, generating nearly $800 million in proceeds.

When added to proceeds from note collections and timeshare note sales, we generated total disposition proceeds of over $1.4 billion.

Despite our aggressive share repurchase program, long-term debt increased only $137 million during the year, reaching $1.8 billion.

And our core outstanding guarantee exposure declined from 414 million to 268 million.

Bottom line, we were very efficient users of capital during the year.

When combined with our increasingly strong business fundamentals, we posted record returns on invested capital.

Excluding our synthetic fuel business, our pretax ROIC totaled 22% in 2006.

This result compares to just 13% in 2003.

As we have dramatically grown our pretax income but kept our balance sheet flattish for five years or so.

While we are delighted with these full year results, our fourth quarter was also particularly strong.

Worldwide company-operated properties reported RevPAR growth in the fourth quarter of 9.4% in actual dollars.

Our North American company operated comparable set of hotels posted RevPAR gains of 7.2%, and our International company operated portfolio had an exceptional quarter with RevPAR gains of 14.9% including the impact of foreign exchange.

Our North American results were driven by a 9.7% increase in our average daily rates, as we continued to aggressively shift towards higher rated business, even at the expense of a minimal decline in occupancy.

Our North American Ritz-Carlton Hotels finished the year with a flourish, posting a fourth quarter RevPAR increase of 9.5%.

We have 28 Ritz-Carlton Hotels in the pipeline including 8 in the booming Asia Pacific markets.

You may have noticed the modified segment disclosure in our press release this morning.

One of the principal changes is that our luxury business now appears as a separate segment.

We have revised our segments to align with our hotel business operating structure.

You will find our historical results under the new segment classifications in our upcoming 10-K filing.

Our luxury business includes 60 Ritz-Carlton Hotels around the world and two Bulgari properties located in Milan and Bali.

Across all our brands the Asia Pacific region accelerated its dramatic growth in the fourth quarter.

Australia and Malaysia were strong.

In China the 2008 Beijing Olympics are already acting as a magnet for travel to the country's capital region.

Hong Kong, especially our J.W.

Marriott Hotel, benefited from a very active financial sector as well as higher travel from mainland China.

Shanghai is our most important source market in China.

India and Singapore did gangbusters with company operated comparable RevPAR [up] 42% in the quarter, 40% on a constant dollar basis.

In Europe, London and Paris saw great RevPAR performance and Russia and surrounding states did well.

The economy seems to be improving in Germany as business travel is picking up.

Over all, the Middle East saw impressive gains.

In the U.S., business was generally very robust.

During the quarter we opened the last of our hurricane affected properties in New Orleans and Cancun.

As we surveyed our fourth quarter performance by market it is apparent that the bigger the city, the better the performance.

New York, Boston, Chicago, Los Angeles all strong.

Only Washington, where we have significant distribution, seemed to lag as our favorite politicians were out on the [hustians].

Overall, transient business remained very strong.

Special transient rate negotiations are underway for 2007.

Currently we expect an 8 to 10% increase in special rates in 2007 on top of the 9% rise in those rates in 2006.

Turning to the cost side, our North American house profit margins improved an eye popping 210 basis points during the quarter.

In addition to the benchmarking effort I mentioned earlier, we also were helped by more favorable energy costs.

Adding it all together RevPAR increases and margin improvements led to higher incentive fees in the quarter.

Nearly 6 in 10 hotels across our company operated system earned incentive fees.

Marriott Hotels and Resorts crossed the 60% level, and Courtyard reached an astounding 90% during the quarter.

Last year we reported that our reinvented brand had more than doubled its contribution of incentive fees from 7 million in 2004 to 16 million in 2005.

That phenomenal performance has continued as Courtyard again doubled it's incentive fees to over $34 million in 2006.

Let's spend a few minutes on Timeshare.

Timeshare sales and services revenue rose 27% to $526 million during the quarter and Timeshare sales and services revenue net of expense increased to $133 million.

The fourth quarter results reflected in part the financially reportable Maui resort.

The quarter also included $37 million of Timeshare note sale gains reflected within revenue.

Such gains for the prior year are included in the gains line.

Operating expense in 2005 included a $7 million charge associated with the write-off of capitalized cost for one Timeshare project.

