萬豪國際 (MAR) 2009 Q1 法說會逐字稿

Good day and welcome to the Marriott International first quarter 2009 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 Executive Vice President, Chief Financial Officer and President of Continental European Lodging, Mr.

Arne Sorenson.

Please go ahead, sir.

Thank you, Operator.

Good morning, everyone.

Welcome to our first quarter 2009 earnings conference call.

Joining me today is Laura Paugh, Senior Vice President, Investor Relations; Betty Daum, Senior Director of Investor Relations; and Carl Berquist, our new Executive Vice President and Chief Financial Officer as of May 1st.

Carl's deep experience, including 28 years with our Arthur Andersen, and well as his most recent responsibilities here at Marriott for the past six years, position him uniquely well to lead our global finance team.

Welcome and congratulations, Carl.

Today Carl and I are going to talk about the first quarter and our ongoing business trends and strategies.

We want to leave plenty of time for your questions, so let's get started.

As always, before we get in to the discussion of our results, let me first remind everyone that many of our comments today are not historical facts, and are considered forward-looking statements under Federal securities laws.

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

Forward-looking statements in the press release that we issued earlier this morning, along with our comments today, are effective only today, April 23, 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/investor.

Economic conditions in the United States and around the world remain very difficult, as clearly reflected by our first quarter REVPAR statistics.

At the same time, there are mixed signals across the broader economy.

On any given day, we see a range of news.

The Fed reported last week that the economy continues to drop, but five of the 12 Fed districts said the decline was lessening, even stabilizing in some regions.

This week leading indicators fell, and other experts predicted the recession would last through the summer.

And of course job losses are widely expected to continue in the near term.

As we've discussed before, our industry typically lags heading into a downturn and to recover; so we are obviously far from being out of the woods.

However there are some initial signs of demand stabilization, even if at today's very low levels.

We have seen gross booking trends for transient travelers flatten during the first quarter, and new group bookings while still declining are doing so at a lower rate.

Of course while demand may have bottomed, there is still risk in pricing and therefore REVPAR.

As you can imagine, it remains exceedingly difficult to predict future results in this environment.

Still, even given the murky outlook, we all must evaluate the trends and take action, and we are doing just that.

We outlined our near-term strategies last quarter.

First, we continue to aggressively manage our balance sheet and our cost structure to meet whatever challenges may present themselves.

During the quarter, we reduced our debt by about $150 million, and expect to reduce debt by $600 million to $650 million in full year 2009.

We raised nearly $200 million from the sale of timeshare notes during the quarter.

We reduced our investment spending forecasts, and won't be contributing incremental capital into hotel transactions unless we see truly compelling economics.

We believe our success in preserving cash and protecting our investment grade rating today will result in earnings growth long-term.

We are also proud of our success in reducing administrative costs and protecting margins for our hotel owners, while preserving jobs where we can, which is especially impressive consider the REVPAR declines.

In fact, adjusted G&A was down 16% during the first quarter, and we expect it to be down roughly 20% for the full year.

Teams at headquarters and our managed hotels cut expenses during the quarter, which helped house profit margins decline only 340 basis points, despite an 18% worldwide company-operated constant dollar REVPAR decline.

We believe that this hard work, along with our compelling REVPAR index, has encouraged interest of owners and franchisees in converting hotels and competitor brands to one of ours.

And we still opened 8,800 new rooms during the quarter.

At the same time, we realize our owners and franchisees are facing challenges.

So in addition to cost controls, we are deploying an array of revenue-generation tools and strategies, optimizing our previous investments in systems to drive incremental top line results and capture greater market share.

We are also relaxing some brand standards for hotels and capital expenditure guidelines for new initiatives and renovations.

These steps have already improved our position in the short run, and we believe they will enhance our ability to seize new opportunities and prosper over the long-term as well.

But before we get there, I would like to turn this over to Carl to talk a bit more about our first quarter results and our expectations for the future.

Thanks Arne, and welcome to all of you.

I'm excited to be here and look forward to working with those of you in the investment community through this challenging environment, and even more so in the recovery to come.

Let's get right to the details.

Adjusted diluted earnings per share totaled $0.24 for the quarter compared to our guidance of $0.13 to $0.15 cents.

We booked about a $0.04 gain by purchasing our public debt at a discount, but solid cost savings drove outperformance elsewhere.

Lower G&A costs gave us $0.02, and property cost savings drove $0.01 each for our incentive fees and our own-leased corporate housing and other lines.

An additional $0.02 of our outperformance was related to higher timeshare financing income, and a reverse sales reserve associated with our note sale.

The most gratifying aspect of the quarter was witnessing the team at Marriott pitching in together to make the business work despite the economic climate.

Our sales and marketing experts leveraged Marriott Rewards, Marriott.com and strategic relationships to launch significant new revenue generation programs and promotions during the quarter.

We expanded our reach to customers, and increased our speed to market.

