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Marriott International Inc. (NASDAQ:MAR)

Q4 2007 Earnings Call

February 14, 2007 10:00 am ET

Executives

Arne Sorenson - EVP, CFO and President of Continental European Lodging

Carl Berquist - EVP Financial Information and Enterprise Risk Management

Laura Paugh - SVP - IR

Betsy Dahm - Senior Director of IR

Analyst

Shelay Lapan - Lehman Brothers

Joe Greff - Bear Stearns

Steve Kent - Goldman Sachs

William Truelove - UBS

Amanda Bryant - Merrill Lynch

Jeff Donnelly - Wachovia Bank

Bill Crow - Raymond James

Celeste Brown - Morgan Stanley

Will Marks - JMP Securities

Josh Attie - Citigroup

Smedes Rose - KBW

Operator

Good day and welcome to this Marriott International Fourth Quarter 2007 Earnings Call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to the Executive Vice President, Chief Financial Officer and President of Continental European Lodging, Mr. Arne Sorenson. Please go ahead, sir.

Arne Sorenson

Thank you, Bambi. Good morning everyone. Welcome to our year-end 2007 earnings conference call. Joining me today is Carl Berquist, Executive Vice President, Financial Information and Enterprise Risk Management; and Laura Paugh, Senior Vice President Investor Relations and a new member of our team. I would like to welcome Betsy Dahm, Senior Director of Investor Relations, replacing [Donna Blackman] who has moved on to some exciting new opportunities at Marriott.

Before I get into the discussion of our results, let me first remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under Federal Securities Laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in/or implied by our comments. Forward-looking statements in the press release that we issued earlier this morning along with our comments today are effective only today, February 14, 2008, and will not be updated as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks on our website at www.marriott.com/investor.

I know all of you are especially interested in our outlook for 2008. I will get to that in some detail a bit later. I'd like to start by observing that first our business model is proven and effective in both good and bad economic times, and our aggressive global growth reflects some of the possible impact from a slower US economy.

We also have a terrific growth story to tell, when it's getting better and better, and despite near-term economic volatility and uncertainty over the long haul, we are quite bullish about our prospects, and 2007 is the right place to start.

In 2007, we opened over 200 hotels and announced two new brand additions: a boutique brand designed by Ian Schrager, and a Nickelodeon family resort, bringing our brand portfolio to 19. This is the largest in the lodging industry. We have signed preliminary agreements on nine additional hotels after only six months of effort, and we will likely have over 20 signed by the end of this year. We expect to reach more than 100 hotels worldwide within 10 years.

We introduced new lobby designs in 2007 at Renaissance, Marriott and Courtyard hotels, and introduced a new look for guest rooms and lobbies in our Residence Inn, TownePlace Suites and SpringHill Suites brands. Those new designs are already rolling through our system.

We initiated a new sales and marketing approach in 2007, providing a level of service to group customers that our competitors will be hard-pressed to match, and more than ever we have our customer's loyalty. The Marriott rewards is nearly 30-million member strong and provides us with a rich database to better understand and serve our most loyal and profitable trends in guests. At almost a fifth of all bookings, Marriott.com provides the most cost-effective way to provide that personalized touch.

We continue to reinvent back-of-the-house and invest in technology and systems. We were one of the first to open a global shared services centre for finance operations and we are expanding human resources systems into a similar model to benefit our associates.

Overall, we believe we have the most efficient operating systems, as demonstrated by our outstanding hotel profit margins. While doing all of this, we remain committed to environmental issues that important to us and to our customers. We achieved another 4% reduction in energy usage in our US managed hotels in 2007, and we are again named an EPA ENERGY STAR partner.

Owner and franchise satisfaction was at record levels in 2007. Owners appreciate our delivery of high margins and continuous brand improvements. For the fourth straight year we returned value to shareholders through significantly expanded stock buybacks. Last year we repurchased 41 million shares of our stock for nearly $1.8 billion, including 12 million shares for $462 million in the fourth quarter.

