萬豪國際 (MAR) 2008 Q1 法說會逐字稿

Good day day, everyone.

Welcome to this Marriott international first quarter 2008 earnings conference call.

As a reminder, today's call is being recorded.

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

Arne Sorenson.

Please go ahead, sir.

Thank you, good morning, everyone.

Welcome to our first quarter 2008 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 Betsy Dahm, Senior Director, 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 17, 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 at our website at www.Marriott.Com/investor.

Before moving to the the specifics let me make a few general comments about our results in the quarter.

As expected, slower U.S.

economic growth impacted the lodging industry in the first quarter, as our REVPAR growth trailed inflation.

Although we estimate that our 2.3% U.S.

managed REVPAR growth number was depressed by roughly 1.5 percentage points by the timing of the Easter holiday and the impact of renovations.

In contrast, international demand was strong, yielding international double digit REVPAR growth.

first quarter North American house profit margins declined about seven-tenths of a percentage point and worldwide house profit margins were up about four-tenths, reflecting the strong REVPAR at our international hotels and good cost control and contingency planning in our U.S.

markets.

Not surprisingly the economy is also impacting our timeshare business.

During the quarter marketing incentives helped the top line and our focus on cost controls kept profits on track versus expectations.

The securitization markets remain unsettled.

Based on the feedback from investors and bankers, we feel reasonably confident of our ability to complete note sales during the year but we continue to look at the market day-to-day.

Today's full year guidance assumes that we complete the sale of 550 million to $600 million of timeshare notes in 2008, however with historically wide spreads, we have rolled in higher costs to our forecast, reducing our expected note sale gains by about $20 million compared to our prior guidance.

Given today's thin market we are also planning to sell mortgage notes over the next three quarters to reduce the size of the average deal.

Including reducing the first two note sales to about half of what we normally would sell in a given quarter.

Our second quarter guidance assumes the sale of approximately $150 million in timeshare mortgage notes, probably through a conduit deal, a term deal, or a private placement.

Of course, there's risk here, this is our best estimate given the information we have.

All in all as we approach this challenging environment we are encouraged by our financial flexibility and liquidity.

We have a $2.5 billion bank revolver with a four year term remaining, modest debt maturities over the next five years and strong expected cash flows in 2008 and beyond.

Our philosophy in an environment like this is very simple.

While we cannot make our lodging business immune to a weaker economy, we can strive to out perform our competitors.

Our goal is first, to expand, or at a minimum maintain our substantial REVPAR premiums over our competitors.

Second, despite rising costs and modest REVPAR increases, we focus on our operating margins.

And of course, above all, we remain dedicated to our successful business strategy to remain the leading hotel management and franchise Company.

This strategy protects us when times are tougher and delivers great returns when times are better.

So let's turn to the details.

As we reported earlier this morning, our results for the first quarter were again solid.

EPS from continuing operations totaled $0.33 for the quarter within our guidance provided a quarter ago.

During the quarter we opened up our fantastic new Boston Renaissance waterfront hotel, but we gave up a bit more than $0.01 of earnings due to that hotel's construction cost overruns, and increased pre-opening costs driven by a delayed opening.

With its proximity to the convention center we believe this new hotel is going to do just great.

Our composite North American Company operated comparable REVPAR rose 2.3% for the quarter.

REVPAR at our limited service brands increased 1.5% while full service hotels including Ritz Carlton in North America had stronger performance with REVPAR up 2.7%.

International Company operated REVPAR which includes only the calendar months of January and February including the Ritz Carlton brand rose a bullish 18.5% or 11.5% excluding the impact of foreign exchange.

Even international markets that typically derive a great deal of business from U.S.

Travelers did well.

Markets such as Paris and the Caribbean.

While the U.S.

leisure traveler may be cautious, most of the rest of the world is hitting the road.

In fact a number of international travelers to our hotels in the U.S.

increased at a double digit rate for the first time in three years.

Luxury lodging was particularly strong.

Ritz Carlton's worldwide comparable REVPAR rose 11.9%, including the impact of foreign exchange for the quarter.

As you know, the Easter holiday fell early this year, highly unusual, and in fact the earliest such instance of this in about 95 years.

This generated some noise for our U.S.

results.

If you remove the week before Easter from our first quarter, our REVPAR would have been up over 3% for our North American Company operated hotels.

While the early Easter was part of the story, the weaker U.S.

economy also had an impact on REVPAR but the impact was not evenly distributed across our business.

Leisure, transient business was very soft.

At the Marriott brand, weekend REVPAR declined 0.5% while midweek REVPAR improved 3%.

Business transient demand was stronger than leisure but varied by industry.

Demand from guests employed by professional services firms, defense contractors, and even consumer goods companies continued to show solid increases in room nights and revenue.

Guests associated with the automotive and pharmaceutical industries traveled less than last year.

Turning to groups, room revenue at the Marriott hotels and resorts brand increased about 2% in the quarter, consistent with our expectations.

We were pleased to see good attendance at group meetings during the quarter and cancellations remained below 2007 levels.

Looking at our significant markets we also saw variation in performance, largely related to year-over-year groups, citywide comparison, renovation impacts at our hotels, and new local supply additions.

We've seen a record amount of public space and guest room renovations in our system in recent years.

At the Orlando world center new exhibits face growth REVPAR significantly higher in the first quarter; however across the Marriott hotel and resorts system, the negative impact of hotels undergoing renovations was greater in the quarter than the positive effect of hotels coming out of renovation.