We expect to roll out three times the normal number of marketing programs this year, and do so while cutting the time from concept to rollout by two-thirds.

Our sales associates called on more meeting planners this quarter, and developed new tools to get the deals closed.

On the cost side, we revised purchasing specs, shortened restaurant menus and hours, and reduced food waste.

At some hotels we've temporarily shut down floors, reduced the number of restaurants, and shortened retail outlet hours.

Many associates were working in multiple departments and often in multiple hotels, as we work hard to give associates as many hours as possible.

During the quarter, North American management wages were down approximately 10%, and hourly productivity at our properties was way up.

Even with the pressure our operations team remained focused, driving year-over-year guest satisfaction scores higher during the quarter.

Still, as Arne mentioned, despite this tremendous effort, North American comparable company-operated REVPAR declined 18% during the Q1.

Our statistics were meaningfully impacted by the one-week shift in our fiscal calendar.

Adjusting for this, North American company-operated REVPAR would have been down 21%.

The weakness was widespread across demand segments, regions and brands.

Only one out of seven comparable hotels worldwide reported an increase in constant dollar REVPAR.

In the US, a notable bright spot was New Orleans.

Despite the expected negative REVPAR comparison this year, it's clear that a range of groups are slowly finding their way back to this city.

In the leisure segment, New Orleans reported its best Mardi Gras occupancy since Katrina five years ago.

The Nation's Capital did well during the first quarter, with REVPAR up 17%, led by Inaugural activities as well as business related to the management of the economic crisis.

With the center of economic gravity shifting, at least temporarily, from New York to Washington, we expect that some of this activity could persist throughout the year.

Across our North American markets, transient demand began weakening last Spring, led by the financial services industry.

To buttress transient occupancy, we added business from the Federal Government, travelers using AAA and senior citizen discounts, and other contract customers.

Despite this, we continue to see occupancy declines, reflecting weakness across most corporate-rated business.

We saw some resilience in pharmaceuticals and defense in the first quarter, but this was only relative to the other sectors we track.

In terms of pricing, to recognize that discounting corporate business will not drive demand for us, particularly as the competition tends to react pretty quickly.

Nevertheless, we are already seeing significant competitor discounting of room rates for corporate business in many markets.

As we discussed last quarter, Marriott will not lead the market down on rate, but we also do not intend to lose share by failing to respond.

Room rates are likely to remain weak until the economy shows meaningful improvement.

Group business is typically the last segment to turn down, and this recession has been no exception.

We began 2008 with Marriott brand group revenue on the books up 10% from the prior year.

We actually achieved 2% growth in group revenue in 2008, reflecting disappointing in-the-year-for-the-year bookings, and some attrition from expected attendance.

Late in 2008, significant rhetoric from Washington triggered group cancellations from banking, as well as other customers fearful of populist perceptions.

Our industry, led by Bill Marriott, fought back both against unwarranted rhetoric as well as regulation, and today [as] an understanding of the importance of meetings and business travelers emerge, the Rhetoric has cooled considerably and recent cancellations are running at more normal levels.

One lingering impact is that meeting planners are showing a greater preference for urban and suburban hotels, rather than luxury and resort locations for new business.

Another lingering impact above the rhetoric and the economy is the continued hesitancy on the part of meeting planners to book new meetings.

But we note that the rate of year-over-year decline has been improving for the past 16 weeks.

Attrition in meeting attendance remains a significant problem, but it too appears to be stabilizing.

We are getting better at forecasting near-term group business.

Our first quarter 2009 North American bookings implied a down 15% group revenue in the quarter; actual comparable hotel group revenue for the Marriott brand declined only 13%.

By and large, as the recession spread across the globe we saw international company-operated REVPAR decline 17% in the first quarter, excluding the impact of foreign exchange, and 24% including the impact of currency movement.

For our international rev par statistics, the first quarter includes the months of January and February.

Despite the increasing convergence of worldwide market performance, several markets are worth noting.

Our London hotels' performance was interestingly mixed, with several relatively stronger REVPAR results at some hotels, contrasted by pronounced weakness at other properties.

Clearly, the impact of the credit market problems on the financial sector affected such areas as Canary Wharf.

In the Middle East, Dubai suffered from over-supply and weaker demand.

Several other Middle Eastern markets have seemingly developed more of an in-country travel pattern, which voids some of the results in that region.

Around the world, our properties are well positioned to weather the downturn.

We continue to focus on our brand, reinventing, refreshing and renovating our hotels.

We have installed Great Rooms at nearly 20% of our full-service hotels in the last two years, making traditional lobbies obsolete, and we continue to open impressive new hotels around the world.

In our timeshare business, new contract sales in the first quarter were consistent with our expectations, and we were pleased by relative strength, albeit within small volumes, of our fractional sales.

Unfortunately, we recorded $28 million of contract cancellation reserves, largely associated with our residential business.

We are significantly changing the way we market and sell [one-week] timeshare intervals.

We are offering fewer tour packages, reducing the cost of tours, and closing less productive sales (inaudible).

