萬豪國際 (MAR) 2008 Q4 法說會逐字稿

Good day, and welcome to the Marriott International fourth quarter 2008 earnings conference call.

Today's call is being recorded.

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

Arne Sorenson.

Please go ahead, sir.

Thank you, Elizabeth.

Good morning, everyone.

Welcome to our year-end 2008 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 Betsy Dahm, Senior Director of Investor Relations.

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

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

Forward-looking statements in the press release that we issued earlier this morning along with our comments today are effective only today, February 12, 2009, 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/investors.

Before getting into the details of our 2008 results, let me pause to reflect a bit on the environment we face and how Marriott's management is responding to that environment.

Obviously, economic conditions in the U.S.

and now around the globe are difficult.

Those conditions are having a profound impact on our business.

As far as we can tell, every public company in every industry has acknowledged the difficulty of predicting results for the future in this environment.

We certainly share that review and yet we have to make judgments in the face of uncertainty so that we can run our business.

After continued internal dialog, we have developed essentially two models to guide us in our decision making.

In both models, we assume that timeshare demand stays at the levels we experienced in December 2008 and January 2009 for the balance of the year, and, therefore, that any improvement in demand will be no sooner than 2010.

For lodging our more pessimistic scenario of minus 17% US RevPAR takes essentially the same line.

Factoring in easy comparisons as the year progresses, we think this RevPAR level is essentially the current run rate.

It goes without saying, therefore, that our minus 12% US RevPAR scenario is more optimistic.

It contemplates some improvement, whether from the economy generally, or perhaps more likely from a reduction in the sense of paralysis that seems to be gripping many.

Of course, we invite you to consider which of these scenarios or another altogether you think most appropriate.

For us, we are actively managing Marriott to size our balance sheet and our business to meet the more pessimistic scenario.

Our efforts, of course, start with the drive to continue to expand our market share in RevPAR and in new rooms growth.

As we do so, we will continue to reduce our investing activities and our cost structures to reflect this environment of weakened demand.

We believe these steps will allow us not only to survive, but to be in a position to seize opportunities and to prosper.

The fourth quarter was one of the most challenging quarters we have ever faced.

Adjusted diluted earnings per share declined 45% to $0.34.

Fourth quarter pre-tax restructuring and other charges totaled $192 million, of which $152 million were non-cash.

Excluding our 53rd week in 2008, fourth quarter system-wide worldwide RevPAR declined 8%, or 7% on a constant dollar basis.

Outside North America, system-wide RevPAR also declined 8% in our fiscal fourth quarter, or 5% on a constant dollar basis.

We saw strength in markets in South America and the Middle East, but weakness in Europe and Asia.

Month-to-month fourth quarter RevPAR progressively weakened in most markets around the world.

There are very few places not affected by today's economic climate.

In North America, we began the year with very weak leisure business.

In the spring, business travel declined led by a weakening financial sector.

By the fourth quarter, the industrial sector was also showing large declines.

Group business also eroded as the year went on.

In the fourth quarter, corporate group revenue declined 13% at the Marriott brand as meeting planners deferred short-term training meetings, staff meetings and the like.

We also saw more corporate cancellations impacting meetings that had been planned to occur either in the fourth quarter of 2008 or sometime in 2009.

In contrast, fourth quarter association business at the Marriott brand showed some stability with RevPAR flat year-over-year.

All in all, our current 2009 snapshot shows group revenue on the books for the Marriott brand down 12% due to expected attrition, cancellations and fewer new group bookings.

Interestingly, we're not seeing trade down from full service to limited service brands at this time.

With our broad brand portfolio, we will be able to retain guest loyalty should that occur.

However, with less corporate business the mix of our occupancy is changing.

AAA and government business is up due to greater available inventory as well as aggressive marketing efforts.

Our special corporate rate negotiations are over 85% complete.

While our special corporate rates for 2009 seem to be holding roughly flat to last year on a comparable account basis, total special corporate rates are likely to end up about 5% lower than 2008 due to an unfavorable mix of special corporate customers.

Corporate customers from relatively higher rate-paying financial services firms, for example, are being supplanted by lower-rated corporate and government business.

While the changing mix of our business should impact our reported average daily rate, we continue to monitor our rate structure and do not intend to lead the way down on corporate rates.

We're gaining market share.

Our comparable Company-operated US RevPAR index increased about half a point in 2008, largely due to the quality of our brands and our efforts to drive the top line.

One competitive advantage is Marriott Rewards.

With over 30 million members, the Marriott Rewards program accounted for nearly half of our rooms sold last year, producing for our owners what we believe is the greatest number of room nights at the lowest cost in the industry.

We launched our No Blackout Date program in January, opening considerably more inventory to our most valuable guests.

Marriott Rewards provides more than just purchase incentives for guests.

It provides us with important customer knowledge.

We have made significant investments over the past five years to better understand our guests and address what is most important to them.

This allows us to create more relevant and targeted e-mail and other marketing and to do so very quickly.

We modified our marketing approach in 2008 to focus less on image advertising and more on short-term heads in beds.

And we focused on speed to market.