Fourth quarter contract sales rose a stellar 33%, led by strong sales in Hawaii.

Excluding whole ownership units, contract sales increased 10%, largely due to higher sales at projects in St. Kits, Orlando and Hawaii.

Propensity to borrow was also strong in the quarter, and mortgage delinquencies were down.

Loan defaults are at an all-time low and demand for these products is strong.

As we have discussed on previous calls, the synthetic fuel tax credit sunsets at the end of 2007.

Synthetic fuel has been a terrific investment for shareholders generating $407 million of net income since 2002 with an outlay of just $60 million.

As we described earlier this year, a complex formula based on the year's average oil price governs the degree to which producers can claim the tax credit.

We currently have three plants up and running, and have hedges in place covering a portion of forecasted production to help protect the business from operating losses if oil prices rise meaningfully for the rest of 2007.

For 2006, our syn fuel business contributed $5 million of net income or $0.01 a share.

On the G&A line, expenses increased 21% in the quarter, reflecting a $12 million impact from the new accounting rules requiring the expensing of share-based compensation.

Development write-offs, a performance cure payment, some severance costs, and deferred compensation expense also pushed G&A a bit higher.

I'm sure you also noted significant declines in gains during the quarter.

We expect to have fewer assets available for sale, and that, coupled with the reduction of our loan portfolio due to note sales, repayments, and refinancings, will continue to reduce gains and interest income going forward.

Now let's turn to our outlook.

As we get to the guidance portion of our comments, I'm reminded of a small town doctor who was asked to attend the Women's Club one evening to talk about sex.

If any of you come from small towns you know the doctor had no choice but to agree to attend.

When the evening of his presentation arrived his wife asked the good doctor why he was getting ready to go out.

Reflecting his ambivalence about the evening, he told his wife that he was making a presentation to the Women's Club but he told her the presentation was about sailing.

The next day when the doctors wife was walking downtown, one of the women from the club stopped her and said, your husband gave a great presentation last night.

The doctor's wife paused, thought a minute and said, I'm surprised, he's only done it twice.

The first time he got sick, and the second time he lost his hat.

So let's turn to 2007.

Well, first of all we don't see any signs of economic slowdown.

With Marriott brand bookings up nearly 7% for 2007, and 10% for 2008, group business is off to a good start.

And as I mentioned, special transient rate negotiations are yielding an 8 to 10% increase in rates for special corporate business.

So, in short, we're looking for a good year.

For the full year we anticipate comparable domestic RevPAR will increase by 7 to 9%.

Again, mostly through rate increases.

House profit margins should increase by 150 to 200 basis points over 2006.

Somewhat impacted by higher utility and insurance costs.

Even so, house profit margins at Marriott hotels and resorts should exceed record 2000 levels in 2007.

Based on anticipated strong unit growth of approximately 30,000 rooms, projected RevPAR house profit margins and rooms expansions, we believe 2007 base franchise and incentive fee revenue will total 1.38 billion to $1.4 billion.

Our 2007 incentive fees should also be at record levels.

We project Timeshare sales and services net of direct expenses to decline modestly.

Ranging from 320 million to 330 million as a substantial part of our Timeshare growth will come from joint ventures.

This includes note sale gains of roughly $70 million which is down about $7 million from 2006 actuals, primarily based on our expectation that the interest rate spreads on our sold notes will be a bit tighter in 2007.

Equity and earnings from joint ventures is expected to total approximately 30 to $40 million next year due to expected contribution from several new Timeshare joint ventures.

Marriott Vacation Club, our weekly interval business is doing very well.

Representing approximately 70% of contract sales in 2006, the business is expected to continue to deliver strong results in 2007.

Contract sales of fractional units will be led by our resort projects.

For our whole ownership we are continuing to see the construction cycle lengthen, and as a result we have limited inventory on our books and a commensurate delay in reported sales.

Our year-over-year reported results will drag somewhat in the first quarter but accelerate in the second quarter as project works advances.

Collectively for 2007 we expect our contract sales will be up 10 to 15%.

We expect owned, leased, corporate housing and other income will deliver 165 million to 175 million in 2007, as we own fewer hotels.

Net interest should increase to between 120 and $130 million, as our debt levels rise with additional share repurchases.

