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Executives

Jason Koval - VP, IR

Frits van Paasschen - President and CEO

Vasant Prabhu - EVP and CFO

Analysts

Bill Crow - Raymond James

Jeff Donnelly - Wachovia

Celeste Brown - Morgan Stanley

Joe Greff - Bear Stearns

Amanda Bryant - Merrill Lynch

Jeff Randall - Black Creek Global

Won Kim - JMP Securities

William Truelove -- UBS

Steve Kent - Goldman Sachs

Starwood Hotels & Resorts Worldwide, Inc. (HOT) Q4 2007 Earnings Call January 31, 2008 10:30 AM ET

Operator

Good day and welcome to the Starwood Hotels & Resorts fourth quarter earnings call. (Operator Instructions)

At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Jason Koval. Please go ahead, sir.

Jason Koval

Thank you, Patrick, and good morning, everyone. I would like to thank all of you for joining us for Starwood's fourth quarter 2007 earnings call. Joining me today are Frits van Paasschen, our CEO; and Vasant Prabhu, our CFO.

We will be making statements on this call related to company plans, prospects and expectations that constitute forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995.

These forward-looking statements generally can be identified by phrases such as Starwood or its management believes, expects, anticipates, foresees, forecasts, estimates, or other words or phrases of similar import. All such statements are based on our expectations as of today, and should not be relied upon as representing our expectations as of any subsequent date. Actual results might differ from our discussion today.

I point you to our 10-K and other SEC filings available from the SEC or through our offices here and on our website at starwoodhotels.com for some of the factors that could cause results to differ.

With that, I am pleased to turn the call over to Frits for his comments. Frits?

Frits van Paasschen

Thank you, Jay, and good morning. I want to thank each of you for joining us today.

I am very proud of our fourth quarter results that our team delivered in the face of economic uncertainty, but I want to spend the majority of this call discussing our vision for Starwood's future, our strengths and opportunities and how we will continue to create value for our shareholders through a combination of growth, prudent capital allocation and cost containment.

But first, some headlines numbers from Q4. We beat our EBITDA guidance of $340 million by $21 million, and EPS came in at $0.79. That's $0.12 ahead of consensus. In fact, Q4 2007 was one of the best quarters Starwood has ever had as system-wide RevPAR jumped 13%.

Company-operated international RevPAR increased 21% or 12% excluding the impact of foreign exchange. Europe, Africa and the Middle East and Asia Pacific were particularly strong with gains of 24%, 20% and 19% respectively.

But what about 2008? This morning, we issued our revised guidance. Vasant will get into more detail, today, there are still no clear signs that economic conditions in the US are adversely affecting our business. Nonetheless, in the face of uncertainty about the US economy, we widened the range of expectations for 2008.

We chose this approach to help you understand the range of EPS and EBITDA results we can deliver under various RevPAR scenarios. We are comfortable with out ability to hit these ranges in large part because of Starwood's transformation since the last cycle, when Starwood was viewed as an owner of US real estate.

Today, Starwood is the most global of the major lodging companies, and not nearly dependent on the US economy as it has been in prior cycles. US-owned hotels contribute about 20% of the company's profits.

Managed and franchised fee streams are now the largest contributors to our bottom line and also increasingly international. In fact, over half of our hotels are located in international markets and almost 55% of our fees are generated outside of the US. And we expect this evolution towards international and fee income to continue, especially as we contemplate selling additional assets and growing our international pipeline. We believe this means we should be valued differently than during the last cycle.

So, back to our guidance. We can see worldwide RevPAR growth scenarios in the range of 4% to 7%. Our expectation is that international RevPAR will again outperform the US. In light of the uncertainty about economic conditions and wages, on their impact on the lodging demand, we revised our North American expectations to reflect RevPAR in the range of 3% to 6%.

But let me repeat, we are not yet seeing signs of a slowdown in demand. Our fee business will see strong growth of at least 10% to 13% on the heels of robust new hotel openings during the year. In fact, in spite of delays over the past few months, we still expect to open 80 to 100 hotels in 2008, which equates to almost two hotels every week. And we were confident that our timeshare business will deliver as expected.

This includes a planned securitization in the fourth quarter. All in all, we see continued strong growth in our core lodging business, owing in no small part to our great global footprint, our portfolio of strong brands, and the constrained supply in the segments and locations where we operate. We are now providing a range for 2008 EBITDA of between $1.23 and $1.3 billion and EPS of $2.32 to 2.57.