Over the past four years, we have repurchased almost $6 billion of our stock. We deployed about $900 million in capital in 2007, which included capital expenditures, loan advances, net time share development, and equity and other investments. For the year, we recycled about $1.5 billion of investments, including dispositions of 13 properties, and interests in five joint venture hotels as well as note collections in sales and timeshare note sales.

We were very efficient users of capital during 2007, posting record returns. Our pre-tax return on invested capital topped 25% in 2007, nearly double our performance just four years ago. Our fourth quarter financial highlights include earnings per share from continuing operations totaling $0.62, up 19% from 2006, and right on our third quarter a guidance of $0.61 to $0.63 per share.

There was some give and take RevPAR, margins were strong and on track, and lodging fees came in about $0.03 ahead of expectations. About $0.02 of the fee performance related to receipt of business interruption insurance proceeds. Our time share business outperformed expectations by about $0.02. General administrative and other expenses were about $0.02, higher than expected due to legal costs. We lost about $0.03 on a non-cash loan reserve on a hotel and a leveraged aircraft lease.

Well below the line, we bid farewell to our synthetic fuel business in the fourth quarter of 2007, moving the business to discontinued operations. With oil prices at very high levels, our full-year results reflect a substantial phase-out of tax credits. All in all, over the six years we operated synthetic fuel, we booked over $400 million in higher net income as a result of the program.

Our International Company operated hotels posted RevPAR growth in the quarter of 8.5% on a constant dollar basis, or 15.5% including foreign exchange impact. Our International house profit margins increased to 120 basis points. As you can tell, our international business continues to boom, led by our Caribbean and Latin American, Continental European and Middle Eastern regions.

Our comparable hotels in Central and South America registered RevPAR gains of 25% and 17% respectively on a constant dollar basis, during the fourth quarter. The Caribbean resorts delivered a 9% RevPAR increase, and we have a strong pipeline of new projects in this region.

Economic strength in Europe grows strong RevPAR gains in the fourth quarter. In Eastern Europe, a strong Russian economy provided impetus to our six properties in Moscow and 8 Hotels overall in the country. Western Europe is also doing well, with Brussels displaying strength of center of the Euro zone, Paris reporting particularly good transient business, and the German economy was stronger than expected.

In the UK, the London area continues to do well and is also attracting travelers from plenty of non-US sources. The Middle East is still driving strong demand in the region, particularly in Cairo, Dubai and the Red Sea resorts. We see booming economies in Central and Southeast Asia and markets like India, Vietnam, Singapore, Thailand and Indonesia are all doing well.

In China, our spectacular resort in Sanya is doing great with RevPAR up by more than a third. Our 3000 hotel opened in Beijing not long ago and we expect a good performance there as the Olympics approach.

Our preeminent luxury brand, Ritz-Carlton also opposed to the exceptionally strong RevPAR outside North America in the quarter at 9.2% on a constant dollar basis, were 14.2% including the impact of foreign exchange. The brands resorts are doing somewhat better than City Center Hotels, which is attributable to the continued strong and more resilient leisure demand in the luxury segment. Globally, we now have 70 Ritz-Carlton hotels opened, and 31 are under development worldwide.

Across all our brands in North America, including Ritz-Carlton, the company-operated comparable RevPAR increased 6.2% in the fourth quarter. Across our system, our hotels increased occupancy well, continuing to drive average daily rates. Both transient and group business made solid RevPAR gains.

Across the US, our business story was primarily a coastal one; solid to strong on coast and softer in between. New York, Boston, LA, San Francisco and Seattle led during the fourth quarter, while Atlanta and Chicago were softer. Detroit underperformed by the US only in that market, where we saw an obviously weak economy.

Pockets of new supply and renovations also impacted some markets. In Orlando, which was quite soft in the fourth quarter, the completion of a new 100,000 square-foot ballroom at our World Center Hotel made all the difference. With the new ballroom Orlando expects a better first quarter.

Our North American in-house profit margins increased 140 basis points during the quarter, led by Courtyard which jumped 250 basis points to 52%, matching the brands previous record in 2000. Clearly, the Courtyard brand and the efficiency improvements made in recent years continue to pay off both for us and our owners.