Our guidance assumes we've repurchased another $1.5 billion worth of our shares in 2007.

We expect gains in 2007 of approximately $40 million as we have fewer assets to sell.

We expect G&A to be flattish in 2007 with higher spending on product improvement and new branding initiatives.

With these assumptions we expect 2007 EPS will total $1.82 to $1.92 per share excluding any impact from our synthetic fuel business.

And of course, 2007 will be the final year for that business as that program expires at the end of the year.

For the first quarter we expect U.S. comparable hotel RevPAR to come in at the lower end of our 7 to 9% range.

This expectation is driven by the relatively soft January experienced by the industry.

We anticipate house profit margins to improve 125 to 175 basis points for the quarter.

We expect fee revenues of 295 million to 305 million.

Timeshare profits to decline to about 45 to 50 million due to delayed construction cycles.

Gains are expected to be about $15 million, and interest expense should increase with our continuing share repurchase activity.

All in all we expect fully diluted EPS to be $0.35 to $0.39 in the first quarter.

Just a bit more on the future.

You may have seen that Bill Marriott has begun blogging.

He's been in the blogosphere for about a month or so now, as has posted observations on various issues and themes ranging from astro turf anecdotes to the importance of big national and global issues to our industries.

Our customers, our stakeholders are talking, and we're listening and acting.

And we're taking a step forward here, too.

For the first time a podcast will be available of this call on our website.

Our products continue to improve, our distribution continues to grow, and our spirit to serve is intact.

We intend to keep on striving to do even better.

As always, we appreciate your interest in us, and we thank you for checking into our hotels when you travel.

Kim, we'll take questions now.

Thank you, Mr. Sorenson. [OPERATOR INSTRUCTIONS] Our first question today is from Steven Kent from Goldman Sachs.

Hi, good morning.

Good morning, Steve.

Hi.

Just two quick things.

One, I don't know if you talked about your pipeline, the break out North America versus the rest of the world.

I may have missed it, but maybe you could talk a little bit about that and whether some of these delays in construction are affecting one region more than another?

And then, Arne, on the soft January and how that's affecting Q1, could you figure -- give us some sense as to what you think is causing that soft January result?

Okay.

The -- couple of statistics on the pipeline.

About close to 30% of the product is international.

As we mentioned in prepared remarks, about 40% is full-service.

For those of you who have got any concern about supply growth, one of the statistics you should take comfort in is there are only 4,000 rooms in that pipeline that are urban full-service hotels in the United States.

The construction cycle that we really -- we're talking about was primarily focused on the U.S. market.

There are some other markets outside the United States which have a similar dynamic, but those are really very much U.S. centric comments.

In terms of January, we have-- we've obviously all watched the industry data.

We've looked at our own data come out with a fairly slow start, but as we have talked to our operators, as we have looked at our group booking trends, the group business on the books looks great, transient business demand looks great, and so we think January is probably a function of it really being a slower travel time and not much more than that.

Our first week in second period-- really first week of February, was really gangbusters for us, and it looks like people are coming back to travel, and that's what we expect, based on our group dynamics.

Okay.

Thanks.

Moving on, we have a question from Harry Curtis from JPMorgan.

Good morning, Arne.

Hey, Harry.

First of all there is an opening at the Comedy Club down in Soho that you might want to look into. [laughter] Quick question on G&A.

Your outlook for '07 is up only 1 to 3%.

Where are you finding some savings?

That seems to be a bit lower than the past and inflation.

And that's-- we are benefiting by some G&A expenses that we recognized in 2006 that are really not recurring.

I don't mean that necessarily in a technical sense but in a practical sense.

So, our fourth quarter G&A results, for example, we've got -- we've got a few million dollars of severance, we've got a few million dollars of our performance cure payment, we have got about $5 million of deferred comp, which is offset in our tax rate.

And all of those things are the kinds of things we would not budget or expect to recur next year.

And so, really, we're probably seeing G&A on a more steady state basis grow in the 4 to 5% range, but on a reported basis it will come in less than that.

Thanks.

We'll go next to Joe Greff from Bear Stearns.

Good morning, guys.

When you look at 2006 base franchise and incentive management fees what percent came from international properties?

Base, franchise and incentive, it's going to be around 20 but don't hold us to that.