Cities with significant hotel renovations included Boston, Washington, Baltimore, New York, and Chicago.

In fact we estimate that first quarter renovations reduced REVPAR at Company operated Marriott hotels by nearly 0.5 a percentage point.

Fewer citywide conferences impacted hotels in Chicago, Atlanta, and San Diego, although the second quarter looks better in those cities.

Philadelphia and San Francisco reported strong group business in the quarter.

Net supply continues to impact hotels in Orlando, Detroit, and Chicago, although across most major markets, supply growth remains modest.

Overall, across the U.S.

while occupancy rates were under pressure, we've seen little transient or group discounting and average daily rates have increased 3 to 4% year-over-year.

We look, as we look at our international portfolio, the UK was a bit soft particularly in areas outside London, but we continue to see great results everywhere else.

In our South Central Asia region, several of our resorts reported REVPAR of well over 35% growth.

India continues to do well, while our China growth story is just terrific with 25 hotels opening up in the next three years.

There are 34 million Chinese traveling outside the country each year and we suspect there's lots of pent-up demand as a result of the growing wealth in China.

Results were great in Continental Europe during the first quarter, in Paris, for example, REVPAR was up over 11%, in Russia the strength of the countries energy sector continues to power the economy.

In Kazakhstan, also buoyed by the rising energy sector, REVPAR rose 50%.

The Middle East continued to be strong particularly in Dubai and Cairo with strong demand from both European and Mid East travelers.

The Caribbean and Latin American regions reported impressive results and the Dominican Republic continues to deliver stellar REVPAR increases of nearly 35%.

In Panama, REVPAR was up 40% benefiting from lots of activity surrounding the expansion of the Panama Canal and in Mexico we're glad to see that Cancun is back.

Turning to the cost side, worldwide house profit margins were up four-tenths of a percentage point during the quarter while house profit dollars increased about 7%.

In North America, house profit margins declined seven-tenths of a percentage point and house profit dollars increased 1%.

Our U.S.

labor rates are running up 3 to 4% and our cost of utilities is up up only 1 to 2% reflecting our energy hedging at many of our North American properties.

We are working aggressively to hold house profit margins in this slower demand environment in North America, given the significant variability in hotel performance, we've put in place three levels of contingency plans designed to address each individual hotel's circumstances.

All our Company operated hotels have implemented at least the modest -- most modest cost savings and all of our limited service hotels are in mid level contingency cost control.

65 of our full service hotels have implemented the tightest cost controls.

Our revenue efforts rival our cost containment plans.

We began reorganizing our group sales effort last year and are pleased with our progress to deliver better service to our customers and stronger bookings for our hotels.

In addition, we're adding languages to Marriott.Com and we've enabled guests to click on handheld devices to check on reservations and directions.

Small groups can now even book online.

Our free weekend breakfasts, special packages where kids eat free, and exciting contests such as win a million points and a million miles.

In other words promotions are attracting guests.

Further, we are preparing new sales promotions that focus on weekend leisure and group business, coordinating our Marriott Rewards program, e-mail promotions, Internet travel partners and Marriott.Com.

So, we're deploying fresh new product and experienced opportunities to drive revenues, not to discounting rates.

Sales REVPAR and house profit margins are only part of the story.

We added over 5,900 rooms in the first quarter and nearly a quarter of those openings were conversions from other brands.

One conversion to our Renaissance brand was the Blackstone in Chicago, opening after $128 million renovation.

Appropriate to this Presidential election year, the Blackstone is the stuff of political legend, where President Warren Harding was said to have been picked by those in a smoke filled suite 404.

Needless to say the hotel has opened as a non-smoking facility.

In addition to our Boston Renaissance the fully renovated Renaissance hotel Time Square in New York has drawn much attention.

Our system grew to nearly 538,000 rooms and our pipeline of hotels and development were under construction with just at over 130,000 rooms at quarter end.

Of those, 55,000 are already under construction.

Over 60% of our pipeline of full service rooms is located outside North America.

Over 3,000 rooms exited our system during the first quarter primarily as a result of our prune and plant strategy which has been very successful.

Reflecting the planting side of our limited service strategy, our limited service component of the hotel pipeline is now at about 79,000 rooms compared to 74,000 a quarter ago.

Many of our larger limited service franchisees are well positioned to reinvest in this sector.

They are able to secure financing through local banks with which they have relationships and are optimistic about the business and about Marriott brands.

We continue to enhance our brands and just a few weeks ago we launched our extreme makeover of our Courtyard lobbies.

The brand has redefined the lobby experience with an open, bright, and contemporary new Courtyard hotel lobby beginning with more private check in podiums upon arrival.

Guests can choose from seating at communal tables in the middle of the action to more private media booths with Hi-Definition televisions.

The signature element of the lobby is the Courtyard go Board, a 52 inch LCD touch screen packed with local information, maps, weather, news, business, and sports headlines.

Guests can navigate using the touch screen to find restaurants, local attractions, and directions.

Check out goCourtyard.Com for an idea of what we're doing.

On February 26, we held our first timeshare Analyst Day.

Our slides and speech transcripts are still available on Marriott.Com/investor.