Our thanks go out to our operating teams for these great results. Our story for the full year 2007 was strong as well. Our EPS from continuing operations, excluding the impact of our ESOP tax settlement earlier this year, was $1.89, which is 15% higher than the prior year.

Total adjusted EBITDA rose 11% to $1.6 billion and management and franchise fees in 2007 were $1.4 billion, 17% higher than 2006. In 2007, worldwide system wide comparable RevPAR, using constant dollars increased 6.5%, and 7.6% with the impact of foreign exchange. North American company operated comparable RevPAR rose 6.2% and house profit margins increased 160 basis points to nearly record levels.

Worldwide, our incentive fees reached an all-time record of $369 million during the year, about a third higher than the previous year. 67% of managed hotels generated incentives fees during 2007, compared to 62% in 2006, led by our two largest brands Marriott Hotels and Resorts and Courtyard.

Our international hotels represented 36% of incentive fees in 2007, compared to only 15% in 2000. We opened over 31,000 rooms in 2007, 25% opened outside the US. The pipeline of hotels approved under construction or waiting conversion total more than 125,000 rooms at year-end. We expect to open another roughly 30,000 rooms in 2008.

To date, the credit crunch has had little impact on our pipeline of the 800 hotels and 125,000 rooms in our pipeline. Roughly 60% of the rooms are limited-service US hotels, where financing typically comes from a local lender. Another 20% of the rooms are in Asian or Middle Eastern markets, where obtaining debt financing typically is not an issue. So, only 20% of the pipeline rooms are coming from the more than 100 full-service hotels in the US, Europe or Latin America.

Obviously credit has been tight in these markets in recent months. Approximately 80% of these hotels, however, are already under construction and financed, so we don't see a significant financing risk in our pipeline, at least for 2008 and early 2009 openings. Over time we expect that debt markets will constrain US full-service industry supply-growth for later 2009 and beyond. This could impact our openings a few years from now, but there may be some offset in upside from conversions of our competitors' hotels.

I will talk about timeshare for a few minutes. We completed our timeshare mortgage note sale in the fourth quarter, for a $36 million gain. While credit spreads widened, interest rates declined and so our gain was only modestly below expectations. The market has been volatile, but was very receptive to our paper. Borrower credit scores continue to be good and investor experience with the paper has been excellent.

Delinquency rates on our paper continue to run at about 6% year-over-year. If you recall, segment profit includes timeshare sales and services revenue net of direct expenses; as well as base fees, equity earnings, minority interests and general and administrative expenses associated with the timeshare business. Segment profit rose 16% in the fourth quarter on higher earnings, from our joint venture project in capital of Hawaii and savings from lower G&A.

Our profit improvement in the 2007 quarter also reflected a move to more effective and less costly marketing channels, and the closing of a couple of less productive sales offices.

Fourth quarter contract sales were lower than last year and softer than expected. We booked a large amount of residential and fractional sales in the fourth quarter of 2006, when a new project received final government approval, so comps were tough and we continue to see some softness in demand at our western US resorts.

So, where do we go from here? As bullish as we are with the medium and long-term, we of course read the same new sources as you do, and we are looking at the future with some caution in mind. There are some trends that are quite positive, but because lodging demand tends to lag economic activity, we simply can't help you much with the most fundamental questions you have about where the US economy is going. But we can talk about some of the data points in our business, which are getting our attention.

Not surprisingly, lodging demand and with it RevPAR growth are stronger outside the US than in the US. Our International results in January for example, with RevPAR up nearly 10% in constant dollars, and with all regions other than the United Kingdom reporting occupancy and rate growth.

Also, not surprisingly, lodging demand and with it RevPAR growth are strong at the higher-end. Our January results for Ritz-Carlton were up about 9% in the US and 18% in constant dollars outside the US, with occupancy and rate growth virtually across the board.

