萬豪國際 (MAR) 2007 Q4 法說會逐字稿

Good day and welcome to the Marriott International fourth 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 and Chief Financial Officer and President of Continental European Lodging, Mr.

Arne Sorenson.

Please go ahead sir.

Thank you Bambi.

Good morning everyone, welcome to our year-end 2007 earnings conference call.

Joining me today is Carl Berquist, Executive Vice President, Financial Information and Enterprise Risk Management, Laura Paugh, Senior Vice President, Investor Relations, and a new member of our team I would like to welcome, [Betsy Dunn], Senior Director, Investor Relations, replacing Donna Blackman, who has moved on to some exciting new opportunities at Marriott.

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 and/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 14, 2008, and will not be updated as actual events unfold.

You can find a reconciliation of non-GAAP financial measures referred to in our remarks, on our website at www.Marriott.Com/Investor.

I know all of you are especially interested in our outlook for 2008.

I will get to that in some detail a bit later.

But I would like to start by observing that first, our business model is proven and effective in both good and bad economic times, and our aggressive global growth deflects some of the possible impact from a slower U.S.

economy.

We also have a terrific growth story to tell, one that is getting better and better, and despite near term economic volatility and uncertainty over the long haul, we are quite bullish about our prospects.

And 2007 is the right place to start.

In 2007, we opened over 200 hotels and announced two new brands.

Edition, a boutique brand designed by Ian Schrager, and Nickelodeon, a family resort, bringing our brand portfolio to 19.

This is the largest in the lodging industry.

We have signed preliminary agreements on nine Edition hotels after only six months of effort, and will likely have over 20 signed by the end of this year.

We expect to reach more than 100 hotels worldwide within 10 years.

We introduced new lobby designs in 2007 at Renaissance, Marriott, and Courtyard Hotels, and introduced a new look for guest rooms and lobbies, in our Residence Inn, TownePlace Suites, and SpringHill Suites brands.

Those new designs are already rolling through our system.

We initiated a new sales and marketing approach in 2007, providing a level of service to group customers that our competitors will be hard-pressed to match.

More than ever we have our customers loyalty.

Marriott Rewards is nearly 30 million members strong, and provides us with a rich database to better understand and serve our most loyal and profitable transient guests.

And at almost a fifth of bookings, Marriott.Com provides the most cost effective way to provide that personalized touch.

We continue to reinvent the back of the house and invest in technology and systems.

We were one of the first to open a global shared services center for finance operations, and we are expanding Human Resources systems into a similar model to benefit our associates.

Overall we believe we have the most efficient operating systems, as demonstrated by our outstanding hotel profit margins.

While doing all of this we remain committed to environmental issues important to us and to our customers.

We achieved another 4% reduction in energy usage, in our U.S.

managed hotels in 2007, and we are again named an EPA Energy Star Partner.

Owner and franchisees satisfaction was at record levels in 2007, owners appreciate our delivery of high margins and continuous brand improvements.

For the fourth straight year, we returned value to shareholders through significantly expanded stock buybacks.

Last year, we repurchased 41 million shares of our stock for nearly $1.8 billion, including 12 million shares for $462 million in the fourth quarter.

Over the past four years, we have repurchased almost $6 billion of our stock.

We deployed about $900 million in capital in 2007, which included capital expenditures, loan advances, net timeshare development, and equity and other investments.

For the year we recycled about $1.5 billion of investments, including dispositions of 13 properties, and interests in five joint venture hotels, as well as note collections and sales and timeshare note sales.

We were very efficient users of capital during 2007, posting record returns.

Our pre-tax return on invested capital topped 25% in 2007, nearly double our performance just four years ago.

Our fourth quarter financial highlights include earnings per share from continuing operations totaling $0.62, up 19% from 2006, and right on our third quarter guidance of $0.61 to $0.63 per share.

There was some give and take.

REVPAR and margins were strong and on-track, and lodging fees came in about $0.03 ahead of expectations.

About $0.02 of the fee performance related to receipt of business interruption insurance proceeds.

Our timeshare business outperformed expectations by about $0.02.

General administrative and other expenses were about $0.02 higher than expected due to legal costs, and we lost about $0.03 on a non-cash loan reserve on a hotel and a leveraged aircraft lease.

Well below the line, we bid farewell to our synthetic fuel business in the fourth quarter of 2007, moving the business to discontinued operations.

With oil prices at very high levels, our full year results reflect a substantial phase-out of tax credits.

All-in-all, over the six years we operated synthetic fuel, we booked over $400 million in higher net income as a result of the program.

Our international Company operated hotels posted REVPAR growth in the quarter of 8.5% on a constant dollar basis, or 15.5% including foreign exchange impact.

Our international house profit margins increased 120 basis points.

As you can tell, our international business continues to boom, lead by our Caribbean and Latin American, Continental European and Middle Eastern regions.

Our comparable hotels in Central and South America registered REVPAR gains of 25% and 17% respectively on a constant dollar basis during the fourth quarter, while the Caribbean resorts delivered a 9% REVPAR increase.

We have a strong pipeline of new projects in this region.

Economic strength in Europe drove strong REVPAR gains in the fourth quarter, in Eastern Europe, the strong Russian economy provided impetus to our six properties in Moscow, and eight hotels overall in the country.

Western Europe is also doing well, with Brussels displaying its strength as the center of the Euro zone, Paris reporting particularly good transient business, and the German economy is stronger than expected.

