Marriott International Inc. Q1 2009 Earnings Call Transcript

Apr.23.09 | About: Marriott International, (MAR)

Marriott International Inc. (NYSE:MAR)

Q1 2009 Earnings Call

April 23, 2009 10:00 ET


Arne M. Sorenson – Chief Financial Officer, Executive Vice President, President – Continental European Lodging

Laura E. Paugh – Senior Vice President Investor Relations

Carl T. Berquist – Executive Vice President Financial Information & Enterprise Risk Management, Principal Accounting Officer

Betsy Daum – Senior Director of Investor Relations


C. Patrick Scholes – Friedman, Billings, Ramsey & Co.

Joseph Greff – J. P. Morgan

Chris Woronka – Deutsche Bank

David Loeb – Robert W. Baird & Company

Jeffrey Donnelly – Wachovia Securities

William Truelove – UBS

William Crow – Raymond James

Smedes Rose – Keefe, Bruyette & Wood


Welcome to this 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.

Arne M. Sorenson

Thank you [Catherine]. Good morning everyone. Welcome to our first quarter 2009 earnings conference call. Joining me to today is Laura Paugh, Senior Vice President Investor Relations, Betsy Daum, Senior Direct 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 Arthur Anderson, as 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 into the discussion of our results, let me first remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal security 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, as long with our comments today are effectively 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

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 5 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're obviously far from being out of the woods. However, there are some initial signs of demand stabilization even if at today is very low levels.

We've 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're 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 considering 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 of 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 and systems to drive incremental top line results and capture greater market share.

We're 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.

Carl T. Berquist

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 total $0.24 for the quarter compared to our guidance of $0.13 to $0.15. We've booked about $0.04 gain by purchasing our public debt at a discount, but solid cost savings drive out performance elsewhere. Lower G&A costs gave us $0.02 and property costs savings drove a $0.01 each for our incentive fees and our own leased corporate housing and other lines. An additional $0.02 of our out performance was related to higher timeshare financing income and a reverse sales reserve associated with our note sales.

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,, 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 roll out 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 revived 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 at 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 first quarter. 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 segment, regions and brands. Only one out of seven comparable hotels worldwide reported an increase in constant dollar RevPAR.

In the U.S. 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 the 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 tracked. In terms of pricing we 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 cancelations from banking as well as other customers fearful of [populace] perceptions.

Our industry led by Bill Marriott fought back both against unwarranted rhetoric as well as regulation. And today an understanding of the importance of meetings and business travel has emerged, 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 of both the rhetoric and the economy is the continued hesitancy on the part of meeting planners to book new meeting though 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're getting better at forecasting near-term group business. While first quarter 2009 North America 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 RevPAR statistics the first quarter includes the months of January and February.

Despite the increasing convergence of worldwide market performance several markets are worth nothing. 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've 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 time share business new sales in the first quarter were consistent with our expectations and we were pleased with the relative strength all be it within small volume of our fractional sales. Unfortunately we recorded $28 million of contract cancelation reserve 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 centers. Instead we are more aggressively selling to in house guest, existing owners and guest 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 as some tours are scheduled as much as a year in advance, but we expect our marketing cost should decline and our closing efficiency should improve over the course of 2009.

In April we rolled out our own stimulus plan to celebrate the 25th anniversary of 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 cancelations, adjusted contract sales total $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% a quarter, as they right-sized over-head to meet current lower demand level. The business reduced development, marketing, sales and finance expenses faster than anyone expected. On the financing side we financed 49% of our time share intervals sales in the first quarter 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 U.S. mortgage delinquency rates have been climbing reaching 9.8% in March compared to 7.9% 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 and 13 loan securitization pools. One such poll 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 and cash flow impact is only about $2 million to $3 million in 2009. We completed a 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 of goods sold. We continue to cut our inventory spending plans for 2009. Last quarter we estimated we would spend $400 million in gross time share 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'll invest roughly $70 million to $80 million for new time share inventory in 2009. We do not on starting any new projects in 2009. With the significant cost savings, inventory spending reductions and successful note sale, 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've postponed new business initiatives dramatically reduced spending for lodging development and reorganized corporate departments to improve efficiency and lower cost.

Many of the changes that we have been making in this very difficult environment are sustainable when we become embedded in our ongoing operations. Turning to hotel development our worldwide pipeline of hotels under construction, awaiting conversion or approved for development still stand 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 a full service hotel. We added no new-build full service rooms to 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've seen an increase in inquiries from owners regarding conversions of their hotels to one of our brands. As you would expect the difficult business environment makes our RevPAR premiums and operating know-how more valuable to owners. This is, of course, challenging environment both for us and for our owners, particularly those who invested in hotel property 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 investments in the hotels where it makes sense.