Focusing on US markets, the data points that gives us the greatest insight into future performance, group bookings is very comforting. As of the end of our first operating period which ended January 25th, group revenue on the books for our 117 comparable Marriott branded hotels is up 9.5%, with good growth in both room nights and rate.

We estimate that roughly 70% of our expected group business for full year 2008 is already on the books. Our cancellation rates are a bit lower, and not higher than last year. As strong as these bookings are, our group business in the first quarter will post more modest growth rates than we expect to achieve in later quarters.

With respect to transient business, our data doesn't tell us much about where we are going. Most transient bookings come in the week before travel, but when we look at December and January results, the hotels, which are most dependent on transient business, suburban and airport Marriott's and our limited service brands show the weakest performance.

Given the normally light travel demand in December and January, we think it is equally inadvisable to overreact to this data, as it is to ignore it. But we suspect it shows some softening in transient, and particularly in leisure demand. We have done our best to factor this data into our guidance, and with it, we are forecasting global and North American RevPAR growth of 3% to 5% with modest increases in property and level margins in 2008.

Our guidance doesn't reflect the impact of an extra 53rd week in our fiscal 2008, which will skew RevPAR somewhat in the fourth quarter, but it has virtually no impact on the bottom line. For the first quarter, we expect worldwide RevPAR to increase 3% to 5% and North American company operated RevPAR to increase between 2% and 4%, reflecting some impact from Easter and the early start of our fiscal year.

It is worth noting that our first quarter RevPAR includes three accounting periods for most of our domestic operations, but includes only January and February for Ritz-Carlton and our international operation. So the strong RevPAR for Ritz-Carlton and in our International hotels, we will have more impact on RevPAR in the second quarter than in the first.

Fee revenue should increase 8% to 10% in 2008, after adjusting the 2007 fees for $19 million of business interruption proceeds; $17 million of incentive fees for prior period results; and also adjusted in 2008 for $10 million, lower re-licensing fees to the fewer anticipated transactions in 2008.

In addition, unit growth of 4% to 5% appears nearly certain in 2008, as these hotels are already under construction or awaiting conversion to our brands. Based on anticipated strong unit growth of over 30,000 rooms and projected RevPAR, we believe 2008 base franchise and incentive fee revenue will total $1.49 to $1.52 billion. First quarter fees should total $310 to $315 million. Even with this modest RevPAR growth, our 2008 incentive fees should set new records.

We expect owned, leased, corporate housing and other income will deliver $170 to $180 million in 2008 and $35 to $40 million in the first quarter. We expect gains and other income to be approximately $30 million in 2008, compared to $97 million in 2007. Net interest should increase to about $155 million in 2008, as our debt levels remain higher than the prior year, driven by additional share repurchases. Our guidance assumes we will repurchase roughly another $1 billion worth of our shares in 2008.

For the timeshare business, we will likely have a bit of a mixed bag over the course of the year. New resorts at Singer Island and Marco Island, each in Florida, are likely to increase contract sales in the first quarter. However, those increases will be partially offset by the impact of projects reaching sell-out. But the business remains strong. Reported results are likely to be down meaningfully in the first and second quarters, due to startup costs at these new resorts and a tough comparison to reportable projects in the prior year.

For the full year 2008, contract sales are likely to increase 15% to 20%, with contribution from both new resorts and easier comparables to 2007. We expect to increase marketing resources at some projects, focus on some sales channels that make economic sense, and continue to pare back efforts that are less productive.

At a reported basis in 2008, timeshare sales and services revenue, net of direct expenses could be down modestly from 2007. This forecast reflects both the realities of percentage completion accounting and the startup costs associated with our four new projects.

Results from our timeshare business are spread throughout the P&L. Some of the profits from timeshares appear in based fees, some in the timeshare sales and services line, some on the equity and earnings line, and some on the minority interest line. In fact most of the $55 million forecast for equity and earnings, and the $10 million in minority interest in 2008, is attributable to the timeshare business.

Adding all these pieces together, timeshare segment earnings are expected to total $300 to $315 million in 2008, roughly flat in 2007. We expect Marriott's G&A to increase approximately 6% to 7% in 2008, excluding the impact of the ESOP in 2007, as we continue to invest in product improvement, new development, our new brands, and other initiatives.