In the U.K., the London area continues to do well, and is also attracting travelers from plenty of non-U.S.

sources.

The Middle East is still driving strong demand in the region, particularly in Cairo, Dubai, and the Red Sea Resorts.

We see booming economies in Central and Southeast Asia, and Markets like India, Vietnam, Singapore, Thailand, and Indonesia are all doing well.

In China, our spectacular resort in Sanya is doing great with REVPAR up by more than a third.

Our 3,000th hotel opened in Beijing not long ago, and we expect good performance there as the Olympics approach.

Our preeminent luxury brand, Ritz Carlton, also posted exceptionally strong REVPAR outside North America in the quarter, at 9.2% on a constant dollar basis, or 14.2% including the impact of foreign exchange.

The brands resorts are doing somewhat better than city center hotels, which is attributable to the continued strong and more resilient leisure demand in the luxury segment.

Globally we now have 70 Ritz Carlton hotels open, and 31 under development worldwide.

Across all our brands in North America including Ritz Carlton, the Company-operated comparable REVPAR increased 6.2% in the fourth quarter, and across our system our hotels increased occupancy, while continuing to drive average daily rates.

Both transient and group business made solid REVPAR gains.

Across the U.S, our business story was primarily a coastal one.

Solid to strong on the coasts, and softer in between.

New York, Boston, L.A., San Francisco, and Seattle lead during the fourth quarter, while Atlanta and Chicago were softer.

Detroit underperformed, but it was only in that market where we saw an obviously weak economy.

Pockets of new supply and renovations also impacted some markets.

In Orlando which was quite soft during the fourth quarter, the completion of a new 100,000 square foot ballroom at our World Center Hotel made all of difference, with the new ballroom Orlando expects a better first quarter.

Our North American house profit margins rose 140 basis points during the quarter, lead by Courtyard which jumped 250 basis points to 52%, matching the brand's previous record in 2000.

Clearly the Courtyard brand and the efficiency improvements made in recent years, continue to pay off, both for us and our owners.

Our thanks go out to our operating teams for these great results.

Our story for the full year 2007 was strong as well.

Our EPS from continuing operations excluding the impact of our ESOP tax settlement earlier this year, was $1.89, which is 15% higher than the prior year.

Total adjusted EBITDA rose 11% to $1.6 billion, and management and franchise fees in 2007 were $1.4 billion, 17% higher than 2006.

In 2007, worldwide system-wide comparable REVPAR using constant dollars rose 6.5%, 7.6% with the impact of foreign exchange.

North American Company-operated comparable REVPAR rose 6.2%, and house profit margins increased 160 basis points to nearly record levels.

Worldwide, our incentive fees reached an all-time record of $369 million during the year, about a third higher than the previous year.

67% of managed hotels generated incentive fees during 2007, compared to 62% in 2006, lead by our two largest brands, Marriott Hotels and Resorts and Courtyard.

Our international hotels represented 36% of incentive fees in 2007, compared to only 15% in [2000].

We opened over 31,000 rooms in 2007, 25% opened outside the U.S.

The pipeline of hotels approved, under construction, or awaiting conversion, totaled more than 125,000 rooms at year-end.

We expect to open another roughly 30,000 rooms in 2008.

To date the credit crunch has had little impact on our pipeline.

Of the 800 hotels and 125,000 rooms in our pipeline, roughly 60% of the rooms are limited service U.S.

Hotels, where financing typically comes from a local lender.

Another 20% of the rooms are in Asian or Middle Eastern Markets, where obtaining debt financing typically is not an issue.

So only 20% of the pipeline rooms are coming from the more than 100 full service hotels in the U.S, Europe, or Latin America.

Obviously, credit has been tight in these markets in recent months.

Approximately 80% of these hotels, however, are already under construction and financed, so we don't see a significant financing risk in our pipeline, at least for 2008 and early 2009 openings.

Over time we expect the debt markets will constrain U.S.

full service industry supply growth for later 2009 and beyond.

This could impact our openings a few years from now, but there may be some offsetting upside from conversions of our competitor's hotels.

Let's talk about timeshare for a few minutes.

We completed our timeshare mortgage note sale in the fourth quarter for a $36 million gain, while credit spreads widened, interest rates declined, and so our gain was only modestly below expectations.

The market has been volatile, but was very receptive to our paper.

Borrower credit scores continue to be good, and investor experience with the paper has been excellent.

Delinquency rates on our paper continue to run about 6% year-over-year.

If you recall segment profit includes timeshare, sales and services revenue, net of direct expenses, as well as base fees, equity earnings, minority interest, and General & Administrative expenses associated with the timeshare business.

Segment profit rose 16% in the fourth quarter, on higher earnings from our joint venture project in Kapalua, Hawaii, and savings from lower G&A.

Our profit improvement in the 2007 quarter also reflected a move to more effective and less costly marketing channels, and the closing of a couple of less productive sales offices.

Fourth quarter contract sales were lower than last year and softer than expected.

We booked a large amount of residential and fractional sales in the fourth quarter of 2006, when a new project received final government approval, so comps were tough, and we continue to see some softness in demand at our western U.S.

resorts.

So, where do we go from here?

As bullish as we are over the medium and long term, we of course read the same news sources as you do, and we are looking at the future with some caution in mind.

There are some trends that are quite positive, but because lodging demand tends to lag economic activity, we simply can't help you much with the most fundamental questions you have, about where the U.S.

economy is going.

But we can talk about some of the data points in our business that are getting our attention.