While we can't motivate a business traveler to take a trip they don't need, we can help stimulate leisure travel and increase share.

In just 19 days, we launched an effective leisure travel promotion called Rejuvenation.

We currently have seven different leisure travel promotions deployed, focusing on customers who we believe are most likely to respond to them.

Marriott.com is an integral part of this marketing push.

This powerful sales channel generated over $6 billion of sales in 2008, but it's not just a booking engine.

Marriott.com is selling vacation packages, small group meetings, last-minute leisure deals, gift cards and special offers for Marriott Rewards members.

In 2008, we also rolled out Marriott.com Mobile so travelers can now plan and book their reservations on virtually all Web-enabled handheld devices.

On the group side, we're taking an aggressive position to get business booked.

In the fourth quarter, we held a sales closing rally to encourage meeting planners to stop delaying and sign a contract.

Our new sales organization, Sales Force One, was introduced in the mid-Atlantic region in 2007 allowing us on to call on 10 times more accounts in that region in 2008 with no additional staff.

We added another region to Sales Force One in 2008 and will roll out to the rest of the US over the next two years.

The numbers prove our success.

In 2008, compared to the prior year, we called on more accounts and grew our group revenue market share while also spending less per room on sales and marketing.

We have experienced downturns before and we know cost control is important.

As a result, despite RevPAR declines, fourth quarter worldwide house profit margins declined only 210 basis points.

Teams throughout our Company responded incredibly well, implementing increasingly rigorous cost containment plans, both from the top down and the bottom up, finding new ways for the Company and hotels to cut costs and operate more efficiently.

Cost savings ranged from modifying menus and restaurant hours to reviewing room amenities, adjusting work schedules and implementing hiring freezes.

We adopted systems that significantly leveraged our size and made operations more efficient.

Turning to our P&L, base and franchise fees declined 6% in the fourth quarter reflecting the weak RevPAR environment.

Incentive fees also declined as lower hotel profits allowed fewer Company-operated hotels to reach their owner priorities.

In the 2008 quarter, 39% of Company-operated hotels booked incentive fees compared to 62% in the year ago quarter.

For the full year, 56% of Company-operated hotels booked incentive fees compared to 67% in the prior year.

Owned, leased, corporate housing and other revenue net of direct expenses declined 31% during the quarter.

At year-end, we owned only six hotels, but we leased another 35 hotels.

Our timeshare business was particularly hard hit by the economic climate.

Contract sales of our core timeshare product declined 37% during the quarter, while sales of our fractional and residential products were negative, reflecting $115 million of sales reversals related to anticipated contract cancellations at three luxury projects.

Tour flow at our core timeshare product declined 7% in the fourth quarter as we closed eight sales offices and one call center.

Of the sales tours completed, only 8% of touring customers bought timeshare compared to 13% in the prior year.

Encouragingly, pricing remained firm, increasing about 5% over the prior year's quarter.

Our timeshare business is focused on cash flow and profitability, rather than revenue.

So we've cut overhead substantially, including about a quarter of the non-operations staff.

On an annualized basis, we've reduced costs roughly $65 million to $75 million across that business.

In the fourth quarter, we financed approximately 70% of our timeshare contracts compared to 80% in the prior year quarter.

By December, we had ended all financing incentives and were financing only about half of new timeshare contracts.

We are optimistic that we'll complete note sales in 2009, but pricing is likely to remain unfavorable so no note sale gain is assumed in our 2009 outlook.

By the way, delinquencies for US-financed loans rose to 7.9% as of December 31 compared to 6.7% at year-end 2007.

Gross timeshare inventory spending in 2008 totaled $687 million, or $299 million net of cost of goods sold.

We expect to spend approximately $400 million in 2009 for gross inventory, or $120 million to $140 million net of cost of goods sold.

We have canceled seven predevelopment projects and don't expect to start any new projects in 2009.

Turning to hotel development, we opened 11,000 managed and franchised rooms in the fourth quarter and 33,000 rooms for the full year, consistent with expectations.

Our pipeline of hotels under construction, contracted, or approved stood at just under 125,000 rooms at the end of the fourth quarter, down a bit from our third quarter pipeline, but we expect to open over 30,000 rooms again this year.

Of the rooms in today's pipeline, roughly 66% are under construction or conversion and another 10% are also financed but haven't yet broken ground.

Our pipeline declined a bit as some properties opened and as new hotel developers saw their bank commitments rescinded or had other financing problems.

The weaker RevPAR environment also impacted deals in their formative stages, particularly luxury projects.

Late in the quarter, we saw a decline in US franchise applications for new limited-service hotels as franchisees became more cautious.

The good news with respect to our hotel development pipeline is that we do not see any erosion in management contract terms.

The value of our room additions is holding up.

While the number of our new build projects in our pipeline is likely to shrink somewhat going forward, we expect conversions to pick up as hotel owners look for ways to drive cash flow.

During the slowdown earlier this decade, from 2001 to 2003, over 20,000 hotel rooms joined our system from competitor brands.