We talked quite a bit that day about the challenge in evaluating performance of the business on a quarter to quarter basis, given timeshares accounting methodology and evolving mix of projects but we spent a lot of time on forecasts for 2008, 2010, and we even provided a 10 year look at cumulative contract sales, development profits and segment results as well as long term valuation.

In the first quarter timeshare pricing was firm and contract sales were consistent with expectation.

New resorts drove sales higher but were offset by projects reaching sell out.

Overall, our contract sales in the first quarter were up about 2%.

While timeshare sales were on target, sales of fractional units were slow as customers were reluctant to buy in a soft real estate market.

Perhaps surprisingly though, our residential sales were stronger than last year especially at our new resort in Kapalua.

Timeshare segment profits were substantially lower than the prior year as expected, largely due to start up costs and reportability at the new resorts and tough comparisons to significant reportable projects in the year ago quarter.

We've stepped up timeshare marketing incentives to attract customers and close sales, especially in the relatively softer markets in the Western U.S.

Overall, reported results are expected to materially improve as the year progresses which I'll get to in a moment.

Despite the weak economy delinquency rates on our U.S.

financed loans continue to run about 6.5%, slightly above a year ago, but the recent trend has been favorable.

Delinquencies fell from 6.7% in January and February to 6.4% in March.

However, as we discussed during our timeshare Analyst Day, we wouldn't be surprised to see delinquencies trend a bit higher over the course of the year.

Our first quarter tax rate was 38.4% and included an $8 million charge associated with our deferred compensation plan.

On an EPS basis deferred comp is immaterial since there is a dollar for dollar offset on the G&A line.

For the remainder of the year we estimate our tax rate will total 35 to 36%.

To summarize our outlook we hold pretty much the same view about 2008 as when we last talked in February.

For the remainder of the year, group bookings at the Marriott brand are up over 8% with group food and beverage revenue expected to rise at a low double digit rate.

With strong group business, occupancy rates should be stronger and hotels should be better able to book the most profitable transient business.

We are encouraged that first quarter cancellations were below last year and group meeting attendance held up.

Price sensitivity was low in the first quarter which also gives us assurance that we can hold rate.

Renovations are generally on schedule and despite the impact we reported on the first quarter, they should not depress REVPAR materially over the balance of the year.

And again supply growth in most markets this year remains modest.

Looking further out 2009 group revenue on the books is up about 5% with the exception of housing and finance related institutions, meeting planners are still planning meetings and expect good turn out.

As we think about our total fees recall that base and franchise fees are derived from REVPAR and unit growth.

We are continuing to forecast 3 to 5% worldwide REVPAR growth and over 30,000 gross room additions in 2008 and therefore, we continue to believe we can achieve a 1.49 billion to $1.52 billion in total fee revenue in 2008, a forecast unchanged from February.

This is not just wishful thinking.

While we remain cautious about U.S.

REVPAR trends going forward, we expect international REVPAR to remain strong and with growing interest in brand conversions, we have increasing confidence in our unit growth goals and the progress we've made on the cost side also gives us more confidence in our incentive fee outlook.

In addition, strong international performance is also good news for future incentive fees.

In 2000, only 15% of our incentive fees were earned outside of North America compared to over 35% in 2007.

Further, as you know, incentive fees earned at most of our hotels in Asia and the Middle East do not stand behind owner priority returns and are therefore more secure in a downturn.

Roughly speaking, nearly 60% of international incentive fees came from those markets in the first quarter with the balance drawn from Europe, the Caribbean and Latin America.

While our fee line guidance is unchanged, the challenges of the financial markets have prompted other changes on our forecasted P&L.

As I mentioned earlier we are planning to complete our timeshare mortgage note sales but to spread them over the next three quarters.

This means that our second quarter volume of notes sold should be lower than last year, with spreads very high we expect note sale gains to be about $15 million in the second quarter and approximately $70 million for the full year or about $20 million lower than last forecast.

Our timeshare sales and services net line reflects this decline in note sale gains.

We also expect higher sales and marketing costs and continued softness in the fractional marketplace offset by above property contingency cost savings.

In our guidance, this brings down our timeshare sales and services net line by $15 million to total between 300 million and $315 million.

Our timeshare segment profit forecast declines by $20 million to between 280 million and $295 million reflecting more modest reportability from our joint venture projects.

For the full year, we continue to expect to increase contract sales by 15 to 20% as four new projects begin sales in 2008.

Contract sales are expected to be particularly strong in the third and fourth quarter.

For the second quarter contract sales are expected to increase approximately 5%, constrained by the sell out of existing timeshare projects.

Given the soft economic climate and difficult financing environment, we are currently estimates only about 100 million to $150 million in asset sales with some sales shifting into 2009.

As a result we have lowered our estimate for gains by about $10 million.

Finally, lower interest rates should lower net interest expense by about $20 million in 2008 compared to our prior forecast.

All in all, our new forecast lowers our earnings per share outlook by about $0.02.

Before closing, you've heard us talk frequently about our connection to our customers and associates, as well as the plans we've been implementing to remain relevant.

While a little later today I'm heading to our Green Fair here at our headquarters where our associates can learn about ways we can be greener at work.

We're all very excited and engaged in this effort.

Just last week our Company took a very bold step.

At the Amazonia Exhibit at the National Zoo in Washington we joined together with the governor of the Brazilian State of Amazonis to announce that we were going to work together to protect 1.4 million acres of the Amazon Rainforest, a piece of land just about the size of the State of Delaware.