In addition to paying close attention to the top line and the costs 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 investments 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 the trading on Marriott to BBB minus stable outlook just 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.

So 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, D.C., 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 decline coming from the 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 dollars 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 owned 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 cost will total about $10 million in the quarter.

The G&A line reflects savings we've taken in our timeshare business as well as 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 the 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, 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 to total $1.05 billion to $1.1 billion, and owned 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 timeshares segment result 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're using fewer villas for marketing purposes overall. In addition maintenance fees from unsold inventory are also depressing results. Finally, we expect significant reductions in inventory spending will slow reportability of revenue of some projects.

While consumers are more cautious there is still interest in our products and we expect our discount program will have an impact. The cost reductions 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 million 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, while reported timeshare results are impacted by weak rental demand, unsold maintenance fees and deferral of some inventory spending. Running these assumptions through our model implies an 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 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 reiterate the following sensitivity. Given the low percentage of the hotels that we expect that 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 forty owned and leased hotels, one point of RevPAR impacts our owned and leased line 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 time share contract sales could impact time share 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 company for the future. We've 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 into a true global company our deeply embedded sense of who we are provides us, with enormous advantages. All of us in more than sixty countries know exactly the road we're on. We look forward to that journey.

Thank you and keep traveling. [Catherine] we'll take questions now.

Question-and-Answer Session


(Operator Instructions) We'll hear first from C. Patrick Scholes – Friedman, Billings, Ramsey & Co.

C. Patrick Scholes – Friedman, Billings, Ramsey & Co.

I have two questions here. In your press release you mentioned that your strong brands continue to drive significant ramp up premiums compared to the competitors, what is your RevPAR index at currently. I think the last I recall it was at about 115%, and has that, how has that been trending over the last several quarters?

Arne M. Sorenson

Obviously the indexes are calculated by brand and I think generally we're in the 1l3 or 114 at the lowest and about high 120s I would guess for the highest established brand. 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 the brand and a weaker demand environment and that sort of strength.

And we're seeing in Courtyard Inn, 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.

C. Patrick Scholes – Friedman, Billings, Ramsey & Co.

Okay, thank you and just another question here, do you feel now that you have any better sense of visibility today than you did during the last time you reported earnings and then could I also get some early sense of how first quarter 2010 group bookings are faring as far as volume and pricing.

Arne M. Sorenson

Yes, I think the short answer is yes, we feel like we've got a measure of greater confidence in being able to predict at least the next way out in the future, thirty to ninety days. There is still enormous uncertainty in the market compared to what we're used to, but as we look back at our accuracy in forecasting we're seeing 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've kind of bottomed in the demand perspective. I think it is quite conceivable that we'll 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're using that the reported numbers in the second quarter will be worse than the reported numbers in the first quarter, and I'm obviously focused on that reporting number.

And then as you look into 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're in, that baseline doesn't mean a lot. And so even though we're down mid teens we think that tells us less about what the implied group RevPAR performance will be for 2010.

C. Patrick Scholes – Friedman, Billings, Ramsey & Co.

Okay, and just touch on pricing if you are able to.

Arne M. Sorenson

Again, I'm glad you raised that because we can have some optimism about the bottoming of demand. I think of the things we worry about, pricing would be very high on the list. We would expect to see continued [revenue] pricing going forward.

C. Patrick Scholes – Friedman, Billings, Ramsey & Co.

Okay, I appreciate the color, thank you.


And we'll now hear from Joseph Greff – J. P. Morgan.

Joseph Greff – J. P. Morgan

Question for you on the RevPAR sensitivity that you talked about a little bit earlier, Carl, does that relationship, is that different depending on whether it is a positive 1% RevPAR or negative, i.e. if it's a positive swing it's a $20 million, if it's a negative it swings from here it's closer to $15 million.

Carl T. Berquist

No, it's plus or minus 1% but I would keep that gage 15 to 20, 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.

Joseph Greff – J. P. Morgan

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're targeting for this year is sort of a rough sustainable annual profitability, all things being equal? How do you think about that, and that's asking you specific about 2010 or beyond 2009 guidance but just generally how do you think about the relationship between investments and the profitability?

Carl T. Berquist

Well 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 slow down 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. That'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.

Joseph Greff – J. P. Morgan

Okay, and then with regard to the second timeshare note sale today, you have any impressions you don't anticipate or you don't have a [no tell] gains assumed, are you assuming you might have a small loss or are you assuming it's a push?

Carl T. Berquist

We're assuming we'll probably break even, I mean we're looking in this second half of the year having a note sale obviously that is going to depend on volume and notes we have as well as the depth of the market and the availability to sell it. But all in all, we're just assuming a break-even on it.


And we'll go on to Chris Woronka – Deutsche Bank.