For Marriott, during the fourth quarter, the major credit rating agencies affirmed our BBB status while revising their outlooks to negative, noting the challenging RevPAR environment.

At year-end, we had drawn down only $970 million of our $2.4 billion revolving line of credit.

So we continue to have substantial available capital.

Our credit facility, which matures in 2012, contains just one financial covenant and we are well within its limits.

More important, our business model provides considerable stability in our cash flow and we have the flexibility to reduce our investment activities further if we choose.

As a result, we believe we will reduce our debt levels by approximately $600 million to $700 million in 2009.

So let's talk about the first quarter of 2009.

As I mentioned earlier, our 2008 fiscal calendar quarter ended on January 2, placing the seasonally slow Christmas and New Year's period into the 2008 fourth quarter, and reducing the percentage change in reported RevPAR in the fourth quarter by about 2 to 3 percentage points.

Conversely, the calendar favorably impacts reported RevPAR in our first quarter of 2009.

Given current soft transient and group business, we estimate our first quarter North American comparable Company-operated RevPAR will decline by roughly 17%, although if we adjust for the shifting week, the real decline is closer to roughly 20%.

Outside the US, we expect comparable Company-operated RevPAR to decline roughly 15%.

Given these assumptions, total fee revenue is expected to decline 20% to 25% in the first quarter.

Our fees are helped by unit expansion and by our shifting calendar, but hurt by unfavorable foreign exchange rates.

Owned, leased, corporate housing, and other revenue, net of direct expense is expected to decline to approximately $5 million to $10 million.

While we own or lease 41 hotels, weak RevPAR at nine properties account for the bulk of the expected profit weakness in the first quarter, including hotels in Anaheim, Berlin, Tokyo and Frankfurt.

Based on December and January sales trends, timeshare contract sales are expected to total $150 million to $160 million in the first quarter.

We expect to complete a note sale during the quarter, but given the economic climate, no gain on sale is expected.

This puts our timeshare sales and services net of direct costs at a loss of about $10 million in this seasonally slow quarter.

The G&A line reflects savings we've taken in our timeshare business as well as at corporate headquarters and in our lodging business.

We estimate first quarter G&A at $145 million to $150 million, a decline of roughly $15 million, or 8% to 10% from the prior year.

Including a benefit from lower interest rates, we estimate the first quarter EPS at about $0.13 to $0.15 per share.

Looking to the full year, there is obviously considerable uncertainty.

In our earnings release, we have shared with you a very broad range of top line assumptions that we are using internally to manage our business.

We are sharing these assumptions to help you model the business and we are not guiding you to any particular RevPAR or timeshare scenario.

Unfortunately, the level of uncertainty is simply too high for us to have much confidence in predicting results.

In this exercise for the full year 2009, our most optimistic assumption is a 12% decline in North American Company-operated RevPAR and an 8% decline in Company-operated constant dollar RevPAR outside of North America.

This implies improving economic conditions as well as easier comparisons as the year progresses.

More conservatively, we have considered a 17% decline in North American Company-operated RevPAR, and a 13% decline in Company-operated constant dollar RevPAR outside North America.

This scenario assumes that business conditions do not improve through the year, but that comparisons ease in the latter part of the year.

Given this wide range of RevPAR assumptions and the more than 30,000 rooms expected to open in 2009, we believe our fee revenue could total $1.075 billion to $1.175 billion and owned, leased, corporate housing and other net of direct expense could total $65 million to $85 million.

For our timeshare business, we assume a continued weak economic climate throughout 2009.

If timeshare contract sales total approximately $800 million in 2009 consistent with our December and January seasonally-adjusted run rate, then timeshare sales and services net of direct costs could total approximately $70 million in 2009 and the timeshare segment profits could total roughly $45 million.

While consumers have slowed their spending and are more cautious, there is still interest in our products.

The cost reductions we've already completed should reduce our timeshare 2009 G&A by about 20% to 25% versus 2008 levels.

Should revenues continue to weaken in 2009, additional cost reductions and investment spending reductions would likely occur.

Among our most important goals in 2009 we expect our timeshare business to be cash flow positive after all investing activities, even if demand doesn't improve.

Overall, corporate G&A spending in 2009 should decline by roughly $100 million to roughly $640 million to $665 million.

The most significant cuts have been in timeshare and hotel development, but every department in the Company has reduced spending.

We anticipate paring back investment spending to about $500 million to $600 million, $400 million less than we spent in 2008.

Compared to 2008, this includes cuts in net timeshare spending, new capital expenditures, and other investing activities.

Running these assumptions through our model implies 2009 earnings per share of about $0.86 to $1.04 per share, and about $600 million to $700 million of lower total debt at year-end 2009, an impressive result given the severity of the downside scenario.

Of course, given the macro environment there are clearly risks to this outlook and we believe investors may have their own RevPAR and timeshare scenarios in mind.

So to encourage you do-it-yourselfers we would like to provide the following sensitivities.

Given the low percentage of hotels that we expect will earn incentive fees in 2009, we believe that today 1 point of worldwide RevPAR is worth between $15 million and $20 million in total fees.