But rather than spend more time on the numbers, which I know Vasant is excited to cover, I will use this opportunity to elaborate on the five pillars I mentioned in the last call, which I believe will position Starwood to create substantial shareholder value over the long term. These five pillars direct our actions to deliver growth, cost containment and focused resource allocation that our investors should expect from us.

So, let me spend the next few minutes describing each of these pillars, why they are important and how we'll measure our success. The first pillar of our strategy is world class brands. As you all know, Starwood has some of the best brands in the industry, especially in the upper upscale and luxury segment.

Our goal is to have distinctive and compelling brands. Distinctive brand positioning means targeting a specific guest with exactly the experience they are seeking. All brands become compelling through delivering those experiences time after time.

The role of innovation is to keep our brands fresh, driving repeat business. Successful delivery of the experience causes loyalty, which in the end drives RevPAR growth ahead of competition. So, put simply, if we are gaining share, we are not doing our jobs.

So, to measure our success, we will focus on RevPAR index by brand. And at the same time, we will keep a sharp eye on the underlying economics for both our sales and the development community. This should translate into additional pipeline growth and increasing returns on invested capital.

Let me give you an example. We would contend that the economics of W are better than any other luxury brand, which explains the explosive growth from 20 to well over 50 hotels in the coming years. Now, let's take a quick look at our distinctive and compelling portfolio of brands. To start with, our luxury brand group offers unique and differentiated products for consumers and developers through St. Regis Luxury Collection and W.

In the upper upscale category, Westin is one of the most sought after brands through its clear and consistent positioning around personal renewal. Sheraton's strong international presence, of course, is a platform to aggressively reinvigorate and bring consistency to the brand in the US. And Le Méridien compliments these upscale offerings with the chic European flare that can grow from its geographic base in Europe, Africa and the Middle East.

Meanwhile, Aloft and Element bring excitement and personality to the select serve category. And at the same time, we've transformed Four Points into a compelling brand with stellar growth in RevPAR GSI scores in pipeline.

Our second pillar for Starwood is to be operationally driven. Now what does that mean? We must consistently deliver the right brand experience for our guests. And we can measure our effectiveness in delivering on that brand promise through tracking our guest satisfaction scores. But at the same time, we must also manage expenses at our hotels to improve efficiencies. And because we own hotels, we're focused on growing not just the top line, but also margins.

Take, for example, the worldwide increase of over 150 basis points in the fourth quarter. I also believe we have an opportunity to streamline our processes and better allocate resources within the company to their highest and best use.

Prioritization is the key to our success, as we enter a period of great growth in our managed and franchise businesses. Take, for example, innovation, which has been a hallmark for Starwood. Our goal going forward will be to focus on fewer, more significant innovations that will resonate with our guests and are aligned with our owner interests.

And this leaves me to our third pillar, growth. We believe that Starwood is poised to gain market share over the coming years. Our development team has led the charge in building a great pipeline to increase our penetration in the US. More importantly, these are exiting times for the upper upscale and luxury segments, thanks to the extraordinary rise in global prosperity.

This is most dramatic in China, India and the Middle East, but is also true in scores of other markets around the world. Our distinctive and compelling brands will have a global appeal as guests reach income levels where they can afford to travel.

Our optimism about our growth, is reflected in our industry leading pipeline. With 120,000 rooms in the pipeline, our room count can grow potentially by over 40% over the next four to five years. And as I said before, these are high quality rooms with almost 70% in upper upscale and luxury categories and over half in the international locations.

At the same time, we need to be sure that we grow smart as we invest ahead of growth. The expenses we are incurring today to sign management contracts and build hotels will only result in income several years down the road. And because we've only ramped up our investments in growing the pipeline over the past couple of years, there is a lag between our expenses now and when fee revenues kick in.

We also now have the additional expense related to ensuring that we open our pipeline of hotels, HOT, which in our parlance means on time, on budget and full. These expenses are incurred in anticipation of future income. Delivering growth will require us to be smart in how we deploy our resources over the coming years, as I believe we already have most of the people we will need to grow.

This will allow the company to enjoy increasing economies of scale as our room count grows while we control expenses. Remember we are working off about half the base of rooms that Marriot and Hilton have. So, the best economies of scale are yet to come as we are investing heavily today for tomorrow's growth.

Our fourth pillar is building great teams. After spending time with our people in the field around the world, I can tell you that we have a deep pool of talented lodging professionals. But our biggest future challenge is managing our growth. 100 new hotels means forming 100 new teams that are ready to deliver the brand experiences.