With these assumptions, we expect 2008 EPS will total $2 to $2.10 per share, and first quarter EPS to total $0.32 to $0.36 per share. Based on what we are seeing in our business, we are optimistic about 2008, but we are prepared if the environment turns less friendly. We are highly confident in our business model, which delivers consistency growth. Our brands, which represent the most profitable segments in lodging, are being renewed faster than ever, and our associates inspire us every day.

As we think about risk and volatility, it's worth noting that the vast majority of Marriott's earnings are fee-based and low risk. As a result, in 2008 we estimate that one point of RevPAR moves pre-tax profits by approximately $25 million. We have been in the timeshare business since 1984. It has tremendous potential and offers significant opportunities for future growth.

The business has synergies. With our lodging customer base, it enhances overall loyalty to Marriott brands and has been resilient across economic cycles with an annual compounded growth rate of 18% since 1997.

Still, in 2007 our timeshare segment comprised just 19% of our operating results and development profits from the timeshare business accounted for less than 60% of that segment.

Just a quick note on timeshare, we are holding a Security Analysts Day on February 26 in Orlando to drill down more deeply into the timeshare business. We hope to see you there.

In the lodging business, our management contracts are long-term and very tight. Our management talent is deep and experienced and we are prepared for whatever economic conditions are on the horizon. I think the true value of experience is demonstrated in weaker economic climates, where customers may not be so easy to find, and costs being not so easy to control.

As they say "Smooth seas do not make skillful sailors." While we can predict the future, whatever it brings us, we are well-positioned. In the meantime, thanks for staying on the road.

Bambi, we will take the questions now.

Question-and-Answer Session

Operator

Thank you, Mr. Sorenson. (Operator Instructions)

We will take our first question from Felicia Hendrix from Lehman Brothers. Please go ahead ma'am.

Shelay Lapan - Lehman Brothers

Yeah. Good morning. This is actually [Shelay Lapan] for Felicia.

Arne Sorenson

Good morning.

Shelay Lapan - Lehman Brothers

Good morning. Arne, you mentioned earlier that you saw continued softness in Western US timeshare contract sales in the first quarter. Just wondering what's behind that and if you seen any improvement in the first quarter.

Arne Sorenson

Not yet, really. Obviously we really had January results in our timeshare business. This is Southern California by and large not including Hawaii, but on the comment I think both in Southern California serve suburban-ish markets like Orange County and Palm Springs.

We are seeing maybe a little more softness in the half of the last few quarters than we have seen in the Western Company, could be related to some extent to tougher housing market in California. We know that at least in one of the projects in Tahoe or Northern California from the impact of fires, but there is probably an economic piece of this more than anything else.

Shelay Lapan - Lehman Brothers

Okay. Thanks, and also regarding your RevPAR guidance with the first quarter guidance seeing lower than on the full year for North America. Are you implying an improvement throughout the year and so what is that based on is that based on external forecast?

Arne Sorenson

Yeah, I think a couple of things are worth bearing in mind here. In the prepared remarks you heard us talking about group bookings and our group bookings on the books for full year up over 9% in revenue with good strong room night growth and rate growth.

But the weakest quarter in terms of group bookings in the first quarter, so that will have some impact in the first quarter. The second thing is our reported first quarter results will be December 29th will include three days of last year through March 21st, I think and that calendar will probably tap us a little bit.

Shelay Lapan - Lehman Brothers

Okay. Thanks.

Arne Sorenson

You bet.

Operator

And we'll take our next question from Joe Greff from Bear Stearns. Please go ahead, sir.

Joe Greff - Bear Stearns

Good morning, everyone.

Arne Sorenson

Hi, Joe

Joe Greff - Bear Stearns

Arne, you raised your '08 investment spending from a quarter ago, can you just helps us understand the increase there?