Chris Woronka – Deutsche Bank

I just wanted to kind of follow up a little bit on Joe's question about a timeshare, and understood your comments about kind of having enough into 2010, but how do we look at it beyond that for, say, two to four years? I mean, ultimately you're going to have to spend some more money to have future profits beyond that. Is that right?

Arne M. Sorenson

Let me take a crack at this, since Carl has tried once, and rather than repeat himself, 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've sold a couple hundred million dollars of this product, and that's great. And, 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'll see that our cash flow from this business is higher than in 2009, because we'll 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.

Chris Woronka – Deutsche Bank

Right. Okay, that's helpful. And then if I could just kind of get your thoughts on – you guys added back that the cancellations on the residential and fractional contracts, just your thoughts on adding that back to your adjusted number?

Carl T. Berquist

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. But 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 primarily the residential and fractional areas. And that's why we added them back.


We'll now go on to David Loeb – Baird.

David Loeb – Robert W. Baird & Company

Hi. Arne, you've mentioned a couple of times that you're 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'll actually see growth in demand from here, or that the rate of change will be less?

Arne M. Sorenson

The latter.

David Loeb – Robert W. Baird & Company

Okay. That's too bad. I was hoping for the former. And one more for you, and then I've got one for Carl. We're 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?

Arne M. Sorenson

Yes, I think on the mix of rates and occupancy, it's important to keep a couple of things in mind. Obviously, a group contract, typically there would be a negotiated rate, there'd be negotiated minimums in terms of volumes, maybe some 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. And 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're also down, in part, because the mix has shifted. So we're doing relatively more contract business, which Carl mentioned in his comments. We're doing 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. And so the disconnect between the group and transient rate may be much less than first appears to be the case.

David Loeb – Robert W. Baird & Company

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 doing the math correctly that you bought those notes for about $101 million, or 82.8% at face?

Carl T. Berquist

Approximately that area, yes.

David Loeb – Robert W. Baird & Company

And you have appetite to continue doing that?

Carl T. Berquist

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


We'll now go to Jeffrey Donnelly with Wachovia.

Jeffrey Donnelly – Wachovia Securities

Good morning, Arne. And ask a question about margins. Your RevPAR declines are increasingly seeming to be weighted towards rate declines, which, obviously, can be more damaging to margins. So I just wonder what kind of degree of success is controlling costs in Q1? I'm just trying to think, as you roll through the next few quarters, can you talk a little bit, maybe 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 related directly to occupancy? Or has most of that work been done?

Arne M. Sorenson

Yes, I think pound-for-pound – I'm glad you asked the question, because pound-for-pound it's going to get harder on 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're doing today are sustainable. We've got tremendous productivity, significant reductions in management wages, we've 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're going to run into 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.

Jeffrey Donnelly – Wachovia Securities

And 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 they did, I think [Mitsky] on a broad-scale hotel percent travel. I think what's even more striking to me is that decline even outpaced the drop for your company-operated full service. Why the gap in performance there for the limited service products?

Arne M. Sorenson

Well, you think about a Courtyard, and particularly in the most established locations, which would be where the managed portfolio dominates. This is, you know, our promotional tagline is – goodness, it's escaped me at the moment. But for business travel, it's for business transient travel, essentially no group business. And that is the weakest segment of the market. So there's no group business to help buoy that, particularly where they're in established business destinations.

Weekend business is performing better, but it's going to be a less significant performance of those hotels than it would be for the typical full-service hotel.

Jeffrey Donnelly – Wachovia Securities

Yes, that distance you mentioned, and I'm curious – people talk about, as they say, "the AIG effect." I know some of the bookings for group events that were into the future are still yet to come, but do you feel that, 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?

Carl T. Berquist

I think the good and bad here 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 and with the White House and others to make sure 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 cancelled. And so you look at the impact on a number of Ritz Carlton Hotels or J. W. Marriott or Marriott Hotels and we've suffered that. Essentially already been baked 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.

Jeffrey Donnelly – Wachovia Securities

Just one last question, and it might be for Carl, which by the way, congratulations. Sorry I didn't say it earlier. The last question is actually on loan impairments. In your schedule you mentioned the $42 million loan impairment; can you tell us on what base that is being taken against, and I guess, what's the risk of future impairments of that same nature?

Carl T. Berquist

That's a good question. The loan impairments that we took as adjustments, that's a couple loans. And basically, its situations where we had one case or 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.

And we concluded given our focus on the balance sheet where if it didn't make economic sense to invest, we weren't going to. So we reserved that loan. The other dealt with some fundings that we had made in the past that we think now that 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'd like to point out is if you look at our total loans that we have right now, our total notes and interest receivable that we have right now at the end of the first quarter net is about $200 million, $210 million in that neighborhood. And that's 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 some much more manageable number.