You better let us-- anybody have that with them?

I don't have it with me, but we can get it for you.

We'll have to confirm that for you, Joe, it's going to be in that ballpark.

It should be in that ballpark.

And then, your '07 outlook talks about North American comparable RevPAR growth, what's baked in, in terms of a worldwide number?

It's about the same.

About the same.

Yes.

It varies a little bit by region of the world, given the World Cup impact in central Europe, particularly in Germany in 2006, that numbers -- reported numbers from there will look a little bit lighter than that, we would guess, but certainly the steady state growth is going to be in that 7 to 9% range.

Great.

And then also, easy question here, the diluted share count at the end of the fourth quarter?

Yes.

Oh, you want to know what it is?

Please.

Oh --

We'll get that for you as well.

Before the end of the call we'll have that.

In terms of your outlook, your guidance, what do you have baked in, in terms of asset sales?

Very little.

You heard our gain forecast, which is not very much, but have -- we're probably selling $400 million worth of assets next year -- this year, excuse me, 2007.

Great.

And then, just one final question -- bigger picture question.

Are there any markets or any segments, where you're seeing pricing push back?

I mean, obviously, you're talking about the group dynamics being very strong and the transient pricing being very strong, but are you seeing anything limit service or any segment where there has been a little bit of a pricing push back?

Customers always would like to pay less, and we end up probably with more, by definition, live conversations with our customers in the group segment than anywhere else.

And in the group segment we end up talking a lot about pricing, that probably is still pricing that's growing, we you look only at the room rate at a bit more modest rates than the transient business, and that's impacted by demand dynamics in various markets.

So if you've got a big group house in a maybe not one of the top five or ten cities in the country, that's going to be a more competitive buy probably than the -- certainly than the transient house in the urban market, but even more competitive than the group business in the more central city locations.

Joe, in answer to your other two questions, the common shares outstanding, the basic common shares outstanding at quarter end were 300 -- approximately 390 million shares, and then you want to take away that approximately 25 million shares of dilution to come up with an approximate year end fully diluted.

So about five million shares less than our average quarterly, fully diluted share count.

Right.

In answer to your other question, total management fees for the year were $1.2 billion, approximately 270 million of that came from international markets.

Excellent.

Thanks, guys.

You bet.

[OPERATOR INSTRUCTIONS] We'll move on toW ill Truelove with UBS.

He, guys.

Let me congratulate you on a good quarter and year.

Thank you very much.

Back in 2000 about 70% of your hotels were earning incentive fees.

You're saying it's 60% in 2006.

How far do you think that can go?

Or to put maybe another way; how many hotels back then just never had an opportunity to earn incentive fees, so where can this kind of percentage go in the next few years?

Thanks.

Hopefully it will go-- continue to move higher.

Realistically, I don't think we would expect that it will go much higher than someplace in the 70s, [7 handle] where we were in 2000 for a couple of reasons.

Some percentage of hotels have essentially no realistic chance of earning an incentive fee, ever.

That is, usually, a function of the that the owner's priority was set at a different time, in effect, in the market, and based on that owner's priority we really expect never to get there.

And then another percent-- then that's-- that maybe is 10% of the hotels at most, something like that.

Then there will be another percentage of hotels which probably will be a bit more than that, which, hopefully, knock on wood, as we continue to grow and add new units into our system will be recently opened hotels, hotels opening in the two to three years prior to whatever year in question you've got.

And the way the dynamics work, particularly in the United States, you need two, three, four years before you get into incentive fee land.

So those two things would probably cause us to stay someplace in the 70s.

Thanks so much.

You bet.

We'll take our next question from Will Marks from JMP Securities.

Great, thank you.

Hello, Arne.

Good morning.

Two quick questions.

I don't know how quick, but, the first is, can you discuss the positives and negatives of doing a tender?

Your share price may be at it's all-time high, but let's hope it keeps going higher.

And then, second question is, you talked about how the bigger markets are doing better.

We see that from Smith travel, those numbers are better from the top 25 markets, and your pipeline seems to be not as focused on urban markets, and I can understand that too, but maybe just discuss the big picture issues going on with the big markets and the smaller markets and your pipeline and how it's focused?

Yes.

All right.