Our brands, growth and operational effectiveness will depend on retaining, developing and attracting talented associates around the world. And we are focused on making Starwood a world class organization. Also, I should add that I expect to announce some additions to our leadership team over the coming months.

This leads us to our fifth and final pillar, our commitment to delivering superior returns to our shareholders. As a baseline, we'll continue to consistently meet our financial targets. And looking forward, we need to bring discipline to two more areas: first, investing in high growth areas that don't tie up the company's capital; and second, managing our expenses through disciplined and prioritizing activities.

For example, our view is that there aren't many businesses quite as compelling as managing and franchising hotels. The capital requirements are minimal. There is great potential for growth and the earnings can be sustained over the long run. This leads us to redefining asset right and reviewing our criteria for determining which assets we continue to own as market conditions change.

In today's market, for example, we see arbitrage opportunities between an underlying real estate value and the share price. This discipline in capital allocation also relates to our vacation ownership business. Over the past few years, we have grown this business dramatically and had another record year 2007.

This growth has been fueled by our great brands and world class sales organization. As the economics of this business change over time and across geographies, we need to apply discipline to balancing our desire to grow in 2009 and beyond with potential returns as measured on a project-by-project basis. In the coming years, that's likely to mean favoring high returns to continued rapid growth as we concentrate our focus on key existing markets.

As a management team, we are also committed to controlling our expenses. This will be an important discipline even without the economic uncertainty for 2008. So, we're launching a thorough review of our spending with an eye towards reducing costs, improving productivity and reinvesting against high priority such as growth.

We expect that this capital allocation and cost discipline should result in excess cash being thrown off by the business that we intend to return to our shareholders. And as an example of this commitment, in the fourth quarter, we brought back a record $563 million of stock or over 5% of our diluted share count.

So, let me summarize what I have been talking about this morning, and I'd like to emphasize three key points. First, business fundamentals were terrific in the fourth quarter.

Second, we're committed to the guidance we share with you for 2008. And importantly, Starwood has never been better positioned to weather US economic uncertainty through our reduced reliance on owned hotels and our global footprint.

And third, I have a clear vision for the company's future that can be easily tracked and should generate significant shareholder value for years to come.

That concludes my prepared remarks. And with that, I'd like to turn the call over to Vasant for more details on the financials and our guidance.

Vasant Prabhu

Thank you, Frits, and good morning, everyone. The fourth quarter significantly exceeded our expectations. The primary driver of the strong results was our North American business where we had the best quarterly RevPAR growth and margin improvement in 2007.

Q4 in North America was sequentially stronger than Q3 and the second half was stronger than the first half of 2007. Our international business remained robust with double-digit RevPAR growth in local currency, magnified to 20% growth by the weak dollar. And our vacation ownership business was generally in line with the expectations.

We are pleased by the strong finish for the year, but we know that what is uppermost on your minds is what happens next. So let me give you a sense of how the business is performing right now.

Through the first 28 days of January, RevPAR growth at branded same-store owned hotels in North America is over 8%. RevPAR growth through the same period at branded same-store company-operated hotels in North America is over 4%. At this point, we have completed rate negotiations at 75% of our large corporate accounts.

Rate increases are coming in 6% to 7%. Given that rates for these large accounts are significantly lower than our retail rate in most markets, we believe we will in fact realize these rate increases even if there is some slowdown in demand. These typically account for 15% of room nights in North America.

Our group business is pacing up 5% versus the same time last year. At this point, approximately 75% of group business that we anticipate for 2008, is already on the books. December was one of our strongest group booking months in recent years. So far, cancellation activity has not been unusual and association activity remains strong.

We do have anecdotal data on corporations directing caution on meeting spending and expect that as long as there is economic uncertainty in the air, some of the late breaking small group business may not materialize. But in the aggregate, a change in trend in the group business in North America is not yet evident. Group business typically accounts for around 45% of our room nights.

Visibility in the transient business, as you know, does not extend beyond a few weeks. At this point, 40% or more of the transient business we expect in February is on the books with healthy rate and room night increases. And as we look at day or week customer segment and various market types, it is hard to see any material changes in trend. So, all in all, we do not have a discernible change in demand in North America.

Much of the same holds true in our international business. Asia and the Middle East are off to a strong start. In Europe, the first quarter is the low season, so its contribution to our result at this point is small, but here too, the trend remains unchanged. And foreign exchange continues to help us since the Euro at current levels is approximately 10% higher than it was last year.