Instead, we are more aggressively selling to in-house guests, existing owners and guests staying at nearby Marriott properties.

It's easier and cheaper to sell to a customer who is already staying at or already owns our product.

Changing our strategy takes time, and some tours are scheduled as much as a year in advance.

But we expect our marketing costs should decline and our closing efficiencies should improve over the course of 2009.

In April, we rolled out our own stimulus plan.

To celebrate the 25th anniversary of our North American timeshare business, for a limited time we are offering existing owners 25% off a one-week timeshare interval, and offering new customers a 15% discount.

Thus far results are good, with improved closing efficiencies since the program began.

We began discounting our Ritz Carlton fractional product at the beginning of the year, and are also very pleased with the results.

Excluding contract cancellations, adjusted contract sales totaled $20 million, an increase of 54% from the prior year and $18 million more than in the fourth quarter of 2008.

Significantly, our timeshare team also reduced general and administrative costs by an amazing 37% in the quarter, as they right-sized overhead to meet current lower demand levels.

The business reduced development, marketing, sales and finance expenses, faster than anyone expected.

On the financing side, we financed 49% of our timeshare interval sales in the Q1 compared to 78% in the year-ago quarter.

Of those that financed with us, the average down payment was nearly 20%, and the average credit score was around 730.

As you might expect, US mortgage delinquency rates have been climbing, reaching 9.8% in March compared to 7.9% in December and 6.4% a year ago.

We've seen some stabilization in early April, which gives us some cautious optimism in this area.

We currently have $281 million in retained interest on our balance sheet in 13 loan securitization pools.

One such pool reached a performance trigger in March, which effectively redirected the excess spread we typically receive each month to accelerate returns to investors.

We estimate the earnings in cash flow impact is only about $2 million to $3 million in 2009.

We completed the timeshare note sale in the first quarter, raising nearly $200 million, and we are likely to complete another deal totaling $50 million to $100 million in the second half of 2009.

Gross timeshare spending in the first quarter totaled $94 million, or $33 million net of cost goods sold.

We continue to cut our inventory spending plans for 2009.

Last quarter we estimated we would spend $400 million in gross timeshare inventory, compared to the $687 million in the prior year.

Today, we estimate 2009 gross inventory spending will total approximately $350 million.

Net of cost of goods sold, we currently estimate we will invest roughly $70 million to $80 million for new timeshare inventory in 2009.

We do not plan on starting any new projects in 2009.

With the significant cost savings, inventory spending reductions and successful note sales, the timeshare business was cash flow positive for the quarter.

Let's talk a moment about G&A.

Through the hard work of our associates across the Company, as well as necessary and sometimes difficult steps to reduce expenses, our G&A adjusted for restructuring and other nonrecurring charges declined by 16% from the year-ago quarter to $136 million.

We reversed about $6 million in incentive compensation expense for lower than expected 2008 bonuses.

We postponed new business initiatives, dramatically reduced spending for lodging development, and reorganized corporate departments to improve efficiency and lower costs.

Many of the changes that we have been making in this very difficult environment are sustainable and will become embedded in our ongoing operations.

Turning to hotel development, our worldwide pipeline of hotels under construction, awaiting conversion or approved for development, still stands at over 115,000 rooms, just a bit less than the 125,000 rooms we reported a quarter ago.

We opened about 8,800 rooms during the first quarter, and canceled a few development projects.

As we mentioned last quarter, owners are finding projects requiring debt difficult to finalize, particularly in the full-service hotels.

We added no new billed full-service rooms for our pipeline during the quarter, and our limited-service room pipeline also declined.

Some owners are delaying projects already approved, as they speculate that construction costs, probably down some 10% already, might decline further.

At the same time, we have seen an increase in inquiries from owners regarding conversions of their hotels to one of our brands.

As you would expect, a difficult business environment makes our REVPAR premiums and operating know-how more valuable to owners.

This is of course a challenging environment both for us and for our owners, particularly those who invested in hotel properties at the peak of the market.

Our owners remain pleased with our rapid and creative approaches to controlling costs, and our aggressiveness in driving revenue.

During this difficult downturn, we are also working with them to delay certain expenditures and investment in the hotels where it makes sense.

In addition to paying close attention to the top line and the cost of our hotels, we are committed to improving Marriott's balance sheet.

The charges that we booked in the first quarter largely reflect our decision to write off our investment in a couple of deals, rather than contribute additional capital that would have inflated our debt levels and might not have delivered an adequate return.

S&P reduced its rating on Marriott to BBB minus stable outlook this last week, acknowledging the challenging REVPAR environment but noting the strength of our business model.

At the end of Q1, we had drawn down only $1 billion of our $2.4 billion revolving line of credit, so we continue to have substantial available revolver capacity.

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

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

Today, we expect to reduce our net debt levels by approximately $600 million to $650 million in 2009.

Let's talk about the second quarter of 2009.