This will help us offset our carbon emissions and give us a tool to connect with our customers and allow them to do the same.

The Amazon project is just one part of an integrated environmental strategy.

To us this is leadership and it's the kind of forward thinking that from Bill Marriott on through our ranks, our Company has demonstrated over the years.

It's the kind of leadership that we work every day to bring to our industry.

Which brings me back to the economy and our business.

While we can't know with certainty which direction the economy or our business will go next month or next year, we do know that economic cycles ultimately do have beginnings and ends, tops and bottoms.

As we've said before we are especially well positioned to prosper.

As the noted humorist, actor and financial columnist Ben Stein has said, The indispensable first step to getting the things you want out of life is this--Decide what you want.

We know what we want and where we're going.

We're taking the steps every day to remain a leader and to deliver value to our customers, shareholders, owners, franchisees, and associates.

As always, thanks for listening, and we'll take your questions now.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our first question from Joseph Greff with Bear Stearns.

Good morning, everyone.

Good morning.

I guess another quarter where your development pipeline sequentially increased.

Can you just talk a little bit about that sequential increase and I'm presuming you're going to tell me it's more international, more conversions.

Are you seeing any domestic either new builds or conversions fall out and maybe just talk qualitatively, the financing environment how that might be impacting going forward the development pipeline?

Yes.

Great questions and I think when we see these numbers roll up too, we keep looking to see whether there's a pronounced sign that the financing market is calling back the pipeline and it really hasn't yet.

It's clear that the greatest growth in the pipeline and the greatest strength is in international and in the relatively smaller domestic limited service hotels.

The hotels that are under $25 million in the U.S., Courtyard, Spring Hill Suites, Residence Inns, and the like seem to be getting financed well still, and in fact those are projects continue to come in the door as we speak from our franchise partners.

I think many of our franchise partners did extremely well the last few years in selling a number of hotels that they had built before, so they're flush with equity to invest and again, for the smaller projects, they aren't finding it difficult to get financing.

International is obviously a very different story but there it's driven by better operating fundamentals, stronger economies, continued good performance, obviously some differences in market to market but generally those are stronger environments.

As far as the full service in the U.S.

which we would say is probably the place we've got the greatest concern, we're seeing some delays, we're seeing some of our partners find it difficult to move, get their financing finalized as quickly as they would have liked.

Clearly, generally, where financing was not in place already , we're seeing equity requirements come up and we're seeing spreads expand from what would have been expected a year ago.

We think roughly and we do fairly close tabs on this but we think roughly, three quarters of our full service pipeline, to include the international piece, is fully financed, and in a sense you could think about that as being the openings for the balance of probably for the next 24 months or so I suppose.

The balance is the full service hotels where we would say the financing markets will provide the greatest risk on whether those projects get killed and many of them have not yet because it's just too soon but whether they ultimately get killed or delayed because of the financing

Okay, good enough and one final question, Arne.

You obviously maintained the full year REVPAR growth on a worldwide basis.

As you think about the mix of that between North America and international has that changed over the last three months?

I guess I'm asking international stronger and more than offsetting a lower domestic result?

Oh, modestly, maybe.

I mean first quarter international numbers were great obviously and probably a bit better than we anticipated.

You can see from our domestic report that we were within the range of what we had guided to a quarter ago but at the lower end of that range.

So we're probably a little more optimistic about international, a little less optimistic about domestic, but that's a pretty marginal change.

Remember, our first quarter results we announced only two months ago and we were then looking at a lot of the same signals of weakness in the economy that we're looking at today, and we really haven't changed our expectation.

Fundamentally, the 3.5% REVPAR guidance that we are reaffirming today is buttressed by the roughly 8% REVPAR growth that we've got on the books for group business in Q2, Q3, and Q4 in the United States, and that gives us as much confidence as we can, though to be sure, we're going to be heavily dependent on the performance of the economy over the next number of quarters.

Excellent.

Thanks, guys.

We'll take our next question from Felicia Hendrix with Lehman Brothers.

Good morning, it's actually [Shelay Lapan] for Felicia.

I'm just wondering how much of your U.S.

business is now being driven by international customers and how does that compare to historicals?

Well, we're up double digits from a year ago.

It's going to depend dramatically on the market, in New York and Miami and particularly those two would probably be the highest proportion of international visits.

You get to the middle of the country and even the West I think would be dramatically lower.

I can't give you a percentage.

I suspect when it's looked at as a national average it's a pretty small percentage, single digit.

Okay, thank you and one more question.

Your timeshare guidance, excluding the securitization gains, it looks like it was up about $5 million for the year.

I'm just wondering, is there anything behind that?

It's about actually we brought down our timeshare note sale gains by about $20 million and we brought down the segment results by about $20 million, so it's--.

I guess I was looking at the time share revenues net of expenses.

Yes, that's right and that's down about 15, and so the difference there is going to be on by and large cost focused efforts to offset some of that loss that we expect in a relative to timeshare notes against.

Okay, thank you.

We'll take our next question from Patrick Scholes with JPMorgan.

Hi, good morning.

Can I get a little more color on the performance of domestic incentive management fees versus international during the quarter and also what is your outlook for those two for the remainder of '08?

Yes.

We had not surprisingly the best growth in international incentive fees first quarter 2008 versus first quarter 2007.

You can see our global incentive fees are up 4%, I think it's fair to characterize that as roughly flat.