All the leading indicators, pace, pricing, etcetera, point to another strong year in international markets.

Finally, in our vacation ownership business, we had a very good fourth quarter and 2007 in Orlando, which continues to perform well. In Hawaii, where we fell short of expectations last year, the business stabilized in Q4 and has stayed at those levels through January and despite the [void] of the financial sector, fractional sales at the St. Regis New York are on track. But fractional sales of the Phoenician, our other project, were below expectations in Q4 and that trend has continued into January.

So, that is the state of business right now. We think of it as the tale of two cities. What we read in the newspaper is not what we see in the business. Having said that, we know that RevPAR is correlated to corporate profits and GDP, and as such, if there is a slowdown in the US, we will see lower RevPAR growth. How much RevPAR is impacted will, of course, depend on how deep and how long the slowdown is and whether international markets will be affected.

Past history would suggest that the sharpest slowdowns in RevPAR occur when all three factors are in play: excess supply for several years prior to a slowdown in demand, exacerbated by an event. This was the case in 1991 with the Gulf war, and in 2001, the 9/11.

Today, we do not have an excess supply problem, especially in the major metro markets where we derive most of our earnings from, and there is no event impacting the business. And hopefully, it stays that way. So, any RevPAR slowdown will depend on how deep and how long a slowdown we have in the US economy and whether it also leads to a global slowdown.

On that issue, our crystal ball is no better than yours. So, our approach is to keep a tight control on costs, focus on share gain and prepare to deal with a broad range of possible RevPAR outcomes.

So, how well a US slowdown impacts Starwood? To help you assess that, here are a few aspects of our business you should pay attention to. 55% of our fees are derived from outside the US and a very well diversified across all geographies.

Page 8 in our data pack provides this detail. And on page 7 of our data pack, you can see that 25% of our owned EBTIDA is also derived from outside the US and is also very well diversified. Our US owned EBITDA, which is most sensitive to a US recession, accounts for only 20% of our 2008 company EBITDA pre-overhead.

Also affected by US slowdown would be US incentive fees, which account for only 2% of our total EBITDA. So, only about 22% of our total EBITDA would be materially impacted by US slowdown.

A few other facts on how our international business may be impacted. In Asia, 75% of our business is derived from travel within Asia. This is significantly higher than what it was 10 years ago. Only 12% of our Asian business is sourced from the US. Similarly, in Europe, Africa and the Middle East, 75% of our business is sourced within the region with 15% coming from the US.

So, you are more dependent on how regional economies hold up rather than activity originating from the US. Providing guidance in this uncertain environment is of course difficult. So we've decided to depart from our traditional approach and are providing a range of scenarios instead. It is our intent to help you understand the EBITDA and EPS we can deliver based on a broad range of possible RevPAR outcomes.

It is not that we expect 3% ReVPAR growth in North America or 4% worldwide. In fact, the best available data we have would suggest quite the opposite. Current trends and our own internal goals target delivering at the upper end of the range, i.e., $1.3 billion in EBITDA and $2.57 in EPS.

But if in fact we have the low scenario play out, we intend to deliver at least $1.23 billion in EBITDA, and $2.32 in EPS through cost reductions we are putting in place, and other contingency plans we will implement.

Four weeks into the quarter, our Q1 guidance is of course tighter. As you can see, Q1 will be stronger than our full year range. Our total EBITDA and EPS are quite a bit lower than you might be expecting in Q1, entirely due to our vacation ownership business.

Due to the dynamics of percentage of completion and the sale or receivables, which is now planned for Q4, and anticipated gain of $40 million to $45 million, profits in the vacation ownership business will be $80 million to $90 million lower than 2007 in the first half, and $30 million to $40 million higher than 2007 in the second half, heavily loaded in the fourth quarter.

Moving past our outlook to a couple of other topics, our valuation and stock buybacks. On page 6th of our data pack, we have provided, as we did last year, the 40 owned hotels that account for 90% of our EBITDA. You have the hotels, the locations and room counts and you can make your own estimates of net asset value.

What is a unique global portfolio of hard-to-replicate hotels that includes our trophies such as the Gritti Palace, The Grande Rome, the Phoenician and landmark hotels in the major capitals of world worth?

Our fee business is built around some of the most sought-after upper upscale and luxury brands. Our pipeline of 500 hotels and 120,000 rooms is the largest in the industry relative to our size and also of the highest quality with 50% outside the US and 70% in the high fee, upper upscale and luxury segments.

