萬豪國際 (MAR) 2007 Q1 法說會逐字稿

Good day and welcome to this Marriott International first quarter 2007 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, Jimmy.

Good morning, everyone.

Welcome to our first quarter 2007 earnings conference call.

Joining me today are Laura Paugh, Senior Vice President Investor Relations, Carl Berquist, Executive Vice President Financial Information and Enterprise Risk Management and Donna Blackman, Vice President Investor Relations.

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 this morning, along with our comments today are effective only today, April 19, 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 web site at www.marriott.com/investor.

As I'm sure you've already seen, our results from the first quarter were solid.

EPS from continuing operations, excluding the impact of synthetic fuel, rose 5% to $0.40, $0.03 better than the mid-point of the guidance we provided a quarter ago.

Our out performance was largely due to better-than-expected gains and very strong results from our Timeshare business.

Our management and franchise fees came in at the low end of our range, largely due to a bit softer than expected RevPAR growth, but our incentive fees were stronger due to continued global margin expansion and the very strong RevPAR outside of the United States.

Across North America, Company operated hotel RevPAR increased 5.2% a bit south of our expectations going into the quarter.

Of course, since our first quarter ended on March 23, our fiscal RevPAR does not include the very strong month of March for our Ritz Carlton our our International hotels.

During the calendar quarter, worldwide managed hotel RevPAR rose 8.9%, 7.3% excluding the impact of foreign exchange.

Looking at the monthly trends, and I'm sure those of you who follow Smith Travel have seen this, January was the slowest month and March was the strongest.

You might ask if this adds up to any macro change in the business climate.

We've asked ourselves the same question, but the answer, so far, is none that we can see.

In all, there were certainly some noise this quarter making it a little tough to ascertain trends, but the calendar quarter numbers were certainly closer to our expectations for the quarter and we saw firming trends as the quarter progressed.

Attendance at group meetings during the quarter was on track as groups continued to exceed their initial blocks and food and beverage spending was strong.

Booking pace is showing particular strength in the fourth quarter.

RevPAR in the first quarter was strongest in business-oriented hotels and at higher price points.

For example, North America and full-service company operated RevPAR increased 5.9% while limited-service RevPAR rose only 3.3%.

RevPAR at company-operated Marriott hotels in downtown markets increased more than 9%, while our suburban properties RevPAR rose just 4.7%.

Across company-operated Marriott hotel and resort race classifications, we saw the greatest North American revenue strength in corporate and above.

Our bread and butter business.

With continued, albeit, modest growth in leisure revenue.

In our company-operated Marriott hotels in the U.S., midweek RevPAR increased 7% while weekend room revenue grew only 3.7%.

In the luxury tier, both business and leisure continues to surge.

Ritz-Carlton U.S.

RevPAR for the calendar and quarter increased nearly 10%.

We suspect that some of what we saw in the first quarter was the lingering comparison of Hurricane Katrina, which increased business at our limited-service brands last year.

In addition, unusually mild winter weather, especially early in the quarter, reduced leisure travel to some resort areas.

Of course, RevPAR is only part of the story.

What really matters is what we bring to the bottom line.

In fact, during the quarter our U.S.

house profit margins expanded 170 basis points to 39%.

Our incentive management fees rose 20% to $71 million in the first quarter with 55% of hotels now paying incentive fees compared to 49% in last year's first quarter as we continue to ramp-up hotel profitability throughout our system.

Our consistent approach to reducing costs at our hotels both on property and above property has also benefited our profitability.

Driving room-rate improvement, benchmarking successful performance and leveraging our size have all contributed to improved margins.

Technology has also been important.

For example, we continue to enhance the appeal of our proprietary web site through functionality and service improvements, leading Marriott.com to produce about 16% of booked room nights up from 11% just two years ago.

The cost of the Marriott.com reservation is now about 60% less than a reservation booked on our toll-free numbers.

We believe that our bold moves to enhance our brands are paying off on the demand side.

We continue to renew, refresh and reinvent our portfolio.

In fact, in part due to our Courtyard reinvention, more than 90% Courtyard hotels paid incentive fees in the first quarter up from 78% a year ago.

As we continue with our program to renew our hotels we expect significantly improved profit performance across all of our brands.

We're not done with sweeping initiatives either.

You may have seen our new plug-in ads on cable tv networks.

With our new plug-in technology in North America, including our 32" LCD flat-screen TV and our plug-in panel, we offer the industry's first fully adaptable room technology.

Guests can seamlessly shift between work and play in selective Marriott hotels now and at all properties all over time.

You can see for yourself at plugintomarriott.com.

In the first quarter we continued to see impressive strength in New York, and both Orlando and Miami did quite well, especially with the Super Bowl in February.

The Orlando World Center's new 105,000 square foot Cypress Ballroom should open in October.

The property already has nearly has 40% more group business on the books for 2008 than it had at this point in 2006 or 2007.

World Center expects a record 2008 RevPAR.

In New York our hotels are reporting outstanding RevPAR numbers and are pushing group business to areas outside Manhattan.

We saw surprising strength in St.

Louis during the first quarter and the Austin and Dallas areas did very well.

The Denver Tech Center Marriott RevPAR posted more than 20% in a newly vibrant area of that city.