Not surprisingly, lodging demand and with it REVPAR growth, are stronger outside the U.S.

than in the U.S.

Our international results in January for example, saw REVPAR up nearly 10% in constant dollars, with all regions other than the United Kingdom reporting occupancy and rate growth.

Also, not surprisingly, lodging demand and with it REVPAR growth are strong at the higher end.

Our January results for Ritz Carlton were up about 9% in the U.S., and 18% in constant dollars outside the U.S, with occupancy and rate growth virtually across the board.

Focusing on U.S.

markets, the data points that gives us the greatest insight into future performance, group bookings is very comforting, as of the end of our first operating period which ended January 25th, group revenue on the books for our 117 comparable Marriott branded hotels is up 9.5%, with good growth in both room nights and rates.

We estimate roughly 70% of our expected group business for full year 2008 is already on the books.

Our cancellation rates are a bit lower, not higher, than last year.

Now as strong as these bookings are our group business in the first quarter will post more modest growth rates than we expect to achieve in later quarters.

With respect to transient business, our data doesn't tell us much about where we are going.

Most transient bookings come in the week before travel, but when we look at December and January results, the hotels which are most dependent on transient business, suburban and airport Marriotts, and our limited service brands, show the weakest performance.

Given the normally light travel demand in December and January, we think it is equally inadvisable to overreact to this data, as it is to ignore it.

But we suspect it shows some softening in transient, particularly leisure demand.

We have done our best to factor this data into our guidance, and with it we are forecasting global and North American REVPAR growth of 3 to 5%, with modest increases in property level margins in 2008.

Our guidance doesn't reflect the impact of an extra 53rd week in our fiscal 2008, which will skew REVPAR somewhat in the fourth quarter, but have virtually no impact on the bottom line.

For the first quarter we expect worldwide REVPAR to increase 3 to 5%, and North American Company-operated REVPAR to increase between 2 and 4%, reflecting some impact from Easter, and the early start of our Fiscal Year.

It is worth noting that our first quarter REVPAR includes three accounting periods for most of our domestic operations, but includes only January and February, for Ritz Carlton and our international operations.

So the strong REVPAR for Ritz Carlton and our international hotels, will have more impact on REVPAR in the second quarter, than in the first.

Fee revenue should increase 8 to 10% in 2008, after adjusting the 2007 fees for $19 million of business interruption proceeds, $17 million of incentive fees for prior period results, and also adjusting 2008 for $10 million lower relicensing fees, due to fewer anticipated transactions in 2008.

In addition unit growth of 4 to 5% appears nearly certain in 2008, as these hotels are already under construction, or are awaiting conversion to our brands.

Based on anticipated strong unit growth of over 30,000 rooms, and projected REVPAR, we believe 2008 base franchise and incentive fee revenue will total 1.49 billion to $1.52 billion, and first quarter fees should total 310 million to $315 million.

Even with this modest REVPAR growth, our 2008 incentive fees should set new records.

We expect owned, leased, corporate housing, and other income will deliver 170 million to $180 million in 2008, and 35 million to $40 million in the first quarter.

We expect gains in Other income to approximate $30 million in 2008, compared to $97 million in 2007.

Net interest should increase to about $155 million in 2008, as our debt levels remain higher than the prior year, driven by additional share repurchases.

Our guidance assumes we repurchase roughly another $1 billion worth of our shares in 2008.

For the timeshare business, we will likely have a bit of a mixed bag over the course of the year.

New resorts at Singer Island and Marco Island, each in Florida, are likely to increase contract sales in the first quarter.

However, those increases will be partially offset by the impact of projects reaching sell-out.

While the business remains strong, reported results are likely to be down meaningfully in the first and second quarters, due to start-up costs at these new resorts, and a tough comparison to reportable projects in the prior year.

For the full year 2008 contract sales are likely to increase 15 to 20%, with contributions from both new resorts and easier comparables to 2007.

We expect to increase marketing resources at some projects, focus on sales channels that make economic sense, and continue to pare back efforts that are less productive.

On a reported basis in 2008, timeshare sales and services revenue net of direct expenses could be down modestly from 2007.

This forecast reflects both the realities of percentage completion accounting, and the start-up costs associated with our four new projects.

Results from our timeshare business are spread throughout the P&L.

Some of the profits from timeshare appear in base fees, some in the timeshare sales and services line, some on the equity and earnings line, and some in the minority interest line.

In fact most of the $55 million forecasted for equity and earnings, and the $10 million in minority interest in 2008, is attributable to the timeshare business.

Adding all these pieces together, timeshare segment earnings are expected to total 300 million to $315 million in 2008, roughly flat the with 2007.

We expect Marriott's G&A to increase approximately 6 to 7% in 2008, excluding the impact of the ESOP in 2007, as we continue to invest in product improvement, new development, our new brands, and other initiatives.

With these assumptions we expect 2008 EPS will total $2.00 to $2.10 per share, and first quarter EPS to total $0.32 to $0.36 per share.

Based on what the we are seeing in our business, we are optimistic about 2008, but we are prepared if the environment turns less friendly.

We are highly confident in our business model which delivers consistent fee growth.

Our brands which represent the most profitable segments in lodging, are being renewed faster than ever, and our associates inspire us every day.

As we think about risk and volatility, it is worth noting that the vast majority of Marriott's earnings are fee-based and low risk.

As a result in 2008 we estimate that one point of REVPAR moves pre-tax profits by approximately $25 million.