What is a $100 million fee business well diversified globally, built around some of the best known upper upscale and luxury hotel brands, with the best growth prospects of any fee business worth? And what is the value of our vacation ownership business that will earn value over $200 million this year, backed by the most popular lodging brands with best-in-class sales and marketing capabilities and a decade of delivering industry leading growth and margins?

Given our views on the intrinsic value of Starwood relative to where the stock is currently trading, we expect to remain buyers of our stock. We have kept the promise we made to you a couple of years ago regarding return of cash to shareholders. Our share count at the end of 2006 was $214 million. Today, without additional buyback, our share count is $190 million, a reduction of 11%.

Our growth of debt to EBITDA, which is the way the rating agencies like to look at it, was 2.4 times at the end of 2006 and three times at the end of 2007. Our capital structure is approaching the ranges we had targeted, but we still have capacity, and we will continue to sell assets, as Frits indicated, and use the proceeds as we have done so far to both invest in growth and to buy back stock. We will announce asset sales as they happen.

In summary, we remain very excited and confident about the long-term potential of Starwood come what may in 2008.

With that, I'll turn just back to Jason.

Jason Koval

Thanks, Vasant. In the interest of time and fairness, please limit yourselves to one question at a time, and then we'll take any follow-up questions you might have if time permits.

Patrick, we are ready for the first question, please.

Question-and-Answer Session

Operator

(Operator Instructions)

We will go first to Bill Crow from Raymond James.

Bill Crow - Raymond James

Good morning, guys. Just a question. Having just come back from ALIS conference, and all the focus was on the lack of liquidity, could you talk about how that is impacting your ability to deliver that development pipeline?

And the second part of that would be its impact on asset sales, whether you've seen a slowdown in interest? And I guess, along those lines, there is a report that Sheraton Man had this under contract for $560 million-plus. Any comment on that?

Frits Van Paasschen

Yes, let me make a few comments, and then I'll hand over to Vasant. This is Frits. Thanks, Bill. The lack liquidity has shown up somewhat in the pipeline for the US business, but really more at the margin than in general.

So, we feel very good about the robustness of our pipeline in North America. And I can assure you that outside of United States there are no liquidity issues that are affecting the growth of our business.

In terms of the Sheraton Manhattan, we don't comment on things like that until they are in a place where that makes sense for us to do. So, I'm going to pass on that one.

Vasant Prabhu

Yes, I think in terms of asset sales, which was the other question, Bill, we see the market for asset sales for our kind of assets, to be good outside the US. We just announced signing of purchase and sale agreement on some hotels in Italy.

In the US, you saw that we closed on some of the smaller hotels that we had to sell. There were no problems with the closings. They went through as projected in the fourth quarter.

In the US, clearly for large assets, over $200 million that are dependent on financing or are repositioning type assets, there is clearly a liquidity issue at this point in time. But then, for other kinds of assets that may be stabilized and are not as purely financing driven, there is still a market. So, it depends on the kind of hotel you are talking about.

Jason Koval

Next question, please.

Operator

Yes, sir. We'll go next to Jeff Donnelly with Wachovia.

Jeff Donnelly - Wachovia

Good morning, guys. A question about your forecast. Clearly, looks like you are expecting stronger top line growth in RevPAR in the first half and in the second half for obvious reasons. Thank you for sharing with us what you guys are seeing around January and February. That, I think, proves that you're confident.

But what indications are you seeing from events bookings, I guess, in your group pipeline for the back half of 2008 that either supports or refutes that guidance? Are you seeing anything in back half either in the pay service booking or in the rights that you're getting that might have given you that basis for caution?

Frits van Paasschen

Yes, Jeff, I'm going to handle over to Vasant in a minute for the specifics, but just a point of clarification on your question. We obviously have a much tighter insight into how the first half is coming in. And as we have said, our trends remain very strong. We're not so much forecasting down in the second half as we're saying.

There may be a range of outcomes in the second half of the year. And as Vasant put it, our crystal ball was as good as yours, as to how deep and how significant that turnout might me. But as I said, our trends so far are good, our outlook remains strong, but there are absolutely uncertainties to get into the back half of the year.

Vasant Prabhu

Yes, the only thing I might add to that is, as I said, in the US about North America, about 75% of our group business is on the books. So it's paced reasonably well sort of through the year. So, if there is a change of pace in the second half, it would be through some kind of spiking up of cancellations and our inability to replace them. We are not seeing any of that right now.