The poorest performing contribution not surprisingly is in the U.S.

limited serviceman aged portfolio.

A few of those portfolios of residence in and Courtyard Hotels particularly that have been in place for sometimes 15 years or more are good incentive fee contributors to us historically.

You can see from the REVPAR numbers we reported in the quarter that our weakest REVPAR was in U.S.

limited service hotels, and so the year-over-year performance of those are down a few million dollars which in percentage terms is pretty significant from what we saw a year ago.

I think the U.S.

full service would be next but would characterize that as flatish, maybe down a touch but generally flatish when you look at adjusting for renovations and the like.

And the international piece up big, up 30% maybe something like that.

All of which foretells a larger likely contribution than we experienced even in 2007 for international hotels as a percentage of total incentive fee contribution.

Just a reminder to everybody, the law of small numbers is at work here in the first quarter.

The first quarter is the least significant in terms of incentive fee contributions for the system as a whole, and as a consequence, you can get a high impact in a high incentive fee contributing hotel of $1 million or a few $100,000 and have it be a percentage-wise a fairly significant impact.

It's also the least participating from our international hotels because they only have two months of performance here, so international should be more important going forward.

Okay, one more question on your timeshare notes.

What sort of spreads are you seeing out there in the market right now on your notes?

That's the right question to ask.

We don't -- we're talking to the folks who will help us and looking at varying approaches that we can do with this and one of the main things we're asking in talking to them every day about is what the spreads are going to be.

I can tell you for certain that they will be higher than the last quarter that we did but beyond that, I'm not going to speculate at what those spreads will be in part because we're hoping to get them lower than some of the guidance we're getting from folks outside.

We hope that it's a two handle spread, but we'll have to see how that goes.

Reminder, the last deal we did in the fourth quarter of 2007 was 125, 130 basis points spreads and so with a two handle we're quite a bit worse than we would have been a quarter ago.

Okay, thanks for the update.

You bet.

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

Hi, good morning.

A couple questions.

First, Arne, could you just talk about what level of REVPAR you need in order to maintain this profit margin?

I guess it's roughly with what you're reporting but, or forecasting but it just seems to me with like labor growing, expenses 3 to 4% that that's pretty tight to sort of sustain these margins and why not just go to DEFCON 3 on all of your expenses for all of your hotels right now rather than, you went through that whole exercise of saying, selling your hotels or cutting expenses some aren't or have gone to different levels.

Why not just roll it out across-the-board?

And then finally, Laura, could you just remind us what percentage of timeshare is from residential and fractional so in your forecast or in your revenues?

I think it's roughly 20% that's from that but I wanted to make sure I was right on that.

That's about right, I think.

For a general average.

I think for the full year that's correct, I'll have to look up the number for the quarter but for the full year that's about the number we presented on timeshare day.

Nothing has changed

So let's see, margins I guess the question goes to the, I think it's one of the things we deliberately put in the prepared remarks.

You can see that U.S.

managed margins were down seven-tenths of a point, and even with the modest REVPAR growth of plus 2.3%, that produced a 1% increase in dollars of house profit.

I think pretty interesting actual illustration of the dynamic that we're all looking at here which is what REVPAR number do you need to post either flat margins or flat dollars of profit contribution, which is relevant both to the owners of those hotels and obviously to us in terms of its incentive fee contribution.

So at 2.3% REVPAR, we're not able to support flat margins in percentage terms but we're able to support flatish, a little bit better, actually, margins in dollar terms.

Someplace between that 2.3% and probably 3.5% REVPAR growth I suppose we would see the margins move towards being flat in percentage terms as well and therefore profits being up the same amount as REVPAR is up itself.

Why not go to DEFCON 4 did you say?

For margin focus?

That's something that the most extreme cost savings initiatives at hotel level, we cannot say will be unobserved by our customers, and so we really don't want to implement those stages unless the hotel is suffering from -- meaningfully down already.

The Tier 1 cost control issues by contrast probably are not much more revolutionary than the things that should have been done anyway, and as a consequence we think we'll never be seen by the customers.

You start to get to Tier 2 and Tier 3 and there you're starting to talk about maybe not filling some open positions or having a little less entertainment in the lobby and in the lounge.

Those sorts of things, which probably are not radical and I suspect most of our managed hotels today are into the tier 2.

Tier 3, we have quite a number of hotels that have already moved to Tier 3 but Tier 3 you're starting to do things which are likely to be noticed, they might be shortening the hours of an F&B operation, and probably being a little harder on not filling positions even though those positions in normal times would be needed, and we don't want to go too far.

We don't want to compromise the customer expectation because business performance is really not that bad.

Remember, we continue to believe we're going to see 3 to 5% REVPAR growth this year.

That's not the environment in which we think we should be compromising the experience of our customers.

If I could add the answer to your timeshare number, the timeshare question on contract sales basis, in the first quarter we were about 85% of contract sales came from timeshare with the balance from residential and fractional.

Of course, that includes joint ventures and so that's not necessarily the percentage that you'd see flowing through the reported number.

So and then Laura, so for the balance of the year, the residential part is the one that I've been concerned about.

You still feel comfortable I guess with that part of the business?

The residential sales in Q1 were stronger, were up from the prior year and they're chugging along.

Yes, it's a little bit the law of small numbers there.

There's not that much out there.

Steve, obviously, we have given the best guidance we can, so we think that what we've built into the numbers for full year including around residential are the best numbers we've got.