As I mentioned earlier our fiscal calendar, the shift in the Easter Holiday, and very strong results in Washington DC favorably impacted reported REVPAR in our first quarter of 2009.

In contrast, for the second quarter the shift in Easter Holiday will have a negative impact on REVPAR.

We expect second quarter North American comparable system-wide REVPAR to decline 22% to 25%, with a greater portion of this climb coming from rates rather than occupancy.

When we factor in the fiscal 2009 calendar, the Easter Holiday and the Inauguration, we expect the change in second quarter REVPAR to be nearly the same as our first quarter performance.

Outside North America, we expect comparable constant dollar system-wide REVPAR to decline 17% to 20%.

Given these assumptions, we expect total fee revenue of $245 million to $255 million in the second quarter.

Our fees should be helped by unit expansion.

We expect own-leased corporate housing and other revenue, net of direct expenses, to total approximately $10 million to $15 million in the second quarter.

While we own or lease 41 hotels, seasonally softer performance combined with the weak economy should continue to constrain profits.

Results will also likely be affected by tougher comparables, since contingency cost-cutting for North American hotels began in the second quarter of 2008.

Based on the first quarter trends, along with a good consumer response to our discount plan, we expect timeshare contract sales to total $175 million to $185 million in the second quarter.

We anticipate that timeshare sales and services net of direct costs will total about $10 million in the quarter.

The G&A line reflects savings we have taken in tour timeshare business, as well at corporate headquarters and in our lodging activities.

We estimate second quarter G&A will decline from $184 million in 2008 to $135 million to $140 million in 2009, a decline of roughly 25% from the prior year.

Since cost reductions began in the second quarter of 2008, margin comparisons will become more difficult for the rest of the year.

Including the benefit from lower interest rates, we estimate adjusted second quarter EPS at about $0.20 to $0.23 per share.

Looking to the full year, as Arne noted earlier there is obviously considerable uncertainty.

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

We are sharing these assumptions to help you model the business, but we are not guiding you to any particular earnings number.

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

In this exercise, for the full year 2009 we are operating our business assuming North American system-wide REVPAR will decline 17% to 20%, and outside North America 13% to 16% on a constant-dollar basis.

Given these REVPAR assumptions, and the more than 30,000 rooms expected to open in 2009, we anticipate our fee revenue could total $1.05 billion to $1.1 billion, and own-leased corporate housing and other revenue net of direct expenses to total $55 million to $65 million.

For our timeshare business we continue to assume a weak economic climate, and adjusted contract sales of approximately $800 million.

Assuming this level of contract sales, timeshare sales and services revenue, net of direct costs, could total approximately $55 million in 2009, and the timeshare segment results could total roughly $30 million.

This segment profit number is lower than our outlook last quarter because of a decline in rental demand associated with the weak economy, and a change in our marketing strategy.

We are using fewer villas for marketing purposes overall.

In addition, maintenance fees from unsold inventories are also depressing results.

Finally, we expect significant reductions in inventory spending will slow reportability of revenue at some projects.

While consumers are more cautious, there is still interest in our products and we expect our discount programs will have an impact.

The cost reductions are already completed to reduce our timeshare 2009 G&A by about 25% to 30% versus the 2008 adjusted levels.

With the completion of the first quarter note sale deal, we are confident in our ability to make the timeshare business cash flow positive for 2009.

Overall, adjusted G&A spending in 2009 should decline by roughly $150 million to $170 million to roughly $580 to $600 million, as every department in the Company has reduced spending.

We expect investment spending to total about $350 million to $400 million in 2009, roughly $450 million less than we spent in 2008, and about $150 million less than we expected just last quarter.

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

While a few months ago we were planning to complete $100 million of asset sales, our current scenario assumes no such sales.

All in all, compared to our prior 2009 scenario, our REVPAR assumption is a bit weaker but cost savings are running ahead of plan.

Timeshare contract sales are on track, but reported timeshare results are impacted by weak rental demand, unsold maintenance fees and deferrals from inventory spending.

So running these assumptions through our model implies adjusted 2009 earnings per share of about $0.88 to $1.02 per share, and about $600 million to $650 million of reduced debt at year end 2009; an impressive result given the severity of this downturn.

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

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

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

For our roughly 40 owned and leased hotels, one point of REVPAR impacts our owned and leased lines by roughly $4 million.

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

Given the significance of the recession these results, while of course not cause for cheering, offer us some modest satisfaction that our effective business model, strong management and enormously dedicated associates continue to deliver the maximum value possible to our shareholders.

We are committed to achieving all we can for the present, as we strengthen our companies for the future.

We have discussed in the past the importance of our culture, first established by our founders, but also expanded around the world by our associates.

I believe as we continually evolve in to a true global company, our deeply embedded sense of who we are provides us with enormous advantages.

All of us, in more than 60 countries, know exactly the road we are on.

We look forward to that journey.

Thank you and keep traveling.

Operator, we will take questions now.

Thank you.