Let's see.

The tender.

I can maybe tell you an anecdote.

We had one of our principal investment banking advisors in here at the beginning of 2006.

They were not the only ones that came in with the notion of doing a tender, and looked at a number of different technical approaches to that, but basically they were all about a single shot acquisition of a substantial amount of our stock in the market.

We looked at, sort of then capacity within investment grade rating, which is we have talked about before, we looked at the kind of premium we thought we'd have to pay to clear the market in a significant one-time transaction, and ultimately decided that the premium, and the-- really offset whatever benefit we thought we could get by bringing it in faster.

And, in fact, even over the course of that year with the strong share price performance, we were able to buy it in -- buy in the same volume that we had talked about then, if not more, and essentially to do it at the same price or less on an average basis.

And so, we think we're better off continuing to aggressively and steadily, but not in terms of a one-time shot, buy this stuff into the market.

As we looked at it, the only advantage, and we wouldn't -- really wouldn't credit it as much of an advantage, with a one-time event, is, you get the splash of that announcement, but of course once that splash defuses itself through the market and the dust settles you end up with about the same, if not more expensive, outcome that we can get in the market every day.

Okay.

In terms of the big cities versus the small cities, that's probably a, I don't know, that's probably a discussion around societal development in the United States, and increasing power of the coasts, in some respects, and I'm not sure we have any unique expertise on that, but in the bigger cities, use New York as the most prototypical, you've got the most sources -- sort of separate sources of business.

You've got strong leisure demand in the market, you've got strong international travel in the market, you've got strong group business in the market, and all of those things combined to drive pretty significant performance.

And when you get to-- you can compare that to other markets, and sometimes those are more central in the United States, they're not always more central in the United States where, basically the market is primarily a business transient market.

Or it might be, if it's a big hotel, primarily a regional group product, and the leisure business might be really not very significant at all, or if it's significant it's going to be much more seasonal than it would be in some of those other markets.

And, as a consequence, I think those are kinds of things that are probably driving the difference in average performance between those kinds of cities.

Your pipeline growth outside of those markets, you just can't build in those markets, right?

They're expensive to build in, the real estate is awfully expensive, construction cost is awfully expensive.

Still in many of these markets the residential piece, albeit it's weakened a bit, the residential piece is often more compelling economics than hotels.

And, so-- and those are also markets in which, to the extent projects can be done, they just take a lot longer to do.

Those 4,000 urban rooms I talked about in our pipeline, I think they're all basically slated to open at the earliest in 2009.

And so this stuff-- this stuff is slow and sticky and we're not likely, probably in the near term, to have much of a significant supply growth in those urban markets.

Great.

Thank you very much.

And next we'll go to Jeff Donnelly from Wachovia Securities.

Good morning.

Laura, it's nice to have you back.

Thanks, nice to be here.

Just a question, Arne, concerning, I guess, guidance versus your peers.

Some of your competitors have cited RevPAR growth targets that are, I call it, up for just 200 basis high-- 200 basis points higher than what Marriott has guided to.

And, historically, Marriott has been in the middle of the pack, or maybe at the upper end of it.

Do you attribute that to a fundamental difference in outlook for the industry or is that something more structural such as maybe renovation initiatives or just geographic or price point exposure?

It's mostly the-- mostly the latter.

I don't-- we obviously listen to what our competitors have to say.

We all listen to the same consultants and statisticians who score our industry.

We're all keenly focused on how we're performing against our competitors.

And, there are a couple-- there are really all obvious things that we can say about this, but we are reporting as a collection of companies on significantly different sets of hotels.

Our reporting of comp managed hotels and comp system-wide hotels is a very substantial number of hotels which are spread across lots and lots of different markets, both the strong urban markets that we were talking about a few questions back, as well as relatively weaker regional markets that have very different dynamics at work.

And that's probably singularly the most significant difference between the numbers that come out from the various companies.

I think secondly, a couple of our principal competitors report same-store sales, which we understand to mean usually hotels, even if they were under renovation the year before, they would be in that same-store set, and so the benefit that comes from-- coming out of that renovation is going to be a good contributor to that RevPAR growth.