I think as you can tell from the timeshare guidance we've given for Q2, we have some pretty powerful numbers being contributed by that business in Q3 and Q4 for us.

You look at Q1 actuals, Q2 guidance and our full year numbers, and we think that's the right set of expectations but there will be some risk around that to be sure.

I think residential and fractional are a relatively larger portion of the contribution in Q3 and Q4 which puts some more color on that but it's not all just guesswork because we've often got activity which is under way today which gives us confidence about what that recognition of those sales will be like when we get down to the balance of the year.

Okay, thank you.

You bet.

We'll take our next question from Michelle Ko with UBS.

Hi, good morning.

Good morning.

I was wondering if you could tell me what proportion of the incentive fees were from international for Q1 and where you expect that to be next year?

And also if you could tell us roughly how many of your hotels are in the various stages of contingency Tier 1 versus Tier 2 versus Tier 3?

The international incentive fee contribution was 43% in Q1 and that compares to 33% in Q1 2007 and again that's percentage of total incentive fee dollars that came from international sources.

Last year, full year incentive fee contribution from international hotels was 35%.

I don't suspect we'll end up seeing a 10% increase on the full year basis but we'll probably see that 35 number move towards 40, I suppose when we look at this year full year.

And then what else did you ask, Michelle?

In terms of the number of hotels roughly did you give us a break down for how many hotels are in the different stages of contingency like Tier 1 versus Tier 2 versus Tier 3?

Well, I think the, generally the managed limited service hotels are going to be all at Tier 2.

Tier 3 is going to be driven by market performance and I suspect we have a higher percentage of those in Tier 3 than we do of any other product class.

I think when you look at the full service hotels in the U.S., you probably have 50ish I suppose that are in the Tier 2 and Tier 3 range and virtually every hotel is at Tier 1.

Every hotel is.

Okay, great.

Thank you.

You bet.

We'll hear next from Bill Crow with Raymond James.

Good morning.

Good morning.

A couple of questions here.

First of all is it fair to assume that you're seeing an accelerating number of hotels that the had been paying incentive management fees that are no longer paying incentive management fees because of local market conditions or what not and that -- specifically I'm talking about North America.

Yes.

I wouldn't say or I wouldn't put it the way that you've put it.

We have total number of hotels paying incentive fees this year compared to last year is down a bit, but it's down a few percentage points.

It's not a dramatic decline, and you can see why, and that decline by the way is driven more by either limited service hotels where we've had the lowest REVPAR growth or by renovation activity.

When you look at the numbers as a whole, you can see that with even with seven-tenths decline in margins, that's driving an increasing dollars of house profits and it's dollars of house profits comparative.

Right and how does that compare or contrast to where we were in early 2001, the pre-9/11 downturn?

I don't know the first quarter numbers for 2001 but we can certainly get that for you.

It just feels better I'm sure than it did back then.

Is that fair?

Yes.

First quarter -- let me think about this for a second.

First quarter of 2001 REVPAR performance was--.

We were down, we were up--.

We were up a few points in the first quarter.

2.5% REVPAR and we had seen a lot of cancellations, we had seen terrible turn out at group meetings, you had basically seen a very group focused downturn and business transient focused downturn and transient business was very strong and Courtyard was, I'm sorry, leisure business was very strong and Courtyard was very strong.

This is a very different circumstance, and since we're primarily a business oriented hotel, this is a much much friendlier environment.

Yes.

Okay, great.

Arne, talk about your capital allocation.

Is there a chance with acquisition opportunities perhaps getting more attractive that maybe you focus more of your capital output into acquiring hotels where you can put your brands on them as opposed to share repurchases or other alternative usages?

That's a great question.

What we've talked about over the years is that our preference would be to invest every dollar of available capacity we have in growing our business, and it's really only the residual in a philosophical sense that we use to repurchase stock and in that way return cash to our shareholders.

We do think it is imperative from a capital allocation perspective to distribute that cash to our shareholders in that way if we don't have a use for it in investing in our business.

And that's really what has driven our performance here and share repurchases over the last few years.

As we look now into 2008 and 2009, to the extent the opportunities to invest in growing our business become more compelling and that may be driven by prices coming down or it may be driven by fewer of the aggressive buyers that we've seen competing for us and others in the last couple of years, see those people seed the field a little bit, that may present more opportunities for us.

My guess is those opportunities are less about today than they might be about nine months, 12 months from now.

The places where the best opportunities are going to present themselves are probably the deals which were done with relatively high and cheap leverage, and as they get closer to maturity of that debt they are probably going to feel more pressure to reduce their expectations and see about selling it at different levels.

We're still not seeing incredible bargains out there in the market today, by and large because nobody is under duress to sell these hotels.

And then one final question, and thank you for the answer, but are you seeing more requests for mezzanine financing on the development pipeline than you have in the past now that other alternatives might not be available?

We're certainly seeing many more conversations about what do we do about the relatively lower levels of leverage that are available today, and we're talking with our partner s about that.

Sometimes, that is phrased in the context of Marriott, will you participate in some way or another in our effort to put together this financing package?

Which could be about mezzanine debt or it could be about some other approach and in some circumstances I'm sure we'll find opportunities to participate in that way which is value enhancing for us.

We will not generally though step into fill the gap between whatever the leverage levels available were a year ago and whatever they are today.