Jeffrey Donnelly – Wachovia Securities

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

Carl T. Berquist

That's right.


Your next question comes from William Truelove – UBS.

William Truelove – UBS

Okay, I'm going to start with the timeshare question first unfortunately. Maybe, Carl, you can answer this. The $200 million note that you sold in the first quarter or for the note sales, what was the gain or loss on that note sale? I didn't see that anywhere.

Carl T. Berquist

We lost $1 million on the transaction.

William Truelove – UBS

Okay, and then secondly can you talk a little bit about, I see that one of the charges was the $38 million related to security deposits not a prior year reserves in G&A, is that related to the House Valley Properties Trust situation and to what extent can you guys comment on that?

Carl T. Berquist

You know, as we talked earlier, we're very focused on our balance sheet and we've concluded that we're not going to support or fund owner shortfalls unless we have a contractual obligation to do so or if there is an economic reason for us to do so from 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'll get base and system fees that, in the near term, are basically equal to the management fees we're getting today.

Given that we've chosen not to fund the shortfalls, we reserved the security deposits netted from 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.

William Truelove – UBS

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

Carl T. Berquist

Well, obviously we'll continue to talk to them. They're an owner, we work with them through lots of different portfolios and we'll continue to talk to them. I never say never, but right now we don't have any specific deal on the table that we're looking at.


Your next question comes from William Crow – Raymond James.

William Crow – Raymond James

No timeshare questions for me. Let's talk about a couple of other things though. As you get a little bit more confidence in the outlook on the demand side at least, and as maybe the time share notes sales become more viable, evidenced in the first quarter of course, do 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.

Carl T. Berquist

Well, I think, it's a good question, but I think first and foremost, we obviously want to maintain our investment grade rating and so we're going to continue to manage our balance sheet and reduce our debt in order to do so.

As we watch those debt-to-EBITDA ratios, one of the levers obviously is [inaudible] down debt and that will be our first and foremost thing to do. As you know our model is such that it's a d-leveraging model. It generates a lot of cash as you pointed out either through time share notes or just our fee of managing franchise fees.

But right now that focus is on retiring debt. Into the future 1011 ratios get down below the 3 1/4%, 3 1/2% and obviously we'll be looking at investing it back into the business.

William Crow – Raymond James

Arne, as we think about 2010 and I'm not looking for guidance per say, 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 this get cut in half or is that too pessimistic?

Arne M. Sorenson

In rooms, in terms of our rooms opening?

William Crow – Raymond James


Arne M. Sorenson

Oh no, I think it will be a number very similar to 2009. There's obviously risk on the down side given as we get into 2010, we'll see the construction, as projects under construction today get completed. And we're clearly not filling that bucket, but we are seeing an increase in activity around conversion products and certainly the full service openings are really full year 2010 are all under construction.

So it could, I suspect the risk is on the downside, but nothing like half the levels of 2009. I think that is way too pessimistic.

William Crow – Raymond James

Then on the management contract side, it's a fairly competitive environment out there. How is Marriott faring relative to maybe historical capture rates and new management contracts? Are you as competitive as it used to be?

Arne M. Sorenson

I think these are times which are great for us and they're 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're 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're an owner of an existing hotel looking to convert a brand or 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 owner and franchisees. So if anything, we'd say it's improving.

William Crow – Raymond James

Okay, interesting. Then finally, the Greenbrier, could you just talk about how that strategically that plays within your thoughts?

Arne M. Sorenson

Greenbrier's 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 and JW Marriott Hotel. It's a process that still has a number of months to run, but we're quite optimistic that's where we'll end up sometime this summer.

William Crow – Raymond James

And that'll be a more than $100 million commitment on your part? Is that right?

Arne M. Sorenson

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 viewed the project as taking some risks potentially, capital risks. 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.


Your final question comes from Smedes Rose – Keefe, Bruyette & Wood.

Smedes Rose – Keefe, Bruyette & Wood

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 ratings agencies about how the potential adoption of FASB 140 would impact the way they look at your potential liabilities, which I think would significantly change your balance sheet liabilities?

Carl T. Berquist

Well first of all, when the rating agencies do their calculations they do take in, in some respects, take into consideration the securitization pool 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's taken comments and we haven't heard anything for a while and we're watching it close. So it would probably be premature for us to assume that all those would come back on our balance sheet, since we don't know how the final ruling's 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.

Smedes Rose – Keefe, Bruyette & Wood

Okay, and then on further write-downs 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 rents is it just fair to assume that Marriott will not be funding any of those portfolios going forward?

Carl T. Berquist

I think the other portfolios the arrangements are slightly different than the one we talked about and so they all don't work exactly the same so it would be premature to make any decision right now. It would be more of a fact or circumstances.

Arne M. Sorenson

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

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.

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