(Operator Instructions)

We will hear first from Patrick Scholes with Friedman, Billings and Ramsey.

Good morning.

I have two questions here.

In your press release you mentioned that your strong brands continue to drive significant REVPAR premiums compared to competitors.

What is your REVPAR index at currently?

I think the last I recall was 115%, and has that -- how has that been trending over the last several quarters?

That's my first question.

Obviously the indexes are calculated by brand, and I think generally we're in the 113% or 114% at the lowest, and about high 120s I would guess for the highest established brand.

And we get -- the data is a little hard to get currently, so we have not seen anything for March yet.

I think all we've got is through February year end, and generally we're seeing what we would expect, which is that the Marriott brand, which tends to benefit in weaker times, is continuing to take share solidly, benefited probably a bit by group, a bit by the importance of a brand in a weaker demand environment, and that sort of strength.

And we are seeing in Courtyard and Residence Inn greater strength in the newer franchise portfolio, and relatively weaker performance in the managed portfolio, by and large driven by product quality and new competition in those markets, with still though sort of category-[killing] REVPAR premiums in those brands.

Okay.

Thank you.

Just another question here.

Do you feel now that -- do you feel that you have any better sense of visibility today than you did during the last time you reported earnings?

And then if we could also get some early sense of how first quarter 2010 group bookings are faring as far as volume and pricing?

I think the short answer is yes, we feel like we have gotten -- we've got a measure of greater confidence in being able to predict at least the next, you know, way out in the future, 30 to 90 days.

There is still enormous uncertainty in the market compared to what we are used to, but as we look back at our accuracy and forecasting we have seen greater accuracy in terms of our internal looks over the last quarter, really.

You could hear in the prepared remarks we are optimistic, with some data to support it but it's hardly unequivocal, that we have kind of bottomed in the demand perspective.

I think it is quite conceivable that we will look back and see the second quarter of 2009 as being the low point in terms of year-over-year REVPAR performance.

You can hear from the modeling assumptions that we are using that the reported numbers in the second quarter will be worse than the reported numbers in the first, and I'm obviously focused on that reported number.

And then as you look in to 2010, we really hesitate to say much at all about what could happen in 2010.

Our group bookings on the books are down in the mid-teens year-over-year.

But let me do a really big bright flashing caution on that; that is a comparison of the group business on the books at this time in 2008 for 2009, compared with the group business on the books today for 2010.

In normal times that would be a reasonably good data point for forecasting what group REVPAR would perform at next year compared to this year.

But because much of the business we have on the books at this time in 2008 for 2009 has already been whacked by the environment that we are in, that baseline doesn't mean a lot.

And so even though we are down mid-teens, we think that tells us less about what the implied group REVPAR performance will be for 2010.

Okay.

And just a touch on pricing, if you are able to?

I'm glad you raised -- because we can have some optimism about the bottoming of demand, but I think of the things we worry about, pricing would be very high on the list.

We would expect to see a continued threat in pricing going forward.

Okay.

I appreciate the color, thank you.

We will now hear from Joe Greff with JPMorgan.

Good morning, everyone.

A question for you on the REVPAR sensitivity that you talked about earlier, Carl.

Does that relationship, is that different depending on whether it's a positive 1% REVPAR sensitivity or a negative?

Ie, if it is a positive swing, it is $20 million, if it's a negative swing from here it's closer to $15 million?

No, it's plus or minus 1%.

But I wouldn't -- I would keep that gauged $15 million to $20 million.

It's not an exact science relative to one side or the other side of it, so I would say plus or minus 1% is $15 million to $20 million.

Thanks.

Then I have some fun timeshare questions.

If you, going forward from here, maintain the 2009 level of timeshare investments, does that mean that the profitability that you are targeting for this year is sort of a rough sustainable annual profitability, all things being equal?

How do you think about -- not to ask you the specific 2010 or beyond 2009 guidance, but just generally how do you think about the relationship between investments and the profitability?

I think as we look at the investments, what the goal would be as you continue to make investments to obviously not build inventory, but instead try to get as close to a just-in-time inventory as you can, right now because of the slowdown we have adequate inventory to get us through 2009, and probably partially into 2010.

So we can pull back our capital expenditures relative to the inventory we have.

It's also the reason we don't need to start new projects in 2009 to still maintain a sales pace of contract sales at the $800 million level.

Okay.

And then with regard to the second timeshare note sale today, you have in the press release that you don't anticipate or don't have a note sale gain assumed; are you assuming that you might have a small loss or are you assuming it's a push?

We are assuming it's probably break-even.

I mean, we're looking in the second half of the year of having a note sale.

Obviously, that's going to depend on volume of notes we have as well as the depth of the market and the availability to sell it.

But all in all, we are just assuming a break-even on it.

Great.

Thanks, guys.

Thank you.

And we will go on to Chris Woronka with Deutsche Bank.

Good morning, everyone.

Just want to kind of follow up a little bit on Joe's question about timeshare.