Further west along the Pacific coast, Southern California was soft including Orange County, which we've noted the past couple of quarters.

In San Francisco, Bay Area was also softer than in recent quarters, but the West Coast is looking significantly better in the second quarter.

Our Arizona resorts reported a bit of sluggishness due to a late start of the typically cold northeast winter.

Finally RevPAR in Hawaii trailed other markets a bit as airline fuel surcharges for flights coming out of Japan reduced vacation demand there.

In the Washington market, after a couple of softer quarters, things are looking up.

Our newly renovated JW Marriott downtown is doing very well, and advanced bookings for both transient and group business are solid.

In New Orleans the slow rebuild of business continues and trends are looking up, with about 60% of typical bookings pre Katrina.

Groups are coming back slowly and the fourth quarter is looking very good, albeit against last year's weakness.

Despite fewer city-wides, Chicago and Atlanta, each held their own and both expect stronger second quarters.

Outside of North America, business is booming.

Comparable system wide hotels reported RevPAR of 11.1%, led by our middle east region.

Dubai continues to be hot and the Red Sea resorts are coming back.

Performance in the Caribbean and Latin America surged as more normal winter weather finally affected the northeast and midwest.

Mexico is doing well with our Cancun hotels reopened and South America produced especially strong results during the quarter.

In Europe, the economy has continued to improve, particularly in Germany where we've seen minimal impact from the recent vat tax increase, Moscow and Leipzig continue to do well and Paris posted great results for the quarter.

The UK region continues to perform strongly led by London.

In Asia, India's supercharged economic growth is fueling impressing results for us, and in Australia a good economy and healthy industrial sector are driving our business.

Beijing is continuing to benefit from the build-up to the 2008 Olympics.

For our company operated international hotels, the calendar quarter was outstanding.

A very strong March will be included in our second-quarter results, so our second quarter is getting a good head start.

Last month, all regions reported company-operated RevPAR gains of 12.5%, ranging from 11.5% in the UK to 14.9% in the Caribbean and Latin American regions.

During the quarter we added approximately 4,800 new rooms in 35 hotels to our system, including the Shark Village and Spa in Doha, Qatar, managed by Ritz-Carlton.

In the last three weeks we also opened our first Ritz-Carlton in Tokyo, a truly spectacular property, which is at the top of the tallest building in the Japanese capital and already reporting room rates in the $650 per night range.

Our system now totals 517,000 rooms, and our active pipeline of hotels under development has grown to more and it 100,000 rooms.

We continue to expect to add approximately 30,000 rooms to our portfolio in 2007, with our select service and extended stay brands, accounting for nearly 60% of that growth.

In fact, we are on track to open 100 hotels in 100 business days from April 1 through August 15, with our owners and franchisees investing $1.8 billion in this expansion.

We continue to be bullish about China and India, and in fact have additional developers in those markets.

In Beijing alone with 1800 rooms currently open in our system, we have another 2300 rooms under construction today.

As we've said, we expect nearly 30% of our lodging rooms additions to come from outside North America from this year through 2009, and we continue to open, and in some cases, reopen market-leading hotels across the globe.

If the first quarter, we welcome back a brand new, yet historic, Renaissance brand property, the Shelbourne, this is Dublin's largest five-star hotel and it's the place where the Irish constitution was signed.

We also opened the Ghent Marriott in Belgium, as well as the Renaissance Wuhan in China.

We continue to focus on the Renaissance brand positioned as a destination of choice for travelers who love to experience the idiosyncrasy and culture of a particular location and all that it has to offer.

Our new stylish urban Renaissance hotels exemplify the brands future.

The Schaumburg Renaissance outside of Chicago, the Renaissance M Street in Washington, which will re-open as a conversion in the second quarter, and the Renaissance New York in the heart of Times Square which we will relaunch after having completed renovations and repositioning later this fall.

The scope of renovations of the brand has taken several high-performing hotels out of our set of comparable hotels for the quarter which has temporarily softened Renaissance RevPAR results.

We have great expectations for the future of this brand.

We also have a couple of Renaissance Club Sport complexes in our development pipeline, the design of these projects, a hotel within a state-of-the-art health and fitness complex, will appeal to boomers and gen-exers for whom fitness and health complement their pursuit of experiences with a local flavor when they travel.

The story for Ritz-Carlton's first quarter is superlative.

The brand posted worldwide RevPAR gains of more than 10% in the calendar quarter, and just about all elements of Ritz-Carlton's business, including group and business transient leisure, resorts and central cities, are all doing well.

Internationally the demand for luxury continues to energize Ritz Carlton's growth and performance, the brand's fast growing Asia-Pacific region reported RevPAR up 12% over the year-ago quarter.

Our Timeshare sales and services revenue increased 21% during the quarter, while net of expenses, profits totaled $57 million, about $9 million ahead of our expectations.

Overall, contract sales rose more than 5% during the quarter compared to last year, reflecting stronger sales at new beachfront projects in Hawaii and St.

Kits as well as in downtown San Francisco.

At our Newport Coast villas in Southern California demand is picking up, defaults are at an all-time low, and average credit scores for borrowers are strong, ranging over 700 for those familiar with the terminology, something to note in today's climate of concern over subprime mortgages.

We've included some new disclosure about the Timeshare business in our earnings release.