We been in the timeshare business since 1984.

It has tremendous potential and offers significant opportunities for future growth.

The business has synergies with our lodging customer base, enhances overall loyalty to Marriott brands, and has been resilient across economic cycles, with an annual compounded growth rate of 18% since 1997.

Still in 2007, our timeshare segment comprised just 19% of our operating results, and development profits from the timeshare business accounted for less than 60% of that segment.

Just a quick note on timeshare, we are holding a Security Analyst Day on February 26th in Orlando, to drill down more deeply into the timeshare business.

We hope to see you there.

In the Lodging business our management contracts are long term and very tight.

Our management talent is deep and experienced, and we are prepared for whatever economic conditions are on the horizon.

I think the true value of experience is demonstrated in weaker economic climates, where customers may not be so easy to find, and costs not so easy to control.

As they say, smooth seas do not make skillful sailors.

While we can't predict the future, whatever it brings us, we are well-positioned.

In the meantime, thanks for staying on the road.

Bambi, we will take the questions now.

Thank you, Mr.

Sorenson.

(OPERATOR INSTRUCTIONS) We will take our first question from Felicia Hendrix from Lehman Brothers.

Please go ahead, ma'am.

Good morning.

This is actually [Shelay Lapan] for Felicia.

Good morning.

Arne you mentioned earlier that you saw continued softness in western U.S.

timeshare contract sales in the fourth quarter.

Just wondering what is behind that, and if you have seen any improvement in the first quarter?

Not yet, really.

Obviously we have only had January results in our timeshare business.

This is Southern California by and large, not including Hawaii, but I think both in Southern California, sort of urbanish markets like Orange County and Palm Springs, we are seeing maybe a little more softness in the last few quarters than the rest of the Company.

It could be related to some extent to tougher housing market in California.

We know that at least in one of the projects in Tahoe, more Northern California, some impact of fires, but there is probably an economic piece to this more than anything else.

Okay, thanks.

And also, regarding your REVPAR guidance, with the first quarter guidance being lower than the full year for North America, are you implying an improvement throughout the year, and if so, what is that based on?

Is that based on external forecasts?

Yes, I think a couple of things are worth bearing in mind here.

In the prepared remarks you heard us talking about group bookings, and our group bookings on the books for the full year are up over 9% in revenue, with good, strong room night growth and rate growth, but the weakest quarter, in terms of group bookings is the first quarter, so that will have some impact in the first quarter, and second thing is our reported first quarter results will be December 29, so it will include three days of last year through March 21 I think, and that calendar will probably tap us a little bit.

Okay, thanks.

You bet.

We will take our next question from Joe Greff from Bear Stearns.

Please go ahead, sir.

Good morning, everyone.

Hi, Joe.

Arne, you raised your '08 investment spending from a quarter ago.

Can you just help us understand the increase there?

Yes, I don't know that anything particularly stands out.

We have gone through a more fulsome budgeting process, since the early guidance we gave you for 2008 in October.

There is nothing significant there in terms of movement, although it would reflect whatever deals sort of surfaced in the fourth quarter that we wanted to budget.

Sometimes those deals are bound, often they are not, but there are opportunities that pop-up, and we roll them into our budget.

Philosophically it is very much the same as what we were anticipating a quarter ago.

Great, and then with respect to the amount of capital devoted to buybacks this year, it is a little bit less than you targeted a quarter ago.

Yes.

Can you help us understand that a little bit as well?

Yes, again, last year's actual numbers were just shy of $1.8 billion, and you heard us in the prepared remarks talk about roughly a billion for this year.

Those two numbers are not unrelated.

You will recall when we met in Paris in the Fall of 2006, we talked about sort of a three year plan, of about $1.5 billion a year over three years.

To some extent, the lower number in 2008 is driven by the fact that we accelerated purchases in 2007, over what we would have anticipated before.

We find ourselves at the beginning of 2008 much more levered, appropriately so, than we were at the beginning of 2007, so we have brought debt up by, net debt up by about $1 billion, essentially year-over-year, and that gives us a little less capacity to use incremental borrowings only to feed our share repurchase program, and as a consequence, we depend on operating cash flow and asset sales and the like, and that just leaves us a little bit less, in terms of capacity this year than we had last year.

And speaking of 3-year forecasts, in October last year, you gave us that '07 to 2010 sensitivity analysis.

I know the world seems like it has changed a great deal since then.

Are those still reasonable relative to sensitivity analysis that you were to look at as, giving the investment community some relevance?

Advance?

I think the biggest pieces in that 3-year model continue to be fair kinds of assumptions.

Obviously, the numbers we have got for 2008 guidance now are lower than what we talked about a quarter ago.

By and large, that is driven by weaker economic assumptions, which has caused that REVPAR range to come down by 2 full basis points, high end and low end, and it is driven by the timeshare story, which is less robust for 2008 than we anticipated a quarter ago.

The way the model works, I don't know that we would necessarily say that if we lose 2 points of REVPAR in 2008 versus what the we thought a quarter ago, that we will necessarily get that back in 2009 and 2010, I think that isn't necessarily a fair assumption, but the growth rates that the come from REVPAR and unit growth, and the long term story about timeshare in that business, we remain extremely confident in.

One of the measures that I think is interesting, and we talked in our prepared remarks about the sort of one-time fees that benefited us in 2007, and we talked about the significant decline in gains that we anticipate in 2008, compared to what we achieved in 2007.