I understood your comments about kind of having enough through or into 2010, but how do we look at it beyond that for say two to four years?

I mean ultimately you are going to have to spend some more money to have future profits beyond that, is that right?

Let me take a crack at this, since Carl has tried once and rather than repeat himself, the -- it's way too early to talk about P&L profits for this business in 2010 and beyond.

Obviously, we're dealing with pretty historic low demand levels.

Gratified by what we have sold this year, and remember we have sold a couple of hundred million dollars of this product, and that's great.

As Carl mentioned, we've got a good customer response to some of the promotional activity we've got underway.

And so this is still a product that resonates with many, even in a tough environment.

I think what we would say is that with each passing month, the completion of construction in process will continue.

And as a consequence, the need to put incremental capital into building new inventory will decline.

And so in 2010, while it's too early to talk about what our reported profitability would be, I think in a steady state environment we will see that our cash flow from this business is higher than in 2009, because we will simply have less of that construction that is underway.

We obviously are not going to start incremental projects until demand comes back to a level where it's justified.

Right.

Okay, that's helpful.

If I could get your thoughts on -- you guys added back that the cancellations on the residential fractional contracts.

Just your thoughts on adding that back to your adjusted number?

Yes, we added back -- I think the amount we added back was net about $4 million to $5 million, because keep in mind that percentage of completion and completed contract accounting, the whole $28 million wasn't benefited through the P&L.

So the total add back was about $4 million to $5 million.

The reason we added back was because we feel that those reserves are not a recurring type of item.

Typically we don't reserve for things like that, but given these volatile economic times it was a unique situation relative to the -- primarily the residential infraction variance.

That's why we added them back.

Okay.

Fair enough.

Thanks.

We will now go on to David Loeb with Baird.

Hi.

Arne, you've mentioned a couple of times that you are seeing demand bottom.

Do you mean demand -- the absolute level of demand may now be as low as it's likely to be, and that we will actually see growth in demand from here, or the rate of change will be less?

The latter.

Okay.

That's too bad.

I was hoping for the former.

One more for you, and then I've got one for Carl.

We are hearing from Smith Travel that group rates are now at a premium to transient rates.

As you operate your hotels and manage revenue, how do you deal with attrition, and apparent attrition that's really just people moving around the group block to book at lower transient rates?

Yes, I think the mix of rates and occupancy is important to keep a couple of things in mind.

The -- obviously group contract, typically there would be a negotiated rate, negotiate minimums in terms of volumes, maybe provisions around [F&B] and other services that would be provided as part of that group business.

And it is, certainly depending on those contracts, possible for group participants to book around the block and see whether or not they can get lower rates.

That may implicate the guarantee or the minimums that the group customer has put in place.

So depending on the precise terms of those contracts, it may or may not be significant.

I think it's important to keep in mind a couple of things, though.

When we look at reported transient rates, they are down to be sure on a year-over-year basis, but they are also down in part because the mix has shifted.

So we are doing relatively more contract business, which Carl mentioned in his comments, we're relatively more AAA and government, and leisure is relatively stronger, and we really end up with the most pronounced weakness in the [rack] rate and less so in the special corporate rate, but that mix is something that is important to keep in mind.

So if I'm a group customer and I'm thinking about booking around the block, I'm not necessarily going to go find the AAA rates available to me as something that can do it.

So the disconnect between group and transient rate may be much less than you -- than first appears to be the case.

Okay.

That's great.

And one for Carl.

You mentioned $0.04 after tax from the repurchase of the senior notes.

I gather that means the entire $21 million pretax extinguishment of debt relates to that?

So am I correct -- am I doing the math correctly that you bought those notes for $101 million or 82.8% of face?

Approximately that area, yes.

And do you have appetite to continue doing that?

We'll probably opportunistically watch the market, and if the opportunity comes we probably will continue to look at buying it back.

That's great.

Thank you very much.

We will go now to Jeff Donnelly with Wachovia.

Good morning, Arne.

I'll ask a question about margins.

REVPAR declines are increasingly seen to be weighted towards rate declines, which obviously can be more damaging to margins.

So I guess while you've had a degree of success controlling cost in Q1, I'm just trying to think as we roll through the next few quarters, can you talk about the sustainability of the cuts in expenses you've made to date, and maybe quantify how much more room you have to cut costs that are not directly related to occupancy, or has most of that work been done?

Yes, I think pound for pound -- I'm glad you asked the question, because pound for pound it's going to get harder on margins, hotel-level margins, per point of REVPAR.

I think a piece of that is rate occupancy mix, but a bigger factor is that while the comparisons ease on REVPAR, they become more difficult on margins.

So I think many of the things we are doing today are sustainable, we've got tremendous productivity, significant reductions in management wages, we have driven a couple of points, two to three points really, in F&B margins on a year-over-year basis through procurement and other initiatives, and I think all of those things are very sustainable.