We report comp hotels, and so if a hotel's renovation causes that hotel to have 5% or more of its available rooms not available, over the course of a year as a whole, we'll pull it out of our comp set, not only when it's under renovation but it will be out of our comp set the full year after its renovation is completed.

And that has an impact on it.

We've looked very hard, we think we're competing extremely well.

We view our 7 to 9% as a really exciting RevPAR number for 2007, and one that speaks of a very strong demand environment, very strong pricing environment, and one that we kind of relish experiencing.

Just following up on a comment you made, it feels like there's more hotel renovation activity going on out there, so when you guys look at your pipeline, or I should say, your existing portfolio, can you see that in your hotel base, like a greater proportion of them under renovation or some phase of it in the past?

Absolutely.

There's more money going into renovation in our system today than has ever been the case.

We are certain of that.

It's a little hard to get the data because, often these projects are done by our franchisees or by our owners, so they're not sort of uniform transactions that are easy to roll up.

I was in a significant city a few weeks ago looking at our hotels, I looked at 6 full-service hotels in that market.

Every one of those 6 hotels had either been under, was under, or would within months be under massive renovations.

And it's -- it will have have some noise impact, I think, to to RevPAR numbers this year.

It's a little hard always to predict.

One of the risks, if you will, is that those renovation projects take a little longer than they were presumed to take in our budgeting process, and that's a risk that we're mindful of now given the way construction cycle goes.

They will have a bit of a depressive impact on the fees that we earn this year from those hotels while they're under renovation, but it's a really great thing to see that capital going into the hotels, because it's going to pay great dividends longer term.

Two more questions.

One is just on the management fees, can you just break out for us where you see IMF fee on a full year basis in '07?

Probably. let's see, of our 1.380 billion to 1.4 billion of total fees, it'd probably be in the 330 to 350 range I suppose, something like that.

And that's, year-over-year that growth rate is lower than what we put on the boards in 2006 for the incentive fees.

Partly that's because, as we talked about, I think, in the second quarter, we had a $10 million deferred incentive fee payment that came in, we've had a little bit of that that probably causes us a $15 million or so bucket that we need to fill to sort of get even, and then grow above that, but something in that rang, 330 to 350.

Okay.

And just lastly, while construction supply is increasing out there, supply growth has really yet to get to a point that it's troublesome for the industry.

We can debate, I think, the reasons behind that, but I'm curious, compared to prior years, are you guys seeing fewer, more, or maybe the same percentage of your rooms that enter the pipeline actually starting construction?

Because it would seem that construction costs are restraining some of the projects that are on the board out there from actually ever getting begun.

Yes, generally we are not.

I will turn your question around a little bit.

We are not seeing a higher percentage of projects fall out of our pipeline than we did in the past.

We're seeing them take a bit longer to get through the pipeline.

Partly that's because our pipeline is, got a pretty high standard.

These are deals that are overwhelmingly, every document is executed, and we have received application fees, for example, on a franchise.

So we're not-- and by and large our partners wouldn't do that unless they're highly confident that they are going to proceed.

Thanks, guys.

You bet.

Our next question today comes from Jeff Randall from A.G. Edwards.

Good morning.

Good morning.

Just a question on the pipeline.

I think you said about 27,000 of the 100,000-room pipeline is in international locations, and I guess I thought that would be higher given that, I think you said 36% of the room openings in the fourth quarter were outside North America, and maybe was it 30% for the year?

Yes, it's 30% for the year, I think, something like that.

It is what it is.

I think to some extent we probably get a few more conversions outside the United States at percentage terms than we do in, and conversions by nature tend to last in the pipeline, if they ever get into the pipeline, for a shorter period of time.

And so that 27% probably understates a bit openings we'd actually expect to experience.

Okay.

Just another question on the weakness in RevPAR.

Smith Travel has been showing some pretty good weakness in weekend RevPAR data, and I'm wondering if you're seeing that and maybe what you attribute it to?

And then, maybe what segment you're seeing that most pronounced in?

It's not dramatically different from segment to segment.

I think-- don't think it's a whole lot deeper than January is not a good leisure travel time, period.

So your weekends are more leisure intensive, a lot of people stay home in January after having gotten through the holidays.

And as a consequence, the strongest parts of our business, which are business transient and group, do less to drive RevPAR growth in these early weeks of the year.