Arne Sorenson

Yeah. I don't know that anything particularly stands out. We have gone through a full budgeting process, since that earning guidance we would give you for 2008 in October. There is nothing significant there in terms of movement although, it would reflect whatever deals surfaced in the fourth quarter, that we want in to budget sometimes those deals are bound, often they're not, but there're opportunities that top up and we rolled in to our budget. Philosophically it's very much the same as what we anticipated in the quarter ago.

Joe Greff - Bear Stearns

Great and then with respect to the amount of capital devoted to buybacks this year, it's a little bit less than you targeted a quarter ago.

Arne Sorenson

Yeah.

Joe Greff - Bear Stearns

Can you help us understand that a little bit as well?

Arne Sorenson

Yeah. We, again last year's actual numbers were just shy $1.8 billion and you heard this in the prepared remarks, it talk about roughly $1 billion for this year. Those two numbers are not unrelated. You recall when we met in Paris in the fall of 2006; we talked about sort of a three year plan of about $1.5 billion a year over three years.

To some extent the lowering number in 2008 is driven by the fact that we accelerated purchases in 2007 over what we would have anticipated before, we find our selves at the beginning of 2008 much more levered appropriately so, than we were at the beginning of 2007. So, we've brought that up by net debt up by about $1 billion, essentially year-over-year.

And that gives us a little less capacity to use incremental borrowings only to feed our share repurchase program and as a consequence it's going to depend on operating cash flow and asset sales and the like and that just leaves us a little bit less in terms of capacity that's here than we had last year.

Joe Greff - Bear Stearns

And speaking of three year forecast, in October last year you gave us that '07 to 2010 sensitivity analysis. I know the world seems like it changed a great deal since then are those still reasonable relative sensitivity analysis that you will look at it, giving the investment community some relevance?

Arne Sorenson

Yeah, I think the biggest pieces in that three year model continue to be fair kinds of assumptions. Obviously the numbers we've got for 2008 guidance now are lower than what we talked about a quarter ago, by and large that's driven by weaker economic assumptions, which is caused that RevPAR range to come down by two full basis points high-end and low-end and its driven by the timeshare story, which is less robust for 2008, than we anticipated a quarter ago.

The way the model works, I don't know that we would necessarily say that if we lose two points of RevPAR in 2008 versus what we thought a quarter ago that will necessarily get that back in 2009 and 2010. I think that isn't necessarily a fair assumption, but the growth rate that come from RevPAR and unit growth in the long-term story about timeshare in that business, we remain extremely confident.

One of the measures that I think it's interesting we talked in our prepared remarks about the sort of one-time fees that benefited us in 2007 and we talked about the significant decline in gains that we anticipate in 2008 compared to what we achieved in 2007. If you adjust only for those two things and of course for the ESOP in 2007 the implied EPS growth rate for us 2008 versus 2007 is high-teens below 20% year-over-year, which relatively modest RevPAR growth and pretty modest margin growth. We think it's a good confirmation that the models working and we would expect to see that kind of formula continuing the work in 2009 and 2010.

Joe Greff - Bear Stearns

Excellent, thank you.

Arne Sorenson

You bet.

Operator

And our next question comes from Steve Kent from Goldman Sachs.

Steve Kent - Goldman Sachs

Hi, good morning. Arne and Laura.

Arne Sorenson

Hi, Steve.

Steve Kent - Goldman Sachs

Could you just talk a little bit more about the operating leverage of the business at this kind of RevPAR growth rates, where does it start to become more difficult to achieve those incentive fees and where profit margins start to get compressed? And what are you doing now and anticipation maybe of that occurring from an operating perspective.

I'm sorry to go back to Joe's question on investment spending, but it was that key money for new development was it JVs, was it mezzanine financing and because it was a few $100 million pick ups, so I just wondering, where some of that came from.

Arne Sorenson

Yeah. Let's take that one first. I don't have it by individual buckets. There is not a significant increase in key money I'm sure verse compared to what we thought about a quarter ago, those dollars can not to be very significant. There might be if you think there probably is some timeshare spending -- have to go back and check on our Las Vegas development.