On page 6 of the tables, we show for the first quarters of 2007 and 2006 the components of segment results, Timeshare sales and services revenue and contract sales.

We hope this disclosure helps make your job a bit easier.

Long-term debt increased in the quarter to just over $2.3 billion, this represents good news in that we're using our balance sheet and strong cash flow to fuel new growth and to repurchase our shares, both of which drive shareholder value.

In fact, we repurchased 9.5 million shares valued at $451 million during the first quarter and as of today, year-to-date, we have acquired 10.7 million shares valued at $512 million.

Our owned, leased corporate housing and other revenue net of expenses declined in the first quarter as we owned only 13 hotels at the end of Q1 compared to 17 hotels in the prior year's first quarter.

In addition, a slow pace of renovation at a resort hotel during the height of this year's winter-escape season depressed results by about $0.01.

G&A improved a bit during the first quarter, largely because of roughly $9 million of reserve reversals.

Our synthetic fuel business contributed approximately $0.04 to earnings-per-share in the first quarter compared to $0.01 in the prior year's quarter.

The increases reflect relatively lower levels of oil prices and higher production during the quarter.

Oil prices remain volatile, and as we have discussed, the IRS synthetic fuel tax credit program expires at the end of 2007.

Therefore, our EPS guidance continues to exclude syn fuel.

Generally speaking, however, if oil prices and production levels do not change substantially, we could earn 15 to $0.20 a share this year from our synthetic fuel business.

We encourage you to continue to exclude this business from your models.

We expect wind-down costs for this business segment to be immaterial.

As we have reported, during the first quarter, we received a notice from the IRS challenging our ESOP related federal income tax deductions claimed between 2000 and 2002.

We continue to examine and participate in various procedural alternatives towards resolving the issue with the IRS, but there is nothing now to report to you at this time.

Stay tuned.

So let's turn to our outlook.

With soft RevPAR growth in January, but strengthening fundamentals since then, we remain quite positive about our business.

At the same time, as we said, at our analysts' meeting just six months ago, the U.S.

lodging industry's RevPAR growth is likely to moderate from the double digit increases we have seen over the last few years.

As a result we are taking a bit more conservative outlook for 2007 estimating RevPAR growth in the U.S.

for the full year of 6 to 8%.

Outside of North America, we expect RevPAR to continue growing at a faster rate, bringing the worldwide, system-wide RevPAR range to 7 to 9%, excluding any benefit from foreign exchange.

This is the same global RevPAR number we gave you a quarter ago.

Despite this somewhat more conservative U.S.

RevPAR growth assumption, we remain confident in our margin outlook.

We expect house profit margins to increase 150 to 200 basis points, and I believe margins are more likely to end up at the higher end of that range, largely due to our successful productivity initiatives.

We expect to open 30,000 rooms during the year and believe 2007 based franchise and incentive fee revenue will total 1.39 to $1.41 billion.

Our fee revenue improvement reflects the receipt of some incentive fees we expect to receive in the second quarter that will be calculated based on prior year results but not earned until 2007.

Our 2007 incentive fees should also be at record levels.

We project Timeshare sales and services net of direct expenses to total 330 to $340 million including $75 million of gains on the sale of mortgage notes.

Equity and earnings is expected to total 10 to $20 million, down a bit from last guidance as construction delays at joint venture projects in Hawaii are likely to delay reportability.

We expect owned, leased corporate housing and other income to total 165 to $175 million, on a full year basis as we expect to continue to own fewer hotels.

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

Our guidance assumes we repurchase $1.5 billion worth of our shares during the year and investment spending totals 1.1 to $1.2 billion.

Excluding syn fuel, gains are expected to total approximately $60 million.

We expect G&A to total 690 to 700 million in 2007 with higher spending on product improvement than new branding initiatives.

With these assumptions we expect 2007 EPS will total $1.84 to $1.94 per share, excluding any impact from our synthetic fuel business.

This is essentially rolling our first quarter out performance through to the full year estimate, tempered a bit by slower results from joint ventures.

For the second quarter we expect the U.S.

comparable hotel RevPAR to come in at the lower end of the 6 to 8% range.

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

We expect fee revenue of 355 to $365 million and Timeshare profits to approximate 105 to $110 million.

Gains are expected to total 10 to $15 million.

All and all, we expect fully diluted EPS to be 51 to $0.55 in the share in the second quarter excluding synthetic fuel.

For those of you modeling the rest of the year, I would expect relatively stronger performance in Q4 rather than Q3, given the seasonality of our business and strong group bookings in the fourth quarter.

You'll see when you look at this guidance compared to consensus estimates today that consensus estimates are generally too low in Q2 and Q4 and too high in Q3.

Just a couple of final thoughts.

We're continuing to up the ante as a green company.

We plan to reduce our emission of greenhouse gases by nearly 1/5 or 1 million tons in the 10-year period ending in 2010.

In fact, tomorrow we're holding our first green fair at our headquarters, which is our observance of earth day which is this coming Sunday.

Companies that sell goods and services to Marriott will be on hand with products and tips on how to live a more eco-sensitive life.

We'll be doing more.

96% of our global hotels actively recycle.

At headquarters we're exploring how to become waste neutral, recycling everything, not only do we believe we're doing the right thing, it's good for business.