For our roughly 40 owned and leased hotels, 1 point of RevPAR impacts our owned and leased line by roughly $4 million.

Lastly, while modeling timeshare is always fraught with percentage of completion and other complexities, we estimate that for 2009 a $50 million change to our timeshare contract sales could impact timeshare segment earnings by $5 million to $10 million.

Marriott has been in business since 1927 and in the hotel business since 1957.

We've seen a lot of business cycles, though Marriott himself has seen eight recessions.

Every one is different yet there are similarities, including the experience of seeing recessions end.

One of the most significant differences in today's business environment is the extraordinary amount of data that is available to all of us.

Investors know more than ever about companies, business trends, consumer sentiment, industry construction pace and so forth.

This transparency enables investors to better understand risks and opportunities and it enables companies to be more responsive to the marketplace.

Unfortunately, it also tends to make many respond to short-term fear rather than position for long-term opportunity.

We are very fortunate.

We have some of the strongest brands in the hotel industry.

Brands that are in even more demand by owners and lenders in a weak economic climate.

Our leadership team is experienced.

The average GM at full-service Marriott hotels and our senior officers have been with the Company over 20 years.

Our culture is well-defined.

We believe that associate satisfaction and engagement are key to industry leadership and success.

At the same time we seek out change, adopting the best practices to drive revenue and profitability.

With strong knowledge of our customer, we are increasingly adept at dealing with the unexpected as our marketing responsiveness and house profit trends can attest.

And as we look ahead beyond 2009, US hotel supply growth is likely to substantially trail demand recovery.

This is the reverse of the situation we will encounter this year, but it is clearer than ever that the brakes on new construction are being and will be applied more dramatically then ever before.

This is a not likely to change for some time.

As we move ahead, we believe we're taking the right steps, making the right moves to ensure that our business thrives in the years to come so that we can drive opportunity for our shareholders, associates, and owners and in all of the communities around the globe we call home.

As always, keep up the traveling and thanks for listening.

Elizabeth, we'll take any questions.

(Operator Instructions) We'll go first to Jeff Greff of JPMorgan.

Hey, guys, this is Joe Greff.

Hey, Joe.

I thought maybe you had changed your name.

No, no.

Hopefully not.

Under your 2009 scenario, you mentioned that you expect to complete timeshare note sales.

How much -- I know you're not assuming any gains on those, but what sort of proceeds total are you assuming and is that over the first quarter and third quarter?

Yes, I suspect we'll get a deal done in the first quarter.

Probably we would try again in the third quarter although we have not committed, obviously, in any respect to precise timing and I think generally we would expect net proceeds to us in the $250 million to $350 million range.

For each?

No, no, total.

In total.

Okay.

And then sticking on the subject of timeshare, now if you're reducing your investment now given the current economic environment, but if you take a step back and you look at timeshare and you think that maybe this is more of a semi-permanent issue in terms of reducing your investment in timeshare.

I guess the parochial way of looking at it is that in the best of times it's maybe high single-digit return, low double-digit return.

And then, obviously, in the down cycle clearly we're seeing the returns there and the profitability there be impacted, but if you can touch on that a little bit, please?

Yes, as we've talked over the years, we have believed that we can calibrate our timeshare investing to meet the vicissitudes of the demand environment.

We are being put to a test of that proposition in this environment like we've never seen it before.

So even when you look at 2001, 2002 and 2003 time frame with a much stronger consumer we didn't experience a fall-off in demand nearly the way we are today.

So we are working mightily to make sure that we can make this business cash flow positive in this year, which really means calibrating our spending to meet an extraordinarily reduced demand level.

I think the team headquartered in Orlando that we've got running this business has done a fabulous job responding quickly both in terms of cost structure as well as reducing the investing space in the business.

Having said all of that, I think we've got to see how things develop here over the next year or two.

To state the obvious, we believe that there are really strong synergies between the timeshare business and our lodging business.

It's why we're in this space.

And those synergies really focus on customer loyalty.

They focus on synergies around resort development, Marriott Rewards program, some of those powerful tools.

I think it's also -- should be reasonably obvious to anyone that in an environment like this one, the best thing we can do is focus on operating the business and making sure we maximize this performance.

And that's really what we're focused on doing.

Okay, and then one final quick question, if I may.

Of your fee revenue scenario, the $1.075 billion to $1.175 billion, what's contemplated in terms of the incentive management fee component?

Well, incentive management fees will be down, obviously, more than -- if I can find my notes here -- more than any of our other fee lines.

I suspect -- obviously, the difference between the two scenarios are about 5 points in RevPAR, and there could be $40 million or $50 million of incentive fee delta alone between those scenarios.

But I would expect that in any event we're going to be down 50%-ish, maybe not quite; 40% to 50%.

Thank you.

You bet.

We'll go next to Celeste Brown of Morgan Stanley.

Hi, good morning.

Good morning, Celeste.

Coming back to the timeshare note, note sale on the quarter or later in the year.

I assume that is part of your estimate for year-end debt.

You need to sell those notes?

Yes, that's baked into that model and just -- I'll take advantage of your question, Celeste, and talk a little bit more about our confidence in this.