If you adjust only for those two things, and of course for the ESOP in 2007, the implied EPS growth rate for us, 2008 versus 2007, is high-teens to low 20s percent year-over-year.

Which on relatively modest REVPAR growth and pretty modest margin growth, we think is a good confirmation that the model is working, and we would expect to see that kind of formula continuing to work in 2009 and '10.

Excellent, thank you.

You bet.

Our next question comes from Steve Kent from Goldman Sachs.

Hi, good morning, Arne and Laura.

Hi, Steve.

Could you just talk a little bit more about the operating leverage of the business at these kind of REVPAR growth rates?

Where does it start to become more difficult to achieve those incentive fees, and where profit margins start to get compressed, and what are you doing now, in anticipation maybe of that occurring from an operating perspective, and just I am sorry to go back to Joe's question on investment spending, but was that key money for new development?

Was it JVs, was it mezzanine financing?

Because it was a few hundred million dollar pick-up, so I just was wondering where some of that came from?

Yes, let's take that one first.

I don't have it by individual buckets.

There is not a significant increase in key money I am sure, versus or compared to what we thought about a quarter ago.

Those dollars tend not to be very significant.

There might be, I think there probably is some timeshare spending.

I have to go back and check on our Las Vegas development.

I think we had that in our model a quarter ago, but we would have to check the precise comparison between those two but again, even though it's a couple hundred million bucks, I think this is much more a function simply of the updated budgeting process, than it is of anything else.

Okay.

In terms of operating leverage, it is a couple of things I guess we would say.

One, we will almost no matter what the environment, be pushing in every way we possibly can to improve margins, and so we are not giving up, even if we are at the low end of our REVPAR range, on trying to achieve some margin improvement.

Having said that, I think the closer we get to that low end if we are down to 3%, it is going to take some real success, in order to deliver percentage margin improvement.

We think probably 3 to 3.5, maybe 3.5 as a single point REVPAR growth, is in normal times required to keep margins in percentage terms flat.

Here we are describing hotel operating profit.

Hotel operating profit margins, not Marriott margins.

Now, if the percentage margins stay flat, that means the profitability of a hotel is growing at the same pace as revenue in dollar terms.

And that will drive incentive fee growth for us, even with flat percentage margins at the same rate as REVPAR growth.

That is on a same-store basis, and then obviously we will get the benefit of new units opening into our system, and probably more robust operating dynamics outside the United States, all of which should drive incentive fees as a consequence at higher growth rates than would be implied by that U.S.

operating unit measure.

There is enough apprehension in this market that we have contingency plans that have been prepared, essentially those contingency plans again, our unit level plans would be phased to look at a relatively greater severity, the worse the operating environment gets.

The simplest things have already been implemented.

They are all back of the house.

They are not likely to impact customer experience at all.

And we are hopeful that we don't have to go to the the more severe contingency plans, but we will watch the way the year develops.

Okay, thanks.

You bet.

We will take our next question from William Truelove from UBS.

Please go ahead, sir.

Hi, guys.

Hi, Will.

Talking about timeshare again, when you talk about the contract the sales going up in 2008 but the recorded revenues going down, does that mean that we get back to where any kind of deferred revenues are now going to be roughly zero in 2008, or does this mean that we are going to see a substantial increase in say the deferred revenues because of the percentage of completion, and would you then book those kind of revenues in '09?

So I am trying to get a factor of what kind of growth, as best you can on an annual basis, from an '08 to '09 given the way the accounting math works in that business?

Just so let me, it is a good question, Will.

A little bit technical so let me try and translate deferred revenues into normal every day speak.

Really, what you are talking about is contract sales which have not yet been recognized through the P&L.

And how those compare at year-end 2007 with what we anticipate at year-end 2008.

I don't have a precise formula for you, but our expectation would be, we would have more of those contract sales that have not yet been recognized through the P&L at the end of 2008, than we would at the end of 2007 entering this year.

Does that answer your question?

Partially.

I would guess I would say how much more would be probably--?

We will have to get you that number.

I don't know off the top of my head.

But we have got, as we talked about we have got 15 to 20% of anticipated full year contract sales growth, and roughly flat segment profit, so we are probably talking 200, 300, $400 million I suppose, incremental unrecognized contract sales, but we ought to get you a number--

We will do our Timeshare Day coming up on February 26th, and I think we will be talking about it a bit.

But then it is probably safe to say though, that if you have a long term trend that because of the deferred revenues building up a little bit in '08, that maybe '09 might be a little bit faster than the historical trend, just and '08 is slower than the trend line on a reportable basis probably?

I would hope that is right, yes.

Okay, thank you.

You bet.

We will now take our next question from Amanda Bryant from Merrill Lynch.

Great, thanks, good morning.

Good morning.

With respect to your now revised '08 REVPAR guidance at 3 to 5%, now is it safe for us to assume that your full service brands are at the higher end of that range, and the limited service would come in towards the lower end?

And then additionally, is it also safe for us to assume that you are baking in occupancy declines across the North American system in that guidance?

Thanks.

Yes, both good questions, and I think the answer to both is yes, although not dramatically.

I think the luxury brands probably would be at the high end, maybe even above that.

I think full service including Marriott and Renaissance will be within that range, but better than the limited service brands.

Again, this is all somewhat guesswork but it is sort of what we would anticipate.

And I think generally, rate will be nearly 100%, maybe sometimes more of the REVPAR contribution.