Shareholders and customers, as well as the communities in which we operate, are paying attention to environmental issues and concerns.

I'll be talking more about our progress in this area on future calls.

As you can discern from the call, we're busy keeping our enterprise ahead of some trends, and at the same time quick to respond to others.

We continue to implement the initiatives we've discussed to keep ourselves at the top of the game, and as always, we remain focused on the details.

This reminds me of a story a friend recently told me.

He was apparently having trouble at home, and so ultimately wrote a letter to Dear Abby and this is what he wrote.

I really need your advice.

I have suspected for some time now that my wife has been cheating on me.

The usual signs, the phone rings, but if I answer the caller hangs up.

My wife has been going out with the girls a lot recently, although when I ask their names she always says, just some friends from work, you don't know them.

I always try to stay awake to look out for her coming home, but I usually fall asleep.

I have never approached the subject with my wife.

I think deep down I just didn't want to know the truth, but last night she went out again and I decided to really check on her.

Around midnight I decided to hide in the garage behind my golf clubs, so I could get a good view of the whole street when she arrived home from a night out with the girls.

It was at that moment, crouching behind my clubs, that I noticed that the graphite shaft on my driver appeared to have a hairline crack right by the club head.

Is this something I can fix myself or should I take it back to the pro shop where I bought it?

Signed perplexed.

The devil is certainly in the details, and we're keeping our eyes on the right ones.

Thanks very much for your time.

Jimmy, we'll take questions.

[OPERATOR INSTRUCTIONS] We'll go ahead and take our first question from Joseph Greff with Bear Stearns.

Good morning, everyone.

Hi, Joe.

Great joke.

Arne, question for you on the '07 domestic RevPAR growth, how much of that 100 basis point difference results to January's results or first-quarter results, how much of that relates to what you're expensing on the limited service side?

Most of it relates to first quarter and a little bit into the second quarter.

And most of it also relates to limited service.

Okay.

You could tell on the different RevPAR numbers that we laid out for you this morning, both in the press release tables as well as the text, that there's a pretty significant difference between performance and limited service and full service and a pretty significant difference between downtown hotels which are really quite strong and suburban hotels.

And then in your calculation of system wide RevPAR, limited service counts as much of the weight as full service, correct?

No, I think globally it's about a1/3 I suppose.

Domestic numbers --

You don't weight it by revenues or -- it's by hotel count or room count?

It's weighted by RevPAR, so it's essentially rated by room revenues, yes.

It's worth noting, also, that if you looked at incentive fees, limited service hotels only represent about 15% of the incentive fees in the quarter, so they're very tiny relative to total.

Great.

And as you talk to some of your field folks, how are they viewing, I guess, the summer season with respect to leisure business?

I mean, do you think, I mean, are we starting to see a little of the above pricing wars or incentives and things like that or what do you guys foresee there?

No, I mean, one of the most comforting statistics, which comes clear to us through the system is, that there is very little pricing sensitivity that we're picking up through the system today.

We've talked with you before about our ability to use our technology to see whether our pricing is fair, and really what we're looking at there is how many times customers turned us down when we offered them a room at a quoted price.

And looking at that data, we're not seeing any increase pricing sensitivity at all.

You could tell in our first quarter numbers, weekend results were worse than workday.

It's tempting on first blush to conclude that that's a sign that leisure is weaker.

We think that that's not very clear though because you've got a couple of things that were pretty significant going on in the first quarter.

One is the Katrina affect, so a year ago, first quarter of 2006, in primarily limited service and some books like service and extended stays hotels throughout the south east and the south central, we had good Katrina business, which was seven-day-a-week, so tended to not only boost RevPAR but to boost weekend RevPAR.

The other thing during the quarter that impacts weekends, we think, a bit is the warm January and February caused less quick dash to the sun weekend travel in the first months of the year than we would have expected otherwise.

So, generally what we're picking up is pretty much a steady as you go mentality, but we're obviously watching this very carefully.

Okay and you made the comment, Arne, which I caught part of, that if you look at the consensus earnings-per-share versus what you guys were talking about, Q3 is too low -- I'm sorry, is too high and Q2 Q4 is too low.

Can you just talk about some seasonal changes in RevPAR?

I mean, the way I look at it is Q2 is going to look better than Q1, Q3 better than Q2, Q4 better than Q3, is that how you're generally looking at it, sort of on a RevPAR growth basis?

Yes, and Joe, I'm going to cut you off after this one just so you don't monopolize the call.

Let's see.

I don't have a full set of guidance for you for each quarter sitting here, so other than what we gave you on Q2 and the full-year numbers and sort of the general comment about where consensus estimates are versus our internal forecast, I don't have much in terms of our full P&L for Q3 and Q4.

Clear to us that, as we look at it, Q4 is the strongest of the year.

Why?

I think there are a number of reasons for that.

Group business on the books is great, Q4.

I suspect as we get into Q4 we're getting past some of the renovation impact that we know is impacting us this year.

And I think the third factor we mentioned is the hurricane season in Q3 continues to be relevant, particularly at the group business in Q3 making Q3 particularly in the hurricane belt a bit weaker than in other parts of the country.

Next question.

Moving on we'll hear from Harry Curtis with JPMorgan.

Good morning.

Good morning, Harry.