We have three active discussions going on with very reliable partners in this area; two very specific proposals, one of which has been approved by the credit committee.

The other of which has been approved at the highest levels of the partner we're having conversations with.

So while the markets are, obviously, still nothing like they were in 2007 and even in early 2008, we have a pretty specific and concrete basis to be optimistic about our ability to get timeshare note sales deals -- timeshare note sale deals done in 2009.

And, Arne, you said no gain.

Would you be selling do you think at a discount?

I think what we're looking at now is roughly a push.

Okay.

I will not -- I can't because there's enough complexity in the discount rates that need to be used for valuing the I/O strips and the default rates and the other things that go into this model.

It wouldn't be surprising to me to see a few million dollars of gain or loss in these deals, but roughly what we're looking at is a push.

Okay, and then in regards to your cost cuts, I know you're very focused on cash flow this year, getting through this year in as healthy a shape as possible.

Besides cutting timeshare investment, were there other cuts that you made to your costs that as things get better you're going to need to ramp up?

For example, did you make a significant cut to your development team and then as the world starts to feel better you're going to have hire a lot of those people back?

Yes.

As I said in the prepared remarks, every area of the Company contributed to this and, obviously, this is not something that's done in the sense that we're still fighting through this weak environment and I suspect we will continue to be focused on efficiency.

I think our timeshare team, which I mentioned, has done a great job.

Our lodging group has done spectacularly well.

I think the margin performance they posted in the fourth quarter is really very much to their credit.

This is notwithstanding the fact that I think they're years ahead of our competition in terms of driving margins.

We've worried a little bit that we had done so well the last few years we were going to find less and less opportunities to respond to this market.

And I still think that's the right watch word, but they continue to sort of disprove their own fear by further enhancing efficiency.

I think when you look at how it ultimately rolls up into Marriott's net admin, which is obviously what you're asking about, there are bits of what we have cut that undoubtedly when economic conditions return will reverse.

I think to the extent -- your example on development staffing is right.

As development pace declines a little bit, that has had some impact on the number of developers we've had.

And it is certainly likely that at some point we get back to stronger economic times and we'll see development pace reaccelerate.

That could be, given the financing markets, some ways down the road and so I don't think that's necessarily something that needs to get built into a 2010 model.

There are other things that we've done.

For many of the -- almost all of the salaried people at Marriott, we have frozen wages 2009 versus 2008.

That, obviously, does not lead to a reduction in '09 versus '08, but it keeps things flat and otherwise offsets growth that would be built into that model.

You can have a philosophical debate about whether that's permanent or not, in a sense that new baseline becomes permanent and wages grow off of that.

On the other hand, we, obviously, are about paying people competitively and if that wage freeze makes us uncompetitive longer term that's something we'll have to respond to.

These are -- to come up with $100 million roughly so far of admin cuts has involved dozens and dozens of different decisions.

And, again, some of those will reverse when we get back to stronger environments.

But we're working very hard to make sure as many of those are permanent as can be or can be converted to permanent through restructuring or efficiency moves that allow us to really use this as a new base to build from.

Okay.

Thank you.

You bet.

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

Hi, good morning, Arne and Laura.

Hi, Steve.

Good morning, Steve.

Just a couple of things.

One, could you just talk a little bit more about the luxury condo and residential and sort of what the expectations there are?

I know you took some charges, and sort of how we should think about that as a component of the timeshare business?

And would you consider, by the way, on the securitizations, would you consider even taking them at a loss, Arne, or would you sort of keep them where they are?

And then finally on timeshare, I think you have mentioned that half of the Company -- half of your customers are financing with you.

Where else are they financing?

And are there ways for you to affiliate with may be a regional bank or a bank to take some of this risk away from you?

And then one final point, Arne, I just wanted to know whether Bill or you or anybody else within your organization is going to reach out to Washington, D.C.

and others to talk about how business travel and employing people is an important part of what we all do?

Yes.

Mr.

Marriott's on the Hill as we speak, I think, having conversations about some of those thing.

And maybe to talk about that a bit, many of you are commenting on the so-called AIG effect which derives from AIG's event at the St.

Regis in Laguna not long after they were bailed out by the government, and that's somehow being a symbol of abject excess, I suppose, that should be stamped out of our system.

And while we won't sit here today and necessarily say that every luxury meeting that any company was scheduling should be had even if they're at risk of failing -- that would be nonsense -- we can sit here and say that there are hundreds of thousands of people employed in this industry today, many of whose lives depend very much on the business of these hotels going forward and people holding there meetings and people doing their business trips and people doing their leisure travel.

And as a consequence, there is certainly a risk of overreaction in some of these conversations that's happening on the Hill and we've got to make sure that there's balance to that.

And so we're going to do everything we can to make sure that that voice is heard and that we can make it resonate somehow.

We've got to get away from the symbolism of a corporate fat cat smoking a big cigar on a golf course, and instead think about the symbolism of people meeting and thinking together and creating ideas and building their cultures and those sorts of things, all of which are very constructive that come out of that.

You asked four questions.

Let me see if I can remember all of them.