So, I would tell you that there is nothing in the sort of the group pace that would suggest a softening second half. In Europe, in fact, it's exactly the same thing. The pace looks really good all the way through the year. So again, I mean the point we made about no evidence right now where change in trends would apply for the entire year at this point.

Jason Koval

Next question, please.

Operator

Yes, sir. We'll go next to Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

Hi, guys. Good morning. Vasant, I know in the past, you said you are not foreign exchange forecaster, but can you just let us know how you are thinking about the strength of the dollar throughout the year? Are you assuming it gets stronger, weaker or stays the same as it is today, so we know if there is any risk there?

Vasant Prabhu

You are absolutely right. We are not foreign exchange forecasters. It would be much more lucrative trading Forex than doing what we do perhaps. Anyway, you are right. We are not going to sort of pretend we know where rates are going, but just so you know, to be conservative, our guidance assumes the dollar will strengthen.

So, there is no question that in our guidance, we have just chosen to assume a strengthening of the dollar through the year. And also, we have hedged a portion of our exposure to the Euro and the Canadian dollar, which are our two largest currencies. So, in that sense, to the extent that dollar does strengthen, the impact on us relative to our guidance won't be as great as it might seem.

Frits van Paasschen

Yes, so we are not in the forecasting business, but we do see the dollar as being at historic lows. And as Vansant said, to be conservative, we've anticipated that that may change and done some hedging to protect ourselves.

Celeste Brown - Morgan Stanley

Right, thank you.

Jason Koval

Next question, please.

Operator

We'll go next to Joe Greff with Bear Stearns.

Joe Greff - Bear Stearns

Good morning, everyone. Frits, one of the pillars that you talked about earlier in the call was team building and hiring right people. I was hoping you can give us an update on the search for replacing reps and how critical is it to get that position filled quickly?

Frits van Paasschen

Well, in terms of update, I'm not going to give anything real specific, but we are looking for someone who has significant deal experience, and someone who has many years in the hotel business. I believe when you put together a team, it's important to find people who balance out your own skills and profile and those of the rest of the team. And given my background, it's very important that we find someone who fits the role, who has instant creditability and knowledge in hotel industry.

So, and more to come on that, do I think it's critical? Absolutely. I think that the business of managing our pipeline, managing our asset base, looking at opportunities first to grow is front and center to the strategy of the company, and having someone to lead that is very important.

Jason Koval

Next question, please.

Operator

We'll next to Amanda Bryant from Merrill Lynch.

Amanda Bryant - Merrill Lynch

Great, good morning. Now given the lodging demand trends do lag the broader economy, is there any specific contingency plans have you implemented at your hotels in preparation for a potential slowdown?

Frits van Paasschen

Yes, our operating group has taken a good look at that. And on a property-by-property basis, we have looked at what we would do if there was a slowdown to control expenses.

The other thing you should bear in mind, Amanda, is throughout our system, we are looking at managing our expenses not just because of the uncertainty about 2008, but because we believe that even as we grow, we can manage how we spend and deliver more to the bottom line.

Jason Koval

Next question, please.

Operator

We'll go next to Jeff Randall with [Black Creek] Global.

Jeff Randall - Black Creek Global

Good morning, guys. A question on guidance. You are looking for '08 EBITDA margin growth of 0% to 7%. Yet, those hotels are expected to see RevPAR growth of 3% and 6%. I am just wondering if you can comment on the disparity, and the lack of flow-through at the property level. Thanks.

Vasant Prabhu

Well, I mean this is just a dynamic on how the fixed and variable costs work. As you know, the increase in fixed costs that comes from previously negotiated union contracts and so on. We anticipate increases in energy costs. So, there is a general increase in the fixed cost base.

So, what happens is as our RevPAR gets closer and closer, to work that increase in the fixed cost base, it tends to affect your flow through. So obviously your flow-through increases. The greater your RevPAR growth, the greater delta is between your RevPAR growth, and how much your fixed cost base is going. So, if you get closer to that 3% or 4%, you get flow-through challenge, so which is why if it's as low as 3%, we would expect margins to decline somewhat.

So that's what explains the 0% to 7% range on EBITDA growth. The other thing I will point out is as much as we were trying to give you sort of our best view of next year; we wanted you to also know about our EBITDA growth in North America. Our owned hotels can be as low as 0% to 7%, and we can still deliver within the ranges we provided you as a whole, because as Frits said, our reduced dependence on North America in general and North American owned hotels in particular.

Jason Koval

Next question, please.

Operator

We'll go next to Won Kim from JMP Securities.