But notwithstanding that, we are going to run in to comparison issues which make the likelihood of delivery margins at these same levels in the third or fourth quarter, if REVPAR is essentially comparable, significantly harder.

Then another question actually on your limited service hotels, specifically the company operated limited service hotels, I think North American REVPAR dipped about 20% versus 15% for system-wide.

That's about what they did, I think, mid-scale and upper-scale hotels did for Smith Travel.

I think what was even more striking to me is the decline even outpaced the drop for your company-operated full service.

Why the gap, I guess, in performance there for limited service products?

Well, you think about Courtyard, particularly in the most established locations, which would be where the managed portfolio dominates, this is -- you know, our promotional tag line is -- escapes me at the moment, for business travel, it's for business transient travel, essentially no group business, and that is the weakest segment of the market.

So there is no group business to help buoy that, particularly where they an established business destinations, weekend business is performing better but it's going to be less significant to performance of those hotels than it would be to the typical full-service hotels.

Yes, then just since you mentioned it, I'm curious, you know people talk about the AIG effect.

I know some of the bookings for group events that were into the future, you know, are still yet to come, but do you feel that the, I guess I'll call it the AIG effect, of group events -- avoiding nicer properties and avoiding certain markets is largely behind us, and that bomb has already gone off so to speak?

I think the good and bad is that the rhetoric that caused a lot of problem coming out of Washington I think has changed.

I think the work that Mr.

Marriott and other leaders in the industry did on the Hill, with the White House and others, to make sure that they understood the implications of some of the rhetoric, has been quite successful.

The bad news is that an awful lot of the resort location group business that was on the books has been canceled.

And so you look at the impact, a number of Ritz Carlton hotels or Marriott -- Marriott hotels, we suffered that, essentially have been baking even if the months are still to come, and it's going to take some time for us to rebuild that group business and get back to the levels we were at before.

Just one last question, might be for Carl, which by the way Carl congratulations.

Sorry I didn't earlier, well deserved.

Thank you.

The last question was actually on loan impairments.

I think in your schedule you mentioned the $42 million loan impairment; can you tell us on what base that's being taken again?

And I guess what's the risk of future impairments of that same nature?

That's a good question.

The loan impairments that we took as adjustments, it's a couple of loans, and basically a situation where we had in one case a project, where in order for the project to continue successfully would probably require us to continue to invest in that project, even though we didn't have requirements to invest in it.

We concluded, given our focus on the balance sheet, where it didn't make economic sense to invest we weren't going to, so we reserved that loan.

The other one dealt with fundings we had made in the past that we think now we won't recover, and we fully reserve that.

So that's what made up that loan impairment at the time.

I think the other thing I would like to point out is, is if you look at our total loans that we have right now, our total notes and received notes and interest receivable that we have right now at the end of the first quarter net is about $200 to $210 million, in that neighborhood.

That is substantially down from where it was five, seven years ago.

So we've substantially reduced our risk in this area by managing down that portfolio to -- to a much more manageable number.

So is it apples-to-apples to say that that $42 million loan is on a base of somewhere around $200 million-odd?

That's correct.

Okay, great.

Thank you, guys.

We will now hear from William Truelove with UBS.

Good morning, everybody.

I'll start with the timeshare question first, unfortunately.

Maybe Carl you can answer this, the $200 million that you sold in the first quarter, or total note sales, what was the gain or loss on that note sale?

I didn't see that anywhere.

We lost a million dollars on that (inaudible).

Right.

Okay.

Then secondly, can you talk a little bit about -- I see one of the charges was the $38 million related to security deposits net of prior-year reserves of G&A.

Is that related to the Hospitality Properties Trust situation, and to what extent can you guys comment on that?

Sure, I will take that.

As we talked earlier, we are focused on our balance sheet, and we've concluded that we are not going to support or fund owner shortfalls unless we have a contractual obligation to do so, or if there is an economic reason to do so from, you know, an earnings standpoint or management standpoint.

In the case of HPT, we can elect to fund shortfalls and recover those fundings through future incentive fees.

However, if we don't fund, HPT can draw on security deposits that were established way back when these portfolios were originally structured, or they can convert the contracts to franchise agreements, in which case we will get base and system fees that in the near term are basically equal to the management fees we are getting today.

Given that we've chosen not to fund the shortfalls, we've reserved the security deposits net of some reserves that we had set up prior to the first quarter.

We also wrote off some receivables that we had for prior fundings that we had done.

So these amounts are all reflected in that adjustment, it's either in the G&A line or that was some of the receivables I talked about in the provision for loan losses.

Okay, so you would say that -- and there is no further ongoing discussions with HPT as to this, or is that -- that's basically set and done now, in your opinion?

You know, we'll obviously continue to talk to an owner, we work with them through lots of different portfolios, and we will continue to talk to them.

I never say never, but right now we don't have any specific deal on the table that we are looking at.

Wonderful.

Thanks so much, guys, I appreciate it.

We will now go to Bill Crow with Raymond James.