That was one.

Two, would we consider selling notes at a loss?

Sure.

Obviously, we would prefer to sell at a gain and we're optimistic that we can meet what we have described in our assumptions which is essentially a push compared to what we've got invested.

But given RevPAR performance, given the amount of capital we've got involved, given what we want very much to do on the balance sheet side, which is to make sure we remain investment grade and we remain positioned to be able to seize opportunities, we're not going to keep hundreds of millions of dollars tied up in timeshare notes if there's a reasonable deal that's available to us.

Three, luxury fractional, that sort of thing.

How does that fit into the business?

I think there we would say that -- I guess we have the least optimism around that product class; that that product class is more like whole residential.

As a consequence, it is more likely to be sticky in a weakened demand environment and will take some time to come back.

And, therefore, of all of the possibilities in the future we think the likelihood of starting new luxury projects anytime soon is very, very slim.

We don't expect that we will start many core timeshare projects either in the near term, but we're hopeful we will see demand come back to the point where returns have improved significantly and that that business can go forward.

And that certainly is much more possible to happen sooner than the luxury fractional does.

Having said that, in January, where we have some Ritz-Carlton product, we were pleasantly surprised by some of the fractional volume that we saw and I think it gives us some optimism for the year.

Partly, that's a function of these resorts reaching opening so that the product is very tangible and these are beautiful places.

They're easier to sell, obviously, when they're right there before you and you're not trying to sell them off of plans and that will to some extent counteract the tough environment that we're in.

I think you're last question was financing and who finances this stuff.

We financed about 50% of the core timeshare product in the last -- really the tail end of 2008.

The likelihood of having another lender step in and finance core timeshare is something we'll continue to look at, but I wouldn't view as particularly high.

These are average purchases in the $20,000-plus range.

If they're not financed with us, people tend to finance them -- either not finance them and simply use cash or they finance them through other vehicles they have to finance their lifestyle, and they're small enough purchases that that seems to work for many.

Did I miss anything, Steve?

No, you got it all.

Thanks, Arne.

You bet.

We'll take our next question from Jeff Donnelly of Wachovia Securities.

Good morning, Arne.

Good morning.

Just a couple of questions.

I was trying to get a handle on the risk of future impairments.

I'm not sure if that's forecastable, but I'm curious did the impairments you recognized in fourth quarter effectively contemplate the guidance you gave in 2009 or could the realization of your '09 guidance eventually give rise to further impairments?

That's a good question.

I think it's primarily the former.

That, obviously, we have a detailed process we go through to assess whatever impairments in whatever product class is on the balance sheet and we have done that at year-end.

And we believe what we've done is all inclusive at the moment.

Now when we talk about minus 12% or minus 17% RevPAR, when we talk about maybe $800 million of total timeshare sales, those are average figures, which beneath them have assumptions for individual hotels and individual timeshare resorts.

We know almost for a certainty that we'll be wrong on the averages.

We know for a total certainty that the averages won't work on every individual property and so that's what ultimately will drive that risk.

We've done the best job we can to make sure that any of those risks we have, have been properly dealt with so far.

But certainly in this environment you won't hear any of us say that there's no risk of decline greater than anticipated in some asset on our balance sheet that has an impact.

And then, I guess, in sticking with timeshare are you able to break out for us within the timeshare business either I guess as cash flow or EBITDA.

I guess I would say you breakout in three distinct areas.

I'll call it the recurring fee revenue expenses associated with the management of the units, the interest you collect from the receivables portfolio, and then, I guess, lastly the development in active sales, revenue and costs.

I guess I'm trying to isolate what is maybe the more stable recurring cash flow aspect of that business versus the more volatile or transaction aspect?

Yes, you ought to probably look at the 10-K.

I'm not sure whether we break it out -- how well we break it out in the 10-K.

We did it quite a bit at our timeshare conference which is, obviously, extremely dated now a year later.

We can certainly have some more dialogue.

I hesitate to do that off the top of my head.

I know --

Carl's got the --

We give in the press release the segment detail.

Yes, you might look on page 12 of the press release schedules.

I guess it's A12.

A12.

And just another question or two, what was the balance of the loans to timeshare owners at year-end 2008?

And I guess as a follow-up to that can you also share with us what series or what issue you repurchased from the debt repurchases you've done?

The balance was a bit over $500 million on timeshare notes at year-end.

You may ask -- I said before $250 million to $350 million of net proceeds in 2009, and we will generate some more paper.

So you could say how do those numbers relate to each other?

Why isn't it more?

It's possible it could be more, but we've got a couple of things going on.

Some of those notes are notes generated in Europe or with our Asia points program which are relatively less marketable, though we've certainly not given up that.

And, two, in this environment, we will be probably advanced some place between 70% and 75% of the gross amount of the notes sold at the initial note sale, the balance being essentially held back as further security in -- to protect the buyers of those notes.

It looks like may be the number is $600 million in 2008.

I'm sorry, actually I meant what was the series of the senior notes?

I'm sorry that you had to --.

No, I understand.

Oh, I'm sorry.