Quick question respect to limited service, and its relative weakness, to what degree do do you think, if any, there is some impact of the growing supply in limited service?

And/or do you get any sense that the relative weakness is economy-driven?

It's possible there's some marginal impact from supply, but we don't think it's very significant at this point.

I think much more it's a function of Katrina, which again is very strongly in this area.

There's a lot of renovation activity going on, which is probably having some impact on the margin.

And then as we look at it from market to market, you've got different stories in a few different markets.

Believe it or not, extended stay Las Vegas numbers for us, which are -- because we've got a big residence in there and some other [private] hotels, as well, are measurable.

That's been a bit soft for us and described for us as sort of fewer city-wides.

There has been weaker performance in extended stay weekend results.

And that seems to us to both Katrina related and a little bit the small group stuff that goes on in those hotels on the weekend, which is a value-driven thing.

So as we look at them -- and those are the things that explain most of that RevPAR performance.

So while it's possible in some markets that you're seeing impact on why we don't think it's significant at this time.

So with respect to Katrina, do you think that in the second or third quarter there'll be less and less impact if any?

By the time we get to the first quarter, it essentially should be gone.

First quarter which year though?

By the time we get to the third quarter, I'm sorry if I said first, by the time we get to the third quarter of this year, that comparison should be gone.

Okay, terrific, thank you.

You bet.

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

Hi, Steve.

Hi, good morning.

Two questions, first, you said earlier that you didn't see any change in the macro but then you said that for Q2 at least that you'd be towards the bottom end of those expectations, yet you've also had a pretty good March, so I'm trying to put all that have together.

And then secondarily, you talked a lot about international a lot about both current trends and also the outlook for development there.

Can you give us some direction, what percentage of revenues or profits or any measure you can is non U.S.

right now?

And where will it be in a few years?

And how much is it swinging overall profitability of the Company now and in the next couple of years?

Yes.

International is about 20% of our fees in the quarter.

Hang on, Steve.

I'm just looking at my notes here.

And I think that will continue to grow higher, probably 25% within a relatively near-term sort of performance.

International is great, it's a great mark for us and continues to contribute, so did I miss something, Steve?

No, I'm sorry, so you said 20% of your fees, is that of the overall company or is that of just the fee part of your business?

That's the fee part of our business.

And then the earlier question was on Q2, you said there were no macro trend -- you said that macro is not impacting results yet you put yourself toward the bottom end of your forecast for Q2, and then, I guess I'm trying to put all that together why that would be?

Yes.

That's just the way we see the numbers rolling up.

I mean, we have -- obviously the big question for us today ,and the question in the market is, the RevPAR numbers we post in Q1, as well as the 6 to 8 guidance instead of the 7 to 9 guidance for the U.S., for the full year of 2007, does it tell us anything significant about what's happening in RevPAR growth generally in the business.

And while it is exactly the right question for us all to be focused on, and one we have certainly focused on, we can't caution you enough that we are, not this morning, calling a macro change in the RevPAR growth rate in the industry.

We're not seeing that.

Now, we should warn you, we tend to lag, we've always tended to lag the economy generally.

And so we're not going to be the first place that this shows up.

When we look at our first-quarter results, when we look at what we're seeing on the books for the second quarter, though, we do not see that as an indication of a significant shift down in the way the business is performing.

And even though that that's the question we've focused on and spent a lot of time talking about, and undoubtedly will continue talking with you as other participants will be over the next few quarters, we're seeing some offsetting bright side which are at least as significant to us, in terms of our P&L, which include more bullish expectations about RevPAR growth internationally, and more bullish expectations about what our operating teams can continue to deliver in terms of margin performance, and therefore, the impact on incentive fees.

Okay, thanks.

You bet.

And we now will take our next question from Jeff Donnelly with Wachovia Securities.

Thanks, guys, Arne --

Good morning, Jeff.

Good morning.

Maybe I'm beating a little dead horse after what you just said.

But, considering that reduction in '07 RevPAR growth, are you able to break that out between how much was Q1 weakness versus the limited service outlook or what happened in that segment?

I think the overwhelming majority of the, sort of 1 point U.S.

number decline, is Q1 and Q2 suburban, which would overwhelmingly be limited service and extended stay.

But not exclusively.

Obviously we've got suburban full-service hotels too, which are competing in those markets.

Do you think that weakness in the suburban segments is maybe a statement about pricing pressures, if you will, for leisure demand?

They're just not able to stomach maybe some of the rate increases that they're seeing.

I don't have much to add besides what we've said before.

That we're not seeing significant price sensitivity.

We are seeing that some of those suburban numbers are driven by the southeast and south central and the Katrina effect.

We see some of it as -- even in some suburban markets as driven by sort of compression, if you will, in those markets.

And so, at this point we're not prepared to sort of give you one single reason as the biggest cause for that, other than to note that it's the suburban markets where we were disappointed as the year began.

Unfortunately that's built over the quarter.

I know you said select service, I think, was 15% of your IMS, but, do you know what percentage that segment select service represents all percentages of your core lodging operating profits?

I think select and extended stay is probably about 1/3, a little bit less, maybe 30% of our fees.

International represented about 20% of total fees in the quarter.

But remember, international only contributed two months worth of performance in the quarter, so for the full year international would be a bit larger share of the total.