That is going to vary a little bit by brand, and so while we are, I think on average we would say we are probably losing a little bit of occupancy in the year, we will watch and see the way it develops.

And then can I imply then you are expecting occupancy increases outside of North America?

Generally speaking?

I would think so, yes.

Okay, great.

Thank you.

You bet.

Our next question comes from Jeff Donnelly from Wachovia.

Good morning, Arne.

Hi, Jeff.

A question on margins.

I guess as you look forward to 2008, which expenses in particular do you think are going to be call it, present the greatest risk of being a spoiler if you will in the assumptions as you are putting it into your guidance, either to the the downside or to the upside?

Well, compensation clearly will be a significant piece.

It is about a third of the revenue of hotels ultimately goes to compensation, and those rate costs are coming up above 3% certainly.

They are going to vary a little bit by market, in some markets where unions have been more active, and where our competitors often have agreed to wage increases as a way of avoiding those battles.

I suspect we will see wage rates pushed a bit higher than that average.

Heat, light and power, who knows.

We will have to continue to watch that.

Oil prices are obviously staying very, very high, and that is likely to continue to move through, but I think those would be the two things we would watch most carefully.

And a question about your pipeline.

What feedback are you hearing from developers on the credit markets, and their ability to get I guess your pipeline built and opened, and are you seeing any of your competitors changing their practices to get more aggressive with fees or key money to help them out?

Not really on the latter.

I think we have seen our competitors accept some terminability provisions in their management contracts, and probably lower fees than we certainly would do, but that has been constant over the last couple of years, and I don't know of any particular change of that in the last few months, in response to the credit crisis.

We are hearing a sort of mixed bag, and you can hear the way it influenced our prepared remarks, but for most of our partners who are developing limited service hotels, we are hearing continued bullishness, that they may anticipate a little bit, some relief in construction costs which is a good thing.

They are still able to find debt from their relationship banks that are often local, and they believe it is a great time to just keep going.

Many of them have sold meaningful portfolios of hotels, and they have got the good resources to potentially reboot and rebuild their portfolios, so that has been a pretty comforting story.

The more you get though to U.S.-based full service new build development, to the extent those deals have not been financed, we are more likely to have started some conversations with those owners, about okay, what are the other financing alternatives that are out there, are they prepared to put in more equity in these deals as leverage, available leverage levels have come down, and we would say there is going to be some risk in that portfolio over the next few quarters or longer, depending what happens to these debt markets.

Some of the debt needs are being met, and we are gratified to hear by what people talk about as balance sheet lenders, so life companies and some commercial banks would be included in that, and it is great to see some of them step up, and hopefully there will be enough of that stepping up so it won't be too big a lurch, but certainly the risk is we will lose some deals being added to the pipeline that we would not have anticipated six months ago.

And how does this extend to relicensing fees?

I think you mentioned in Q3 you are expecting a drop as transaction volumes might slow because of credit market issues.

Are you seeing that?

Well, yes, I am not sure if we are really seeing it yet, but I think it is still the right caution.

We have, on a franchise property, we receive a relicensing fee when a hotel trades from one owner to another, and that fee stream has perked along in the high-single digits, maybe up to $10 million a year something like that, year after year after year for a long time, it has not really gotten much focus from anybody because it has been a fairly low number, obviously on a single quarter it might only be a couple million dollars.

In 2006, that started to step up and in 2007, it really moved significantly more like to the $20 million range, and it did that because hundreds of our limited service hotels were trading hands, sometimes in big portfolio deals that many of you are familiar with.

And we expect that to step back down in 2008.

What fueled a lot of those portfolio deals was availability of high levels of chief debt, and that is not a available in the market today, as a consequence, we think it is pretty obvious we will see fewer of those transactions, so we would guess those relicensing fees are going to step back down more towards their historical levels.

If I could just ask one last question.

Are you seeing trends emerge I guess I will call it in luxury group bookings for 2008, group meetings like at Ritz Carlton?

Not much.

There are some anecdotes obviously coming out of the finance world.

I think finance is a more significant group customer, and the higher up you go in the chain scale, and obviously, there are financial institutions that are suffering a bit, and focused on expenses, so we hear a bit about some caution from some of those customers, but we are not seeing in our data an increase in cancellations yet.

So obviously we will keep watching that.

Thank you.

We will take our next question from Bill Crow from Raymond James.

Please go ahead, sir.

Good morning, guys.

Most of my questions have been answered but let me follow-up on Jeff's question.

If you look just at the U.S.

full service hotels, and the change in the development pipeline, has that been a positive or negative the last few quarters?

Do you have more coming out or more going in?

I think through the end of the year, we still had more going in than coming out.

I should just, we should pause and stop there.

I am not sure we know exactly how everybody counts their pipelines, and I think our approach generally though is to count real definitive transactions, so a hotel which entered into our pipeline in the fourth quarter probably, if you are talking about a new build hotel, probably had been in discussions between our developers who do these deals for us and our partner for a number of quarters, prior to the fourth quarter.

And so in many respects those deals while the financing may not have been contracted for prior to the fourth quarter, it was probably arranged, and it was probably at least a non-binding committment from a financial institution, so while we are gratified that we were still adding more hotels than we were declining, I am not the sure any of us should take that as a sign that the debt markets, that this industry is acting in a way that is immune to what is going on in the debt markets.

Fair enough speaking of the debt markets in the fourth quarter, when did you complete the timeshare note sale, and have you seen or heard anecdotally about changes to the environment since then?