This is the timeshare -- I thought you asked both about timeshare and the senior notes?

I did.

Senior notes we bought were a bit each of our longest three terms.

So they're the 15s, 16s and 17s, I think.

Okay.

And just one last question, it's more of a conceptual question I guess, is relatively speaking Marriott's balance sheet condition is much better than any of your most obvious competitors out there, public or private.

It's a positive for you, but are you seeing at this point any of your competitors take steps on pricing concessions, et cetera, whether it's in the operation of the hotels or securing new management contracts that are very aggressive given their decidedly more stressed balance sheet position?

We're really not seeing that.

We did have in the prepared remarks that we really haven't seen any threat around management contract terms.

I think our principal competitors have gotten over the last number of years longer term in focus and I think they appreciate value in the context of the new agreements they enter into.

It's hard to work yourself out of a near-term balance sheet issue by adding a low-fee hotel, low-fee terminable hotel.

It takes a while.

So while there will be pressure and that's something we'll be watching we don't see a lot of threat of that so far.

Around pricing, I think the pricing pressure in the market is not likely to lead with our major competitors.

It's likely to lead with independents, and franchisees across the various systems where any of them have severe financial pressure.

They're going to be more tempted to do something on pricing that we might question, but that's inevitable.

And that probably is already underway and probably already put some pressure on pricing across the industry.

Thank you.

You bet.

Our next question comes from Patrick Scholes of Friedman Billings.

Hi, good morning.

Good morning.

Hi, Patrick.

Can you just talk -- you mentioned sales reversals in your timeshare business.

Can you give more color on exactly what that is?

Is that something that was prepaid by customers and they decided to back out and are there any sales reversals expectations in your timeshare guidance?

Yes, we essentially made an allowance for $113 million, I think the number was, of previously-reported contract sales that we now expect not to close.

Generally, 100% or nearly 100% of that was Ritz-Carlton product.

Most would have had -- we would be holding deposits in the 10% to 20% range.

I suspect it would never be less than 10% and in some instances it might be more than 20%, but overwhelmingly it would be in the 10% to 20% range.

And while we have not given up on trying to close those sales, I think as we've reached out to those kinds of customers which we do currently to see their intentions about whether or not they close or whether they'll just walk away from that deposit and go on.

We thought that this was about the level of cancellation activity that we would see and so we posted that reserve.

Okay.

As far as just a little more color on the product that those deposits were made on, was that more of closer to the higher end fractional?

Oh, yes.

Okay, so people were basically walking away from something comparable like a real estate investment as opposed to like a pure contract?

We also break that out in the table in the back on the timeshare segment.

We show you it by brand.

Okay.

Great, thank you.

You bet.

We'll go next to Smedes Rose of KBW.

Hi, thanks.

You've answered most of our questions, but I just had a couple of follow-up.

You did talk about, it sounds like about 30% of your development pipeline is not under construction or financed, which I guess would equate to around 35,000 rooms.

Do you have a sense of what amount of those might end up being canceled?

No, not really.

Okay.

Short answer.

Obviously, there's more risk in those rooms than the rooms that are under construction.

There's, obviously, more risk in the rooms that are financed but not under construction yet than there are in the rooms under construction.

And then the most risk in projects that maybe have been -- we've received a franchise fee, it's been approved, we've got signed contracts, but they haven't either financed it or started construction.

And basically our partners have got flexibility to decide whether or not to proceed with that.

The 125,000-room total we've given you hedges back our total by a significant amount in order to deal with some of that risk, but clearly the risk over the next few quarters until conditions change is that we will see both that pipeline shrink as we open hotels out of the pipeline faster than we add them to the pipeline and as we see our partners decide maybe to abandon some projects or simply to continue to delay construction starts.

Only time is going to give us the answers to those questions.

Okay, the other thing I wanted to ask you on your timeshare segment breakout, the base fee revenue, which maybe we're wrong on this.

I thought this was just the fee is paid by the current owners of units.

It declined to $7 million and it's been very consistent at more like $12 million to $13 million a quarter.

Is there something going on there that caused it to decline that much?

Yes, we -- I guess we had a bit of a reclass on a base fee issue on a couple of resorts, which net-net, which was a non-comparable which could be a few million of that.

I don't remember precisely the amount.

Okay, and then the last --

Nothing beyond that.

Okay.

And then just you mentioned some of your things going on in Washington.

One of the things that President Obama embraced was the, I think it's called the Employee Freedom Choice Act which basically allows, as you know, for a much faster and easier unionization.

Do you have any sense of where the current administration's commitment is to that and what your guys maybe are doing?

I guess it's the least unionized brand.

You sort of have the most to lose on that front.

Any sort of thoughts on that?

Yes, I think the good news around this issue, the Employee Free Choice Act, is that the level of awareness has increased significantly such that I'm sure many of you have seen stories in The New York Times or The Wall Street Journal or elsewhere reflecting the intensity of the debate between the unions who support this mightily and the employer base that almost uniformly opposes it.

We, obviously, think that it is a bad policy.