Okay.

Thank you very much.

You bet.

We'll take our next question from Chris Woronka with Deutsche Bank.

Chris are you there?

Yes.

Okay.

A couple of quick ones.

One is any color on kind of the decline in the owned and leased margins?

I think it was down about 550 bips?

And then the second one is on the timeshare sales that get launched later this year, is it fair to assume you guys are expecting most of that to become reportable in 2009?

I would guess that not until we get to the third or fourth quarter will we have a significant amount of those sales which are actually being recognized in 2009.

You're probably an average of three to six months I suppose lag and it's a relatively unusual product that would have a lag more than that so there are a few.

So what we're selling today by and large will be recognized today.

We did have an increase in our essentially unrecognized contract sales from the beginning of the year to the end of the first quarter, from about 100 million to about $150 million so those were contract sales done in the first quarter which we have yet to recognize.

So let's see, owned leased I think probably the single biggest impact there is Boston Seaport which we talked about.

That hotel cost us a little over $0.01 in two different places in our, a little over $0.01 total, but showing up primarily in two different places in our P&L.

One on the owned and leased line, at a hotel which we have sold, but we'll be under a lease format for the first three years, and then we'll convert to a simple management contract, and then we had some pre-opening expense primarily driven by delayed opening for that hotel because of the construction noise at the end, which was probably 3 million or $4 million I suppose of net pre-tax and then about the same number which showed up in the gains line because we had some construction costs that we did not anticipate which because we already sold that hotel, we ended up having to eat ourselves.

We got Camelback, we end up with a decent contribution in owned leases as well.

There we've got a significant renovation events, but that would be another significant thing that would have impacted those margins.

Okay, very good and one more if I could.

On the leisure side of the business, which we know is probably a bigger contribution in the third quarter what kind of booking windows do you have on that and kind of embedded in the guidance, re you assuming that current trends stay the same or there's deceleration or just how should we look at that for especially for third quarter?

Oh, I think we're assuming that they stay the same, but weekend business, which is really what leisure is during most parts of the year, obviously you get towards the Summer and it's a full week dynamic but we're down more in that segment than any other, both in terms of the first quarter and when we look at the next 28 days, and we got some visibility there but not a lot really and what we're seeing is probably on average, 3 to 4 point decline in leisure room nights, and I think our forecast assumes that it's probably going to continue at about that pace for the balance of the year.

Okay, very good.

Thanks.

We'll take our next question from Celeste Brown with Morgan Stanley.

Hi, good morning.

Good morning.

A couple of questions on timeshare.

You were talking about spreads probably being higher.

Why not just wait until the end of the year or just do one big timeshare note so there doesn't seem to be any pressure on your balance sheet to get there?

Or there doesn't seem to be any pressure to get them off your balance sheet in the near term ?

Well I think it's going to depend on the pricing.

That's one of the factors that will go into it depending on where these spreads are, I think it's possible we would decide not to do any second quarter deal and see how the markets develop over the balance Of the year.

To do one deal in the fourth quarter would be $600 million portfolio.

I think our budget which we probably scaled back our expectations a bit was a bit over $600 million for a full year, and that's a bigger deal than we really ever done, and it would present some incremental risk simply based on the size of it.

I think the other thing, to state the obvious, we are building our own internal expectations and we're running our business against those expectations.

At the same time, the financing markets are less certain than I think any of us have seen them in some time.

There's no guarantee that two or three or four quarters from now, we're going to have a market in which we can easily do the deals that we might decide to defer today.

So that's one of the risks that we'll factor in and if the economics may be a little bit worse than what we hoped for or experienced in the years past are acceptable to us, I suspect we'll proceed with them.

So sell them while you can essentially?

Yes, but not at any price.

If you think about, for example, increase 100 basis points in the spread, you see what's happened with underlying interest rates and how they've come down, we're talking probably about an all in return to the investors in the 6% range, give or take, so at that range, really the decision not to sell is a decision by us that we think that's too much to give to the investors and we want to fight to keep that.

We don't have an interest in keeping assets on our balance sheet long term to get an incremental 6% return.

Now, if we had confidence that a quarter later we would have to, we could keep a point of that forever and only give away 5%, well, that would be something and we'll have to factor in whether or not we have that confidence, but thinking about all of the factors in place, if the spreads are within the range of reason and therefore we're keeping a majority of that profitability associated with the high interest rates and giving up something which is meaningfully less than our cost of capital, that's something we'll choose to do.

Okay and then how important is your ability to finance to your ability to sell?

So for example, if you stop financing your sales tomorrow, which isn't, I don't see as a risk any time soon but how far do you think your sales would decline or the demand would decline?

I don't know.

I can't give you a percentage number.

Our tradition -- this is mostly about the traditional timeshare buyer, the buyer of the one week product, it is not about fractional product or the higher end stuff.

And there, the propensity to finance is high.

I mean you're talking about 70 to 80% of buyers timeshare financed through us, which tells you that it's a significant factor in the way this product is sold.

There is really no near term risk that we will end up changing our approach to financing.

I think theoretically, if we concluded that we would never be able to market this paper at attractive economic terms, that's obviously something that we would factor in but we don't think the markets are in that position even today and we think the deals we could get off today are attractive enough that we can continue on with business the way we're doing it.

Okay.

Thank you.

You bet.

We'll take our next question from [Juan Kim] with JMP Securities.