Well, I think we completed roughly the first of November, I don't remember the precise date, and I know the week after we completed, we got some chatter back from the market that it was a good thing we went when we did, and things got worse after that, and of course we heard from some of our competitors that they did not get fourth quarter deals off, which may have been driven by that market.

What we are hearing from the financial institutions today, and in part this is because of the decade plus that we have been selling this paper, and we have got a great track record with it, that we can still get a deal off, but the question would be about spreads, I think at the moment what we are hearing is the spreads would be a bit higher than they were even in November, and in November they were a lot higher than they were in the second quarter deal that the we did in 2007.

The guidance that we have got, what we have sort of got implied in the guidance we have given you this morning, I think if we did the deal today, based on where spreads are, you know, maybe we have got 2 or 3 or $4 million of risk in our second quarter gain number from the timeshare note sale, but not a lot more than that, so it is not massive.

That is helpful.

Finally, nit-picking, the G&A forecast for the year went up by 30 or $35 million, relative to the the prior guidance.

Anything in particular driving that?

We wouldn't accept $30 million as being nit-picking.

(laughter)

Don't be so bashful about that.

We see a bit of an opportunity to tell you the truth.

We have got the two new brands we talked about, and we have staffed up to deal with those brands.

We have staffed up, particularly Edition, faster than we anticipated because of the overwhelming response from our partners, and we have also stepped up our efforts around some of the lobby and rooms renovation activity, for not just the new brands, but for the brands we have had in our portfolio for a long time, and to some extent, we see a great opportunity, given where our competitors are to step up our service levels to our owners and franchisees.

We obviously have a business model which is about receiving high fees in exchange for providing high value.

Our competitors for a mix of reasons probably will put a lot of pressure on the value that they provide to their owners and franchisees, and we want to make sure that we in effect accelerate our lead in this space, and believe that spending some more money around these kinds of initiatives, and delivering service is exactly the right thing for us to do.

Thank you.

You bet.

Our next question will come from Celeste Brown from Morgan Stanley.

Please go ahead, ma'am.

Hi, good morning.

Hi, Celeste.

Couple questions for you.

First, Arne, on the timeshare demand being softer in the western part of the U.S, is there more of a regional buyer there, so the housing market and sort of Southern California would have a bigger impact, or is it sort of a same kind of distribution nationally, as you would in some of your other timeshare resorts?

I think it probably is a bit more regional.

I suspect that is a piece of it.

And then second, we have heard that some of the bigger, some of the bigger hotel developments out there are being held up by tax incentive financing, not coming through because of the sort of dire straits some of these local jurisdictions are in.

Are you seeing of that in your pipeline, and if so, is that included in the 80% you have talked about being fully financed?

We have not seen that in any of our projects.

Now we don't have much that includes TIF financing, but I think some of our competitors may have a couple more of those convention center deals.

That is certainly something to watch.

Okay, and then finally, I know you guys don't forecast, or you aren't currency forecasters, but have you adjusted for the expected dollar strengthening in the back half of the year, or done any hedging that is reflected in your guidance?

We have done some hedging and typically our approach would be a bit opportunistic, but would be to lock in the bulk of our Euro and Pound denominated cash flow, at about the beginning of the year for the next year.

I think as we got to the end of the year and saw the strength in the Euro and the Pound, most of our cash flows in those two currencies have been locked in at the rates that were then in the market.

Have you done anything with the Canadian Dollar?

Have we?

Yes, I guess we have, yes.

Same thing.

Okay, thank you.

And I think generally other currencies we have not.

Partly, they become expensive to hedge because they are less liquid, and partly it is because our cash flow coming out of those markets are also less significant.

Thank you very much.

You bet.

Our next question comes from Will Marks from JMP Securities.

Thank you, hello, Arne, hello, Laura.

Good morning, Will.

My question is on the portion of your CapEx that you dedicate to purchasing property, to drive management fees, and then disposing of it, and just put in the context of the current economy, how should we look at that in 2008?

I don't think there is much built into the capital forecast that we have given you in the guidance, which is about our opportunistically acquiring existing hotels.

It would be great if we found some opportunities, so in a sense, I am not the sure you would all love to hear this, but in a sense, we would love to find at attractive pricing, existing assets that we could step in and acquire, convert to one of our brands, and by attractive price what the we mean is there are prices at the which we could turnaround and resell that asset subject to multi-decade management contract, and extract all of our capital.

We will continue to kick tires and see what is available.

Obviously, some buyers who have been active in this industry, we would expect to be much less active in these kinds of debt markets, which short-term are going to be less relevant to our decision about whether we step in and acquire some of these assets, but we obviously have to factor in that, in terms of anticipating what our exit would be, so we will keep looking, if we find opportunities we would intend to seize them.

It sounds like you see a disconnect between where in general, stock prices have gone in the lodging industry, and cap rates which don't appear to have risen.

Would you agree with that?

I certainly would see a disconnect between the public valuations and the private valuations.

We have seen obviously a massive and immediate lurch in public valuations of lodging assets and lodging companies, and it is really hard to justify the valuations that the markets are giving.

We haven't seen the same kind of movement in cap rates on individual assets.

Your question implies that there hasn't been any.

I think we would guess that there probably has been some, fairly modest, but probably some increase in cap rates.

It is hard to get much of a beat on those, because there have been so few transactions that have been priced in the current market.

And we will have to watch and see how that develops over the next quarter or two.

Great, thank you, Arne.