Good morning.

No timeshare questions from me.

Let's talk about a couple of other things.

As you get a little bit more confidence in the outlook on the demand side, at least as maybe the timeshare sales -- note sales become more viable, evidence in the first quarter of course, as you start to think about that $650 million debt reduction in terms of maybe you could use some of those -- some of that fund, the funds earmarked for that for share repurchases, or is this just kind of set in stone, we want to reduce our debt despite what might be an improving capital markets environment?

I think, Bill, that's a good question.

But I think first and foremost we obviously want to maintain our investment grade rating, and so we are going to continue to manage our balance sheet and reduce our debt in order to do so.

So as we watch those debt to EBITDA ratios, one of the levers obviously is paying down debt, and that will be our first and foremost thing to do.

As you know our motto is such that it's a delevering model, it generates a lot of [audio dropout] as you pointed out, either through timeshare notes or just our fee of -- managing franchise fees, but right now that focus is on retiring debt.

Into the future 10, 11 ratios get down below the 3.25, 3.5, then obviously we will be looking at investing in -- back into the business.

Okay.

Arne, as we think about 2010, and I'm not looking for guidance per se, but with 30,000 new rooms hitting the -- gross new rooms hitting the system this year, what should we think about for next year?

Does it get cut in half or is that too pessimistic?

In terms of our rooms opening?

Yes.

Oh no, I think it will be a number very similar to 2009.

There is obviously risk on the downside, given as we get in to 2010 we will see the construction -- the projects under construction today get completed, and we are clearly not filling that bucket, but we are seeing an increase in activity around conversion product, and certainly the full service openings are for really full year 2010 are all under construction.

So I could -- I suspect is risk is on the down side, but nothing like half the levels of 2009.

That's way too pessimistic.

Got you.

And then on the management contract side, it's a fairly competitive environment out there.

How is Marriott faring relative to maybe historical capture rates on new management contracts?

Are you as competitive as you used to be?

I think these are times which are great for us, and they are great for us not just in the context of REVPAR premiums and margins and some of the other things we've talked about, but they are great for us in the environment of competing for new management and franchise agreements.

This is a -- in times of greater uncertainty, we all seek better stability and better reliability, and those are things that we can offer.

So whether you are an owner of an existing hotel looking to convert a brand or a potential lender, which there aren't many today, but lender to make a loan on a new hotel, all of those things are going to be aided by the reputation and the performance that we can offer our owners and franchisees.

So if anything, we'd say it's improving.

Okay, interesting.

Finally, the Greenbrier, could you just talk about how that -- strategically that plays within your thoughts?

Greenbrier is obviously a special hotel, for those of you who know it, and I think we would be very happy to welcome it to our system as the Greenbrier JW Marriott Hotel; it is a process that still has a number of months to run but we are quite optimistic that's where we will end up some time this Summer.

And that will be -- it's more than a $100 million commitment on your part?

Is that right?

No.

It's a structured deal and I think that would overstate the capital that we would be committing to it.

We are also deep into conversations with a number of folks who would likely be a much more traditional owner, for whom we would manage the hotel.

And we view the project as taking some risk potentially, capital risk, but ultimately something that's very consistent with our model.

I can't be more specific than that until we get a little farther along in the process.

Great.

Appreciate your time.

You bet.

If there is one more question, Operator, we will take it.

Thank you.

And we'll hear from Smedes Rose with Keefe, Bruyette & Wood.

Hi, thanks.

Just under the wire here.

Arne, just a couple of questions.

You spoke about your investment grade rating earlier.

Are you in conversations with the rating agencies about how the potential adoption of FASB 140 would impact the way you look -- they look at your potential liabilities, which I think would significantly change your balance sheet liabilities?

Right.

This is Carl.

I will take that.

First of all, when the rating agencies do their calculations they do take -- in some respects take into consideration note securitization pools through their adjustments, so although they don't add back 100% they do take those into consideration.

But as far as 140 goes, that's been out there for a while, the FASB is taking comment, and we haven't heard anything for a while, we are watching it close.

So it would probably be premature for us to assume that those all would come back on our balance sheet, since we don't know how the final ruling is going to come out.

With that said, like I said the rating agencies do take into consideration our securitization pools when they do their calculations.

Okay.

Then just -- on further writedowns of security deposits, you have I think it's close to another $100 million of deposits with HPT, so if those portfolios fall short of minimum rent, is it just fair to assume that Marriott will not be funding any of those portfolios going forward?

I think the other portfolios, the arrangements are slightly different than the one we've talked about.

So they all don't work exactly the same, so it would be premature to make a decision right now.

It would more of a factor if circumstances [face us].

But obviously any decision that we felt like we were in the position to make we've made and booked in connection with the closing of the first quarter.

Okay, thank you.

Thanks very much.

Thank you all.

Appreciate your time.

Thank you.

Ladies and gentlemen, that does conclude today's presentation.

Thank you for your participation, and once again have a good afternoon.