Won Kim - JMP Securities

Hi, good morning. Can you comment a little bit about the vacation ownership side, and projects that you guys pushed out in 2008, 2009 in a little bit more detail and update on that?

Vasant Prabhu

Sure. The main issues we had highlighted last year were delays in Hawaii. And we have two projects in Hawaii, with one underway, which is the project on Kauai at Princeville, that's fine. It's proceeding exactly as expected, sales are going well. It is in fact, the main project we are selling in Hawaii right now.

The project in Maui, which we call the third phase at our Ka'anapali Ocean Resort, is the one that has been delayed. And we have not yet received approvals to proceed on that. So, that clearly continues to be delayed. There is another hearing I believe, in another month. So, we continue to press on that. It is still our view that we will get the approval, but it is behind schedule and probably delayed more than it was the last time we talked.

The project in Kauai has received the approvals to proceed. We are now working on the next steps, which are the normal permits we need to start construction. So, that's the situation in Hawaii. It continues to be a situation that we will have to monitor. It will have no significant impact on '08, because most of what these delays do is affect what we might expect in '09 and '10.

Jason Koval

Next question, please.

Operator

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

William Truelove -- UBS

Hi, good morning, guys. Frits, you commented in your opening remarks about the wonderful study and returns with the management franchise fees. But as Vasant just commented about the timeshare division, it's obviously very volatile. So, what's your sort of feeling on the timeshare business itself? Is it a good business? Is it a good business for Starwood business to be in? Can you give us a little color on that, because it's obfuscating your EPS growth?

Frits van Paasschen

Yes, good question, William. We've had extraordinary growth from our vacation ownership business over the last few years, and I think it's easy to forget in the light of some of the lumpiness that we have experienced in the last few quarters.

We are still strong believers in the vacation ownership business. As we look at our opportunities across geographies, we are going to focus on those that will give us the highest returns and the best opportunities to be as transparent and predictable in terms of the results of the business.

Given our sales team and the strong brands and the opportunity and synergies that this has with the hotel business, we are supporters of it, but I recognize also that when you're comparing it against maybe the best business models that there is, and that is a cashless growth business with predictable streams going well out into the future. So, it's a tough comparison, but an important part of the overall portfolio of our business.

Jason Koval

Next question please?

Operator

(Operator Instructions)

We'll go next to Steve Kent from Goldman Sachs.

Steve Kent - Goldman Sachs

Hi, good morning. If we could just talk a little bit more about timeshare. Vasant, last time you talked about timeshare securitization, you said the market was very, very difficult. I guess I'm wondering why you put it off to the fourth quarter and if you do see an opportunity, could you move that up more quickly to take advantage of the market? And just generally, timeshare loan portfolio, are you seeing any increase in defaults?

And then finally, average price on timeshare fell 9.5%, but I think that includes residential timeshare. So, I was wondering if you could give us just core timeshare, what kind of pricing you are seeing there?

Vasant Prabhu

I think you have three questions in there. Hopefully, I'll remember all three. The first was receivable sales. Yes, we have a sizable amount of receivables we will plan to sell next year, this year rather. And yes, we can actually break it down into two tranches if we want to. The amount that we were going to sell in Q4, we could, if you wanted to, move it up in the year. We are going to be somewhat opportunistic on that. We are guiding on the basis that it will all happen once in the fourth quarter. But to the extent that market conditions are attractive, we would move it up.

We are monitoring conditions everyday. I wouldn't say that it has improved much right now. So, it's unlikely that it will happen in the first quarter. We think we might do it in the second quarter. We'll probably give you some indication of that on our next call.

The second question was, are we seeing any material changes in defaults and things like that. Well, we are watching it closely where sort of we know that in this environment, it's something we should watch. There is nothing at this point that would suggest any dramatic change.

Many of our loan portfolios, especially the ones in Hawaii, are maturing, meaning they are more history now. And you see some normal sort of trends on that of increase, but nothing of a variety that would concern us at this point. But it is one we are watching closing.

And in terms of pricing, the only reason the price has reported a drop was a change in mix. We had a lot more Hawaii in our mix last year at this time. It is a higher price product. We also had St. Regis fractional at a higher level in our mix. So, it's really more mix driven. The underlying pricing continues to either stay at current levels or actually mostly go up. So, it's not like there is any price cutting going on in the timeshare business.

Jason Koval

Next question, please.

Operator

We have a follow-up question from Jeff Donnelly with Wachovia.