You bet.

Our next question comes from Josh Attie from Citigroup.

Hi.

Can you tell us what level of worldwide REVPAR growth you think you need to keep the incentive fees flat this year?

Worldwide REVPAR growth, I would guess it is in the 2 to 3 range, but it is a bit of a guess.

Here is how we get there.

At 3 or 3.5%, without any new hotels delivering incentive fees, we should maintain roughly flat profit margins in percentage terms, and therefore some increase in dollars of profit, and therefore dollars of incentive fees to us.

As you start to slip south of that, you start to see some margin degradation in percentage terms, but you can take a little bit before you actually click through, and have declining dollars of profit.

Probably by the time you are at 2% you have not only seen percentage margin decline at the hotel level, but you have probably seen same-store dollar contribution to incentive fees to us cross over that line, and maybe begin to decline.

We will have a bit of an offset though, because unit growth particularly for international hotels, which tend to pay incentive fees from the day they are open, or nearly the day they are open will offset some of that, and so even by the time we get to a REVPAR number that shows declining same-store incentive fee contribution, we ought to be growing a little bit or holding flat.

So that is a bit of talking you through it.

It is not a calculated number, so take it very much as an approximate number.

Actually if I could add to that if you think about the broader fee question with 4 to 5% unit growth kind of in the bag for 2008, and REVPAR growth pretty strong outside the United States, total fee revenue would tend to grow even if REVPAR growth were shorter than that, or smaller than that, and implicitly, it would imply that Marriott's margins on our business, on our P&L, would continue to expand even at the REVPAR growth more modest than that.

Okay, thank you.

You bet.

This is our last question if you have got somebody still in the queue.

Yes, sir.

The last question will come from Smedes Rose from KBW.

Please go ahead.

Hi.

Hi.

Right under the wire there.

You answered most everything but I just wanted to go back to your expectation of being able to sell timeshare notes.

The folks that we talked to really are saying that the market has shut down now, so I mean, what is giving you confidence that you can sell these, and what is sort of the worst case scenario?

Do you just keep these on your balance sheet for longer perhaps, the way that some of your competitors have done?

And then just a second part, if you could talk a little bit about, you said your pipeline further out, may have some hurdles just as for full service.

I mean, would you guys be willing to step up and work with developers, with more equity or mezzanine financing in order to keep that pipeline accelerating?

Yes.

Two really good questions.

Let's take the second one first, about our participation to keep the pipeline going.

This sort of goes back to I recall the conversations we had in 2001, and when we started 2001, the Company looked very different than it does today.

We had well over $1 billion of guaranteed exposure to our partners hotels.

We had well over $1 billion of loans funded to our partners, and we probably had another $500 million of unfunded commitments to our partners, so like $2.5 billion.

As of the beginning of 2008, the total in those categories compared to that 2.5 billion is probably more like 500 or $600 million, so dramatically lower.

That is in part deliberate on our part, probably mostly deliberate on our part, and hugely a function of the capital that has gone into the industry in the last few years, which has paid off a lot of the stuff we have funded before.

We got this question a lot in 2001, and the way that the question is framed suggests, do we throw in money to solve, to meet a unit growth target, and it was not the case even then.

It certainly is not the case today, that we think about it that the way.

Instead, what the we would think about is if a partner comes to us, and the project is economically compelling, even given the uncertainty in the market, and structured properly, so that there is decent equity in the deal, and the returns are good, and it fits with our brand, we will be prepared to participate, if we can do it in a way that creates value for our shareholders.

But we won't participate simply to reach a pre-determined growth target and as a consequence, while we will participate in some of these deals because they will be compelling enough, some of them where we will be asked to participate, we won't, and I think the odds are that we'll see some of that full service stuff wash out, because of it.

We are not going to fill in the gap.

Okay.

So it is fair to say then you would not expect your total exposure to get up anything like where it was in 2001?

Not absent some big portfolio deal that is really compelling, that is right.

Okay.

And then in terms of timeshare notes, what are we relying on?

We are relying on what we hear from the folks who are experts in this market, and good bankers who have helped us do many of these transactions over the last decade plus.

There are a few different structural ways of going about selling these notes, and some of those structures kind of a deal we have not used in the past couple of years, but maybe tools that will be available to us, but I think your question is a good cautionary one.

These debt markets are squirrely at best, and we will not take for granted that this deal is going to get done until it is closed, although we are optimistic as we sit here that we will be able to get it done.

If it doesn't get closed, it is not a cataclysmic event for us.

It will cost us, if you will, in the quarter in which we don't close that deal, the gain that we have identified in our guidance, that obviously will tie up a bit more capital in that business, until we can turnaround and sell those notes, but generally retaining those notes are accretive, because the cost of debt, incremental debt that we will have because we haven't received the proceeds from the note sales is less than half, probably in this market, the interest return we are receiving on the notes that we hold.

That is still not the business we prefer to be in, and as a consequence, we will keep moving towards selling them but again, it is not, it is probably not the end of the world if we end up having to delay it a bit.

All right, thank you.

Okay.

Thank you all very much.

We appreciate your time this morning, and your interest in our story.

It is, where we sit I suppose at a moment in the economic cycle, where we have more questions than we have had before, but we think as we have described this morning that there are tremendous opportunities for us in this market, and a model that should allow us to deliver great results, in certain no matter what comes.

We thank you very much for your interest, and we wish you a good day.

This does conclude today's conference.

Have a wonderful day.