Okay.

And just one last question if I could.

On construction costs, I'm curious about any data points you guys are hearing, can you differentiate between, maybe, the construction costs per room excluding land, I guess, or where you see that today for full service and select service hotels, and maybe what change in construction costs you guys have observed out there?

I'm going to take the opportunity to give you sort of a fuller answer than your question asked for and talk about supply just for a minute.

Real basic propositions here.

Supply starts are obviously driven by expectations for economic returns on individual hotel projects.

And those are driven by, again, really basically, the cost of land and the cost of construction as the investment.

And the EBITDA of hotel when it's forecasted to open.

And we spend all our time in this industry talking about RevPAR and margins as being the shorthand for understanding that RevPAR.

When the returns make sense, the projects are going to get started.

So if those things all come together in an economic proposition that makes sense, there will be people who invest.

What's happened in the cost environment, compare this a little bit to 2000 and then we'll talk about it on a sort of current basis.

Compared to sort of peak growths, the way you look at '99 or 2000, land is dramatically more expensive today, and construction costs have grown at significantly higher rates than other cost categories.

And, by the way, today we are not seeing a decline in construction costs.

We occasionally see some folks speculating that with weakened residential market and some of those projects coming up that construction costs are coming down.

We're not seeing that.

In fact, we expect to see something more like 5% increase in construction costs 2007 versus 2006.

In any event, on the cost side, both land and construction costs have grown at dramatically higher than inflation rates over the last seven years.

On the return side, while RevPAR is today nominally higher in most of our brands than it was in 2000, when we adjust for inflation, and this is sort of using headline inflation numbers which are pretty modest over that period of time.

When we look at an inflation adjusted RevPAR, basically every brand for us in [maylow] is still performing at lower 2000 levels, lower than 2000 levels, and obviously margins are fighting to get back to the same level today but they're really not quite there for most brands.

What that tells you is, the economic proposition of starting a new hotel construction project today is still meaningfully less attractive than what we saw in 2000.

When you break it down by segment, it's becoming more attractive sooner with limited service in suburban projects where land has grown relatively less, and where the construction process probably puts a little pressure on that as well, but those still are, by and large, are not deals today that are better than they were in 2000, they are going to be weaker than they were in 2000.

The other big dynamic which I think has changed from 2000, or from the sort of prior strong period, is that construction cycles, the full-time, an idea to opening of a hotel, has gotten significantly longer than it was in 2000, and I think that means something really quite positive for the business.

It's longer partly because of NIMBY, not in my backyard, and other community forces which oppose development.

It's partly longer because of construction costs and, therefore, the need to really spend much more time managing construction and slowing it down.

But whatever the reason, relatively more of forecasted supply growth is sitting in a category of projects which are not under construction today, which means there will be better calibration between supply and demand in our industry than we saw in earlier times, because there will be more projects that the proponents of those projects, if they see any softening in the demand can say, all right, I ought to leave that one on the shelf for the time being and not start it until there's greater clarity about what the forecasted results are.

Much longer answer than your question called for but I thought it was worth putting it out there.

Terrific answer.

Thanks.

Jimmy, let's go to the next question, please.

Next let's hear from Will Truelove with UBS.

Good morning, Will.

Can you give us about RevPAR expectations or any changes in North America for your managed hotels relative to your expectations for the franchise hotels?

And how that works for your fee stream going forward?

If you can put that in some sort of context, it would be great.

Yes.

We manage, essentially ,100% of Ritz-Carlton.

We manage very, very few Fairfield Inns, to take the other extreme, and basically the proportion there, the closer we get to Fairfield Inn, the less and less we managed.

As a consequence, the numbers that we've talked about at some length this morning, when we look at our managed portfolio, which is obviously where our domestic incentive fees are coming from, international as well, but international is a bit different dynamic as we've talked about this morning, though the managed portfolio has performed significantly better than the franchised portfolio, again, not because of the difference in model but because of the different in positioning of those assets typically.

And our expectations as a consequence are higher for the managed portfolio and we were in a sense less impacted in the managed portfolio by the softer start of the year than we were in the franchise side.

So is it fair to say you're not changing the way your -- our guidance is on the managed portfolio?

Mostly it is, but we do manage some Courtyards and some Residence Inns, and those we would have a bit more modest expectations as we would for those brands generally, whether they're managed or franchised, but your comment is mostly right.

So the slowdown that you're seeing in maybe like, for example, the second quarter in that limited service stuff, how much of an impact do you think it has to your fees overall?

We gave you our fee guidance for Q2, obviously, and you can kind of take a look at that and fiddle with it.

Is it down to like 5 million or 1 million or something like that?

I can't give you an answer like that off the top of my head.

I can remind you that our full year metrics are point of RevPAR is about $20 million pretax to us, but that's full year, and that's sort of a composites across the brands.

So, that's something we can keep talking about, but you probably also have in your models based on room counts and RevPAR the ability to put some number around whatever assumptions you want to use.

Okay.

Thank you.

You bet.

We'll hear next from Celeste Brown from Morgan Stanley.

Hello.

Good morning.

I guess with all the concern about RevPAR having been very focused at all on expenses, I was surprised to see this sight, the RevPAR softness year end [inaudible] and yet it's at the higher end of the margin range.