Hi, good morning.

I had a question about your share repurchases this quarter.

It looks like the pace slowed down considerably compared to 2007 and I was wondering if you could comment about that a little bit, what the process is?

Yes, our decision-making process is really, we talked about it in the context of another question a minute ago but is to use our capacity within our target leverage levels to invest in our business and to the extent we're not doing that to return to shareholders through share repurchases.

Our target leverage levels are 3 to 3.25 debt to EBITDA when adjusted appropriately for leases and other contingent liabilities and the like, and we think we're about at that level today.

We're at about 3 times.

So as a consequence, our excess capacity is going to be driven by the ins and outs of operating cash flow, asset dispositions, including timeshare note sales, and investing in our business.

As we look at the year, there's obviously more risk this year that we will not sell the things that we had targeted and planned to sell.

Those numbers are not huge because we don't have that much left to sell, but today, we have less confidence about our ability to sell than we would have had certainly six or nine months ago.

The -- similarly, I think the investing that we're doing in some of the projects we're probably deferring a bit of that and pulling it back so we'll probably invest a little bit.

That could be offset by opportunities which come in over the transom and we'll look at those and try and understand them.

Operating cash flows continue to perform quite well, so so far so good on them.

Is the 200 slower than last year or the 208?

I think our first quarter number.

It is slower than last year but remember last year, we purchased 1.7 billion I think on a full year basis.

We told you a quarter ago to anticipate roughly $1 billion of purchases full year this year, and that number in the first quarter is about at that pace, so it's about what I think you should have expected.

The risks going forward for the balance of the year I think are that we end up spending less on share repurchases based on risk around timeshare.

Note sale deals and financing markets and those sort of things, then that we will spend more than we've guided towards which is what happened in 2006 and 2007.

We'll take one more question if there's somebody in the queue?

We'll take our final question from Jeff Randall with Black Creek Capital.

Hi, good morning, Arne, good morning, Laura.

Hi, how you doing?

Good.

Hey Arne, I wanted to get your thoughts on the recent airline consolidation bankruptcies that we've seen.

I guess four airlines have filed in the last three weeks, and it would seem like sales will rise in flight options, particularly and secondary destinations would decline.

I just wondered how you think about the impact of that on your business longer term?

Yes, we're going to watch it really closely.

We have clearly benefited as an industry from the lack of pricing power that the airlines have went through over the last number of years and so the cost of air travel has been less, meaningfully less as a percentage of total travel than it was in '98, '99, 2000.

To the extent these mergers and maybe fuel prices foretell an increase of significance in airline travel, that will increase the cost of total travel, that's not good for us.

Generally, we think for business travel, that's something which is not likely to be cataclysmic, it's more likely to be impactful in the leisure markets, and think of leisure market maybe that is Hawaii or maybe that's some of the Florida Markets we'll just have to see and have to watch that.

To the extent the mergers allow for these companies to build some more efficiency in the system, net-net that's probably a positive for us.

Do you think in the non-gateway cities in more of the, I guess the limited service segment you see more of an impact as they maybe trim flight options to some of those cities or not the?

It's possible, although remember, the more you get to those sorts of markets the less important airline travel is for them generally.

Yes.

They have a higher percentage of drive business than they would have of flight business.

And so you get into those somewhat more rural or suburban markets you're probably looking more at regional travel or sales focus travel which is done by folks who are using a lot of cars.

Sure.

And then one last question on the green topic, can you you comment on what percent of the development pipeline is either green or I guess lead certified?

It's very low.

We have one, I think one open lead hotel in the U.S.

today and which is Baltimore, not Baltimore, University of Maryland Marriott branded conference center, and it is one of only maybe one or two or three in the country as a whole in the industry.

So really nothing in say the limited service segment pipeline?

No, we've got a limited service hotel in Baltimore which is lead certified which is under construction.

We're working with our franchisees on lead certified prototypes for most of our limited service brands.

There's a lot of a activity around this space.

You've seen probably in the last couple of weeks decisions out of Dubai and Abu Dhabi both that all construction will be lead certified.

We're seeing in a number of municipalities that there is significantly greater likelihood and ease in getting building permits for lead certified urban projects and so as a consequence we will see a dramatic increase in the number of lead hotels, but it's going to be slow in coming I think.

It's not as if we'll see 90% of our hotels in the development pipeline lead certified in the next 12 months but we'll see it increase a lot.

Do you think it's just a matter of time before zoning requirements dictate that?

And I guess if it doesn't how would that impact hotels that are farther out into the three year-end of your pipeline if those requirements would be instituted?

We don't think it's -- clearly the requirements will head only in one direction here.

So it's more and more likely that lead or other sustainable approach to development is going to have to happen.

We think actually the costs associated -- the incremental costs associated with this are coming down.

This gets in the more level of detail than you'd like but we had a breakthrough with one of our air-conditioning suppliers the other day where with them, we figured out a way to do a lead certified air-conditioning approach which is dramatically less expensive than the solutions that were offered before.

So with costs coming down, it doesn't sound like you're real concerned about hotels falling out of the pipeline if standards are instituted?

That's a much less significant risk than the financing markets are today.

A lot less.

All right, well we thank you all very much for your time this morning, and as always, and maybe especially in this market we encourage you to get on the road and travel.

Hope to see you soon.

That does conclude today's conference call.

We would like to thank you all for your participation.

Have a great day.