I think we had that in our model a quarter ago, but we have to check the precise comparison between those two. But again even it's not a couple $100 million bugs. I think this is much more a functions simply of the updated budgeting process and isn't of anything else.

Steve Kent - Goldman Sachs

Okay.

Arne Sorenson

In terms of operating leverage, it's a couple of things I guess we'd say one, we will almost no matter what the environment be pushing in everyway we possibly can to improve margins. And so we are not giving up even if we are at the low end of our RevPAR range on trying to achieve some margin improvement.

Having said that, I think the closure we get to that low end, if were down a 3% it's going to take some real success in order to the deliver percentage margin improvement. We think probably 3 to 3.5 maybe 3.5 as a single point RevPAR growth is in normal times required to keep margins in percentage terms flat.

Steve Kent - Goldman Sachs

Here you were describing hotel operating profit margins.

Arne Sorenson

Hotel operating profit margins not Marriott margins.

Steve Kent - Goldman Sachs

Right.

Arne Sorenson

And if the percentages hook our margins stay flat that means the profitability of our hotel is growing at the same pace as revenue in dollar terms and that will drive incentive fee growth for us. Even with flat percentage margins at the same rate as RevPAR growth. That's on a same store basis. And then obviously we will get the benefit of new units opening into our system and probably more robust operating dynamics outside the United States, all of which are driving incentive fees as a consequence have higher growth rates than would be implied by that US operating unit measure.

We are, there is enough apprehension in this market that we have contingency plans that have been prepared, essentially those contingency plans -- again our unit level plans with the phased to look at relatively greater severity, the worse the operating environment gets. The simplest things have already been implemented, they are all back-of-the-house, they are not likely to impact customer experience at all. And we are hopeful that we don't have to go to the more severe contingency plans, but we will watch the way the year develops.

Steve Kent - Goldman Sachs

Okay, Thanks.

Arne Sorenson

You bet.

Operator

And we will take our next question from William Truelove from UBS. Please go ahead, sir.

William Truelove - UBS

Hi, Guys,

Arne Sorenson

Hey, Will.

William Truelove - UBS

Talking about the timeshare again, when you talk about the contract sales going up in 2008, but the quarter on this is going down, is that that mean we get back to where any kind of deferred revenues are now going to be roughly zero in 2008 or will does this mean that we are going to see a substantial increase and say the deferred revenues because of percentage completion and would you then book those kind of revenues in '09. So, I'm trying to get a factor, what kind of growth best you can on an annual basis from '08 to '09 given the way the accounting math works on that business?

Carl Berquist

Yeah, and just as, so let me, it is a good question, Will. A little bit technical, so let me try and translate deferred revenues in to normal every day speak.

Really what you're talking about is contract sales, which have not yet been recognized through the P&L and how those compare at yearend 2007 with what we anticipate at yearend 2008. I don't have a precise formula for you, but our expectation would be, we would have more of those contract sales that have not yet been recognized through the P&L at the end of 2008, then we would at the end of 2007 entering this year. That answered your question?

William Truelove - UBS

Partially, I'd guess I'd say how much more would be probably.

Carl Berquist

We'll have to get to that number. I don't know at the top of my head. But we've got -- as we talk about we have got about 15% to 20% anticipated full year contract sales growth and roughly flat segment profit. So, we are probably talking $2, $3, $400 million I suppose of incremental unrecognized contract sales, but we have to get a number that (inaudible)

Arne Sorenson

We'll do our timeshare day coming up on February 26 and I think we'll be talking about a little bit.

William Truelove - UBS

But then is probably safe to say though -- if you have a long-term trend that because of the deferred revenues building up little bit in '08 maybe '09 might be a little bit faster than the historical trends just in '08 slower than the trend line on a reportable basis probably.

Arne Sorenson

I'd hope that correct, yeah.

William Truelove - UBS

Okay. Thank you.

Arne Sorenson

You bet.

Operator

And we’ll now take our next question from Amanda Bryant from Merrill Lynch. Please go ahead ma'am.

Amanda Bryant - Merrill Lynch

Great thanks, good morning.