Can you talk about that a little bit more?

Are we seeing some moderation in some of the cost pressures that we've had over the last couple of years?

Yes.

We -- actually, the -- I think -- give credit to our team.

The margin performance that they're delivering is less about the generic cost environment that we're competing in today than it is about some pretty exciting productivity moves that they're pushing through the system, and that's both above property dealing with things like reservations and other costs.

And it's in the property, usually dealing with staffing levels and other property-level productivity moves.

We have spent time with you in the last year or so talking about pretty thorough look that we did where we essentially benchmarked our performance from every bit of data we could get out there, whether that would be data from our competitors or often data from our franchisees, or the data we understood best, which was data within our own system, so we could see the performance of different hotels in our system that were in the same market, and we came up with some pretty exciting tools.

When we got to the first of '07, I think the full service brands were farther along, in that the implementation of those tools than the limited service brands were.

But we continue to roll out all of those tools and so we're seeing good resonance of that and good response on the margins.

We have been helped by some market dynamics.

Certainly January and February on energy costs were good, probably flat to last year, so no real increase.

We are seeing with -- part of this is weather, obviously, April has been a very squirrely month from a weather perspective, and I think in part because of that we'll see utility costs go back up.

We continue to think we'll probably see about a 5% -- 5% increase in utility costs for the balance of the year.

We've just renewed our property insurance, on average the premiums will be flat year-over-year, so there's no growth there.

We're probably seeing 4 to 5% labor costs before productivity impact year-over-year growth.

So it's not -- there are some cost categories where we are not seeing the kind of dramatic growth that we saw in the past.

But the margin performance, to be fair, I think is much more about what our team is doing than the market generally.

Great, thank you.

You bet.

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

Great.

Thank you, good morning.

Good morning.

I just had a quick follow-up on supply.

Do you care to quantify, I don't know if you ever do, the amount of supply growth you're expecting in North America or internationally over the next few years just on a percentage basis?

You're talking about in our system or our [inaudible] in the industry as a whole?

Actually your estimates for the industry.

We don't have them.

We look at Lodging Econo-Metrics and [PIBC] and some of the other folks that put stuff out.

They are paid to and do -- put folks out looking at permitting applications and those sorts of things.

It's not worth it for us to try and count somebody else's pipeline or the industry generally.

So we don't really have data that's any better than what you can find out there from other folks.

Okay.

Tell me what you see on an outside the U.S.

versus the U.S.

over the next few years on growth.

Do you see it as strong or perhaps a weaker number?

Yes, you're talking about RevPAR now or supply?

No, continue with supply.

Supply?

Well, nobody -- no part of the region is going to touch China and India in terms of supply growth.

It's almost the inconceivable that the U.S.

ever could post supply growth numbers that come close to those markets, at least in the next few years.

Similarly, although a smaller market, you would say the former eastern block, Russia, and everything east of there, and sort of southeast from there and the Middle East, I think we would say that all of those markets are likely to be stronger, generic supply growth markets for us and for our industry than other parts of the world.

U.S.

versus United States, that's a tough call.

I think the U.S.

-- excuse me, the Europe is performing better on RevPAR today, and there's a lot of optimism about the way that RevPAR is going to continue.

But it takes longer to get projects, new-build projects going in Europe.

And, it's still expensive to do a lot over there.

So, I guess for the industry supply growth in the U.S.

is likely to lead that in Europe.

I don't think that'll be the case for us because of our relatively small current distribution.

Thank you.

You bet.

Next we'll hear from Jay Cogan from Banc Of America.

Hey, Jay.

A few questions for you, I'll save the one where you're going to reach through the phone and choke me for last.

As it relates to unit growth, actually as it relates to Timeshare, can you talk a little bit about, you said you're delinquency charges offs, as it relates to itemizing on balance as well as the EBS deals, are at all time lows, am I phrasing that correctly?

And can you just give us a sense as to what those all time lows in terms of numbers really are?

Yes, it's 5 or 6% probably is the -- and I'm not sure if that's a default rate or a low payment rate -- late payment rate to tell you the truth.

I think default rate.

And they have declined.

We look at this very carefully, we're obviously reading the same newspapers that you all are and looking at what's happening with subprimes particularly.

I think one reason our results are so different from what you read about, and the reason we put that credit score out there in the prepared remarks, is our borrower is very different from a typical subprime mortgage borrower.

And so it looks great.

And we'll continue to watch it very, very carefully.

On the M&A front including through international, you've talked before about putting capital to work more likely buying real estate and looking to recycle that than let's say buying brands.

As you think about the relative mix in the business and growth opportunities, is there any change in that thought process or can you give us an update as to where that stands with regards to international growing opportunities beyond what you already have in the pipeline?

Yes.

Not really much to add.

I think, we can't help ourselves but to look at everything.

So, we're constantly preparing internal decks to sit and talk about this company or that company.

Not with standing that, I think as we look at it, we continue to be attracted to individual hotels that we know we can get into our system.

It's not risk-free but we can know with a fairly high level of confidence how those hotels will perform, and as a consequence can make a fairly simple decision about the likelihood of our ability to sell that asset and retain, essentially, gratis a long term management contract.

And that's what we've done the last few years, I think that's where we continue to focus our efforts.

And we'll keep looking there.