Jeff Donnelly - Wachovia

Thanks, guys. I am curious, are you concerned that a weakening credit environment could jeopardize your 2009-plus full service domestic development pipeline?

Frits van Paasschen

Yes, I think we talked a little bit about that earlier in response to another question. And liquidity issues in our view, and based on feedback that we've gotten from the owner and developer community, is that some of the projects at the margin have pulled out. But the core developers and owners who have a long standing commitment to this business into growing it are finding ways to finance projects and work with brands that they feel can give them solid return base.

So we're seeing good demand. Will it at the margin take some of the pipeline opportunities away? Yes, possibly, but we haven't seen it in such a significant way. That's something we've felt like we need to talk about.

Vasant Prabhu

And again, to emphasize, I mean half our pipeline is outside the US, where we continue to see huge amount of, essentially infrastructure, construction activity around the Middle East and Asia. And we think that's just the long-term secular trend.

Jason Koval

Next question, please.

Operator

We have a follow-up question from Celeste Brown with Morgan Stanley. Ms. Brown, your line is open.

Jason Koval

Let's see if she jumps back in the queue. Is there any another question, operator?

Operator

Yes. We will go next to Won Kim with JMP securities.

Won Kim - JMP securities

Hi. What kind of difference, if any, are you guys seeing in RevPAR performance between gateway, top markets versus maybe some of your non top 10 or top 20 markets?

Vasant Prabhu

I think at this stage there is no question that the major markets are holding up pretty well and our exposure to the major market is clearly greater. If you looked at our company operated RevPAR growth versus our own RevPAR growth, clearly, the secondary markets are probably a little lower level of RevPAR growth right now than the major markets.

So, I think you could say that secondary markets are perhaps not growing as fast as major markets. But it's not very different than what we had expected. So again, there is nothing that's marked enough to really point to.

Frits van Paasschen

Yes. I think you got to go back to the comment we made earlier, which is we aren't seeing an impact yet of the uncertainty about the US economic environment on our business. So I think the differences in growth are more related to the fact that you would expect some of the key markets to be more robust in general.

Jason Koval

Next question, please.

Operator

We'll go next to William Truelove with UBS.

William Truelove - UBS

My follow-up question is about the difference maybe in demand trends that you're very ultra-luxury hotels versus more your four-star Sheraton and Westin hotels. Have you seen any changes between that mix?

Vasant Prabhu

Nothing that we would highlight. By and large, I mean we look at our data to look at trend changes by segment, by customer type et cetera. There is nothing that we would say. I mean if we weren't reading the papers and we just looked at the data of where it was in the fourth quarter versus where it is right now or where it was last year versus where it is right now. You really don't see any changes in trend.

Jason Koval

Next question, please.

Operator

We'll go back to Jeff Donnelly from Wachovia

Jeff Donnelly - Wachovia

Okay. And Vasant, I guess this is a follow-up to that, how is then January doing versus what I would call your original budget when you guys were looking I think 6% to 8% worldwide RevPAR growth?

Vasant Prabhu

Well, as I said I mean in my comments, branded, owned hotels in North America are over 8% right now. So you would say they are sort of tracking as we had expected in October. So I'd say, it's probably tracking and our guidance is closer to where it was in October for the first quarter. So it's tracking more like what we had expected, two or three months ago at this point.

Jason Koval

Next question, please.

Operator

We will go back to Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

Hi, guys. Sorry, I was muted. Can you comment, Vasant on whether or not you try to forecast weakening demand for timeshares, your lowered guidance is just reflective over the trends you are seeing, your weaker trends that you saw on December that's continued into January?

Vasant Prabhu

Yes. We took our timeshare guidance down a little bit again, so that the general idea of that if there is, in fact, a slowdown in the US, perhaps we would see some weakening in the timeshare business. So it was again an element of bringing in a certain amount of, sort of, caution in to, and all our guidance. So nothing more than that as I indicated on the comments, the trends in January are pretty much holding up the way they were in the fourth quarter.

Jason Koval

Next question, please.

Operator

Yes. No additional questions at this time. I would like to turn the call back over to Mr. Jason Koval for any closing remarks.

Jason Koval

Perfect. Well, that wraps up our fourth quarter call today. We appreciate your time and interest in Starwood Hotels and Resorts, and please feel free to contact any of us to review any of this information or follow-up if you have any additional questions. Good bye.

Operator

Thank you. This concludes today's conference. We thank you everyone for your participation. You may now disconnect your lines.

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Source: Starwood Hotels & Resorts Worldwide Q4 2007 Earnings Call Transcript
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