Is any of that-- could any of that be attributed to Katrina-induced demand from a year ago?

A piece could be, sure, absolutely.

So in your markets like Atlanta and Houston and some of those markets you probably see tougher comps, which make that more difficult.

And that was probably more pronounced among the limited service hotels like Residence Inn.

And just last question.

Any more thoughts on, I think you mentioned in the second and third quarter about changing over from a 52 week year to a calendar year.

Is that still being thought about, and if so would the cost to convert be material?

Carl, take it.

Well, we're still looking at it, but we won't be doing it within the next year or two.

Okay.

Great.

Thank you.

Moving on we'll hear from Bill Crow from Raymond James.

Good morning, Arne and Laura.

Good morning.

Hi.

Couple questions.

Arne, on the occupancy that we've seen across the industry, and within your portfolio in the fourth quarter we get comments from the buy side saying that's a sell signal that it marks the peak of a cycle.

I know you have been very bullish about the cycle and the outlook.

Anything changed in your view based on the economy or supply dynamics or anything like that that would cause you to call a quicker end to the current cycle?

No.

Far from it.

I think the dynamics look very, very good there.

Somebody put a report out yesterday speculating on why demand seems not to be growing so much, and they had a number of different theories, which I think, some of which were interesting.

The only theory we might add in that, when you look at full-year numbers, the softest patch, when we look at our numbers is the hurricane season in the hurricane belt.

And there probably, at the moment, is a bit of a demand decline in those months that we'll have to get through.

And, over time, if we have another reasonably good hurricane season, as we did last year, hopefully that will feather itself out over time.

But other than those sorts of-- which are really sports, in a lot of respects, the dynamic and the every day business, both group and business transient, and even leisure business, is-- looks great.

Okay.

You mentioned you listen to other people's calls.

I'm sure you heard that Hilton and Starwood both boasted that they gained market share, their brands continued to gain market share.

Where does Marriott fit in that?

I assume you're holding your own or gaining market share as well.

If so, where is this market share coming from?

Yes, that's the $10,000 question.

It's coming from-- this is sort of partly tongue in cheek, but it's coming from mid scale with food and beverage.

I don't mean that exactly, but, the older, unbranded, probably [inaudible] sharing market hotels are undoubtedly getting hurt the worst.

When you look at Smith Travel segmentation of our industry, the mid-scale with food and beverage is the segment which has steadily been shrinking, in terms of it's supply, losing a point or two every year.

Those hotels are coming out because they don't work, and their lunch is being eaten by the others that are stepping into the system.

And by a stronger brands and stronger performance.

All right.

And then finally, could you kind of update us with your view, Marriott's view, on the M&A activity out there, where Marriott might fit in over the next few years within that?

There's not much we can say on this which is terribly interesting.

We have got capacity.

We would love to do as much as we could possibly do in the transactional area, both M&A we're at large, and asset transactions, if we can do it on terms that create value for our shareholders.

I think we still have a bias towards transactions that include meaningful amount of bricks, because bricks we can recycle that capital and retain brands and management contracts and franchise contracts with relatively little permanently invested capital.

We look at everything we can possibly look at, as everyone on this call knows, there are a lot of other folks with a lot of scratch who are looking at everything they can look at, too, and as a consequence, the prices on the acquisition side have been pretty, pretty fullsome.

What we have managed to do has been, where we have got an angle, where we have got a vision to see performance on an asset that we can deliver value to that other participants in the market can't, or where we have got a relationship, or we've got something else that will help us pull that thing in.

We are going to keep looking at it, but beyond that there's not much that is really important that we can say about it.

Is it fair to say that even though we're a couple years further into the cycle from when, let's say Blackstone, worked on consolidating the industry that there's still plenty of money chasing hotel companies, hotel deals?

There's plenty of money chasing all things related to hotels, yes.

Terrific.

Thank you.

Our next question today is from David Anders from Merrill Lynch.

Thank you.

Good morning.

Good morning.

Morning. [inaudible] there's a bit of a, kind of a gold rush mentality with respect to hotels in China, and could you just recap your strategy, if I remember correctly it's primarily been full-service and higher end. but is there any desire to bring, and what kind of infrastructure would need to be put in place if you wanted to move down to more mid scale and what not?