There are a few aspects of the deal that are of particular concern to us including the one that essentially allows a work group to be organized without a private ballot that our associates or employees generally would be permitted to participate in.

And we are doing everything within our power, both as Marriott, and I think there are groups of lodging companies and groups of other employers that are trying to make sure that we end up with something which is not the way this thing has been drafted up front.

I wouldn't pretend to be able to tell you where President Obama is personally on this or really what the administration is.

I think so far they have not taken any overt steps to move this forward and we'll just have to see how that develops.

Thank you.

You bet.

Our next question comes from William Truelove of UBS.

Hey, guys.

Hey, Will.

Two questions.

Could you remind us of what our most difficult corporate covenants are from a debt perspective?

We don't really have anything that gives us significant concern.

There is a debt-to-EBITDA covenant in our revolver and that covenant is -- looks at basically simple debt, it does not look at debt equivalents from leases or guarantees or the like which go into our calculation with S&P and Moody's.

And we've got lots of room under that covenant.

I think the covenant is a four times covenant, I don't have the year-end ratio, but I think at end of the third quarter we were at 2.1 times or something on that test so you can see we've got tremendous room.

That's all that's out there.

Right.

Second thing then is, gosh, I'm going to ask another timeshare question, but in terms of -- I know you said you were going to cancel, I think, seven projects that were in predevelopment.

How much would you have to spend -- what's the total spend buildout of the remaining projects that you have if you did nothing else new and how many years do you think that would probably take?

So you just built out what you have actually under development?

I don't know.

And I'm not sure it's terribly germane in the sense that we've got resorts here that would have phases that, on a piece of paper might be a construction start in 2014 or 2015 or 2016, and to answer your question would include the cost associated with that.

But we will never start those phases unless there's a demand environment that's returned that says the customer's there to do it.

So probably the right question is how much does it cost to complete the phases presently under construction?

And while that's a germane question, I'll confess I don't know the answer to it.

The less germane question where you say all right, if you built everything that you already own, I'm sure it's billions of dollars.

Yes, I guess I was trying to figure out the things that you absolutely -- because you don't want to leave things half done, right?

Well, that's right.

That's where you have got considerable economic loss probably by abandoning construction that's well underway.

But you would probably imagine that given that you do build in phases that it's probably, what, one to two years of buildout, probably?

So your additional spending this year plus maybe another $50 million or $70 million in 2010 might be an approximation, maybe?

Yes, I hesitate, Will.

I suspect it's in the hundreds of millions, not the billions.

But I don't -- beyond giving you that range that's something we probably ought to make sure we're more thoughtful about giving to you.

Wonderful, thank you so much.

You bet.

One last question, Elizabeth, if you've got anybody in the queue?

Yes, sir.

We will go next to Bill Crow of Raymond James.

Good morning, guys.

Hey, Bill.

Two quick questions.

First of all, given your comments about the calendar, is it fair to assume that second quarter RevPAR could be worse than first quarter?

Second quarter --

Simply because of the calendar shift?

Yes, what I would encourage you to do is go back and look at as sort of two or three-year comparison.

And essentially that's what we've done to come up with that minus 17% RevPAR scenario.

So we've said if this is the experience we expect to have in the first quarter and now let's look at what the impact of the comparisons are quarter-by-quarter as you look back, what does that imply for RevPAR for the succeeding quarters.

I think second quarter would be close, but I can't tell you whether it's a point higher or a point lower.

Fair enough.

Same order of magnitude, though.

Nobody has a real clear looking glass these days.

I'm going to ask one last timeshare question, which is more theoretical in nature, I guess.

It's a business that, I think, thrives on momentum and it's a product that's sold not bought.

By winding down some of the new developments and given the lower visitation and sales rates, don't you risk losing your top salespeople to other opportunities if ever there are other opportunities out there, and couldn't the business kind of wind down by itself because of that?

I don't think so.

I'm sort of glad you have asked one more timeshare question at the end of the call.

We sold $50 million to $60 million of this product in the month of January and this is a product which sells for a reason.

It appeals to an awful lot of folks.

It's a way they can own their vacation forever.

It is a product which really appeals to their desire for happiness in the best way; experiences with their families and lots of years sort of looking down the pike and seeing what happens.

As a consequence, even though we're in an extraordinarily difficult market, we can overreact to this and say there's nobody to buy this stuff and that's simply not true.

There are folks who will continue to look at this, albeit it at meaningfully lower levels than what we thought before.

And with that our salespeople and our associates who are involved in this business are delivering services and experiences to people which are a pleasure to deliver.

And that doesn't mean they aren't concerned.

Some of them have already lost their jobs because of the reduced level.

But if we can right size this to meet the demand, which we're about today, we think those jobs will be and should be fulfilling and people can continue to build their careers.

And so if we can get those balances right, we think that this business can survive this environment and hopefully live to see a better day.

Great, appreciate it.

So, Elizabeth, thank you very much for hosting the call.

We thank you all for your interest and participation this morning and as always encourage you to get on the road and rest your head on the pillow at a Marriott hotel.

See you.

That does conclude today's Marriott International conference call.

We thank you for your participation and have a wonderful day.