I don't otherwise have anything to add.

Just a final question.

I'm sure you're tired of hearing about RevPAR questions but, just given the limited visibility in some ways of the business and what happened the first quarter, can you at least say that in North America, second quarter thus far ,and I guess that would include the Ritz for the month of March, are you at the low end of your expected guidance in that 6% range or do you still have to work to get there?

Here's the issue we've got with our, the start of our second quarter in North America.

The timing of Easter and Passover, both of which were were in the same week this year, make it pretty tough on three weeks read to give you much that means anything.

But we have factored in, as best we can, the results we've seen so far in the second quarter in giving you the guidance for our quarter as a whole and the balance of the year.

Okay, thanks.

You bet.

Next from Raymond James, we'll hear from Bill Crow.

Good morning, Arne.

Hey, Bill.

I've got three very quick questions here.

First of all on the Timeshare side, you reduced contract sales growth expectations from 10 to 15% to 5 to 10%, anything behind that that we should concerned with?

Construction pace in Hawaii.

Okay.

So it's not fundamental weakening of visits and your properties or anything like that?

No, it's really not, it's not a demand driven or sales driven concern, it's just construction pace.

Okay.

And then given the weakness of the dollar, has that changed your earnings guidance for this year relative to your guidance that you provided in February?

In other words, have you maintained the same ratio?

It really is not factored in in any way to the guidance that, any change in guidance between Q1 and Q2.

So there could be some upside based on the dollar?

Conceivably sure.

All of our guidance, as we talk about worldwide is excluding foreign exchange.

Yes, I was just wondering, obviously you had to make some sort of assumption in February.

Yes, and we're essentially still using our budgeted exchange rates in the guidance we're giving you.

And, Arne, can you just bridge that discussion about how it's less profitable to build a new hotel today, it takes longer, there's several more obstacles relative to six or seven years ago, and yet you and Starwood and Hilton are boasting record levels of development pipeline, is that just a lower risk premium?

Is it the world a wash in liquidity?

What is driving that?

Well it is, it's overwhelmingly driven by franchisee development in suburban markets of limited service and extended stay product.

And it is really concentrated on the brands of a few companies.

We are seeing the -- what does Smith Travel call it, the mid scale with food and beverage, I think.

We're seeing that segment of the market contract.

Those are, by and large, older suburban hotels and they're getting scraped, sometimes to put one of the newer versions of the same together.

Sometimes presumably for other purposes.

So I think a big part of this is that the companies that you mentioned are taking share in that space.

I think another part of it is the maturation of a really pretty interesting business, which is our franchisee partners who do a great job in developing those hotels and running those hotels and like that dynamic.

There is, to be sure, a bit lower cap rate required today than in 2000, and that would be a bit of a offset from the supply dynamic I talked about before.

But other than those trends, I don't think, I don't think this is, by and large, an urban or full service phenomenon.

Okay.

One final question, Arne.

Any impact to your development pipeline based on the -- the deceleration or the demise of the condo as far as mixed-use projects go?

No we weren't really terribly active in certainly condo hotel projects at all.

No, I guess I'm thinking about the Ritz-Carlton sort of condo on top of hotel sort of development.

Yes.

Not -- I don't think so.

In fact, maybe it's partly because we've become more deliberate about it.

We're seeing that step up a bit and step up a bit, these are all, today, virtually all resort locations.

They tend to be pretty small hotels.

They're kind of spectacular pieces of residential real estate, and at that high end, again, it varies quite a bit market by market, but at that high end our partners, and we still think that these projects are projects that pencil and make sense.

But they're not big numbers in percentage terms in terms the rooms growth that they represent for us or anything like it.

Thank you, Arne.

Last question, if you still have one, Jimmy, otherwise we'll wrap up.

We'll take our final question from Bill Lerner from Deutsche Bank.

Thank you, Arne.

You bet.

Given the direction of RevPAR from here, can you talk about strategy to smooth out impact over the next two years?

I mean, obviously you're less sensitive to it than others but how do you handle it?

Is it just unit growth, certainly as it's always been, or is international overweight or just to get a sense that would be helpful.

The way you framed the question, maybe I'm quibbling with you a little bit here, but there's no real cause and effect.

We don't look at RevPAR results posted today, or we don't look at the possibility that we could see RevPAR growing at a point or two less than it's grown in the last couple of years as a reason to cause us to change deliberately a strategy.

Instead, we have been working and we will continue to work on new development with our partners.

We, we've got an emphasis obviously on international.

We have got an awful lot of focus on margins, as we've talked about, which drive our incentive fee performance.

All of those things are quite constant, and I don't see us having slacked off those in the past when RevPAR was strong, and I don't necessarily see us emphasizing them more if the question is RevPAR slowing in the future.

So, I think our model is set up so that we can see the kinds of things we're seeing right now, which is good strong fee performance in a market that might be driven by relatively stronger performance outside the U.S.

than in the U.S., relatively stronger performance of incentive fees than base fees.

And I think hopefully we'll continue to see some of that percolate through.

But we'll just keep focused on the kinds of stuff that we've been doing.

Helpful, thanks.

Thank you all very much for your time.

Keep traveling.

And that does conclude our conference.

Thank you again for your participation today.

We hope do you enjoy the rest of your day.