Our strategy has been to get high quality hotels in great locations with long-term good management contracts, and as a consequence we are mostly with Ritz-Carlton, Marriott, and Renaissance, the distribution that we have in China today.

We are about 11 or 12,000 rooms open, if I remember right.

And maybe another 7 or 8,000 rooms, I suppose, in that pipeline of pretty definitive deals.

And we have got multiple hotels in the most significant cities in China, which is where we're starting to see good rate growth and margin performance is great in China.

You start to step out of the top ten cities, and the rates are really pretty modest.

Margins are still good because labor costs are not very high, but they're really pretty modest and pretty local, and the hotels competing in those markets are from a quality perspective beneath anything that we have in our system.

We all watch, and we watch and talk about it and have got various projects looking at when and how do we move into more deliberately into a Courtyard-like segment, give or take a little bit, and I suspect that's a direction we will go over time.

We'd much rather establish our brands, our management expertise, our economic platform at the higher end with the long-term agreements, and then roll out the moderate-tier stuff.

Okay.

Thank you.

You bet.

[OPERATOR INSTRUCTIONS] We'll go next to Celeste Brown from Morgan Stanley.

Hi, good morning.

Good morning.

Just a quick question.

First, what percentage of your incentive fees are generated from your 30 largest hotels or fee paying hotels, incentive fee paying hotels?

And then, I guess if you have a sense for this, how are these hotels doing versus the guidance you gave in Paris, or is it still too early to have a view on that?

I'm not sure I know the answer to either one of your questions, Celeste.

The 30 biggest incentive fee hotels are going to be a pretty interesting collection of hotels.

It might be a little bit different than you think.

They would include, certainly some of our significant U.S. assets, big, bi hotels like Marriott Marquis in New York.

But we have got a lot of international hotels that pay healthy incentive fees.

And so that mix of 30 hotels is going to be a pretty globally diverse set that will not operate in tandem from an operations perspective, I wouldn't think.

But you're sort of self-defining a group of hotels which are going to deliver a significant amount of incentive fees.

I don't know what that number is.

It could be 80 to 100 million, 70 to $80 million, I suppose, something like that, because the top 30, every one of them is going to be easily $1 million plus, and some of them will be a number of millions of dollars, so maybe it's-- maybe it's even a little bit over $100 million.

How are they doing compared to what we talked about in Paris, specifically, I don't know.

Generally, I would think very much on-line.

I think the business is performing very consistently with what we had in mind in that presentation to all of you in Paris in October.

Great.

Thank you.

You bet.

Moving on, we'll hear from Jay Cogan from Banc Of America Securities.

All right, Jay, you get the prize, you're last.

How are you?

Hi, I'm doing okay and I'll try not to blow it here.

Kind of following up on that question, and I've got another unrelated question after that.

As it relates to the incentive management fee guidance that you did give back a few months ago, despite the fact that your RevPAR numbers-- margins were a little bit below your guidance here, which I think we all understand by now why, I'm just kind of curious as to where that upside came from in this quarter?

And also, it looks like it moves into next year, and so should we maybe start to rethink some of the ranges on the longer term basis for you?

And then, the unrelated question is, I thought energy costs were expected to be up 10% in 2007, from the last time you gave some initial guidance, I was wondering if that's still the case and how things are looking?

Yes, the numbers we gave you-- going to take the second question first, the numbers we gave you presume about a 5% growth, full-year 2007 against full year 2006.

That's a North American number.

Dynamics are very different market to market around the world.

And we think, sitting here, that that's about the run rate we're going at today.

So we think that's probably a fair assumption.

There's, obviously up side and down side from that, but we wouldn't say there's dramatic up side or down side either way from that assumption which is in our model.

Incentive fees, where's the up side coming from?

It's really coming from a lot of focus around margins and good fortune in terms of where the profitability is coming through relative to our incentive fees, gave us some up side in 2006, which was great.

We have done our best to bake that into the guidance that we have given you this morning for 2007.

We really haven't gone back and looked at 2008 or 2009, and I don't know that we would give you much counsel on that today.

All right.

Well, thank you all very much.

We appreciate your attention and participation and ask you to keep traveling.

Bye.

That does conclude our conference call today.

Thank you all for your participation.