Arne Sorenson

Good morning.

Amanda Bryant - Merrill Lynch

With respect to you now revised '08 RevPAR guidance a 3% to 5%, now is it safe for us to assume that your full service brands are at the higher ends of that range and the limited service would come in towards the lower end. And then additionally is it also safe for us to assume that you are baking in occupancy decline across the North American system in that guidance. Thanks.

Arne Sorenson

Yeah. Both good questions and I think the answer to both is, yes, although not dramatically. I think the luxury brands probably would be at the high-end maybe even above that. I think Full-Service, The Marriott and Renaissance will be within that range, but better than the Limited-Service brands, again this all somewhat guess work, but it's sort of what we would anticipate.

And I think generally rate will be nearly a 100% maybe sometimes more of the RevPAR contribution that's going to vary a little bit by brand. And so what we are -- I think on average we'd say we're probably losing a little bit of occupancy in the year, we'll watch and see the way of developing.

Amanda Bryant - Merrill Lynch

And then you -- can I imply then your expecting occupancy increases on outside of North America, generally speaking?

Arne Sorenson

I'd think so, yes.

Amanda Bryant - Merrill Lynch

Okay, great. Thank you

Arne Sorenson

Yeah, you bet.

Operator

And our next question comes from Jeff Donnelly from Wachovia Bank. Please go ahead, sir.

Jeff Donnelly - Wachovia Bank

Good morning, Arne.

Arne Sorenson

Hey, Jeff.

Jeff Donnelly - Wachovia Bank

The question actually on margins, I guess you look forward to 2008, which expenses in particular do you think are going to call it, present the greatest risk of being a spoiler if you will and the assumptions which you're putting into your guidance, either to the down side or to the up side?

Arne Sorenson

Well, compensation clearly will be a significant piece it's about a third of the revenue in hotels ultimately goes to compensation and those rates cost are coming up above 3% certainly. They're going to vary a little bit by market in some markets, where unions have been more active and where our competitors often have agreed to wage increases as a way of avoiding of those battles. I suspect we will see a wage rates pushed a bit higher than that average.

Heat, light and power who knows, well we have to continue to watch that. Oil prices are obviously staying very, very high and that's likely to continue to move through, but I think those would be the two things we'd watch most carefully.

Jeff Donnelly - Wachovia Bank

And then a question about your pipeline, what feedback are you hearing from developers on the credit markets and their ability to get, I guess your pipeline built an opened, now you're seeing any of your competitors changing their practices to get more aggressive of fees or key money to help them out?

Arne Sorenson

Not really on the latter. I think we have seen our competitors accept some termability provisions in their management contracts and probably lower fees then we certainly would do, but that's been constant over the last couple of years. And I don't know of any particular change in that in the last few months in response to the credit crises.

We are hearing a sort of mix bag and you can hear the way it influenced our prepared remarks, but from most of our partners, who are developing limited service hotels we are hearing continued bullishness that they may anticipate a little bit some relief in construction costs, which is a good thing.

They are still able to find debt from their relationship banks and that are often local and they believe it's a great time to just keep going. Many of them have sold meaningful portfolio of hotels when they've got good resources to essentially reboot and rebuild their portfolio.

So that has been a pretty comforting story. The more you get out of US based full-service new build development, to the extent those deals have not been financed were more likely to have started some conversations with those owners about, okay what are the other financing alternative that out there. Are they prepared to put in more equity in this deals as leverage available leverage levels have come down.

And we've said there is going to be some risk in that portfolio over the next few quarters or longer depending what happens to this debt markets. Some of the debt needs are been met and we gratified to hear by what people talked about as balance sheet lenders. So life companies and some commercial banks would be included in that and it's great to see some of them step up and hopefully there will be enough of that stepping up, so it won't be too big a lurch. But, certainly the risk we will lose deals been added to the pipeline that we would not have anticipated six months ago.

Jeff Donnelly - Wachovia Bank

And how does this extend to relicensing fees, I think you had mentioned back in Q3. You're expecting a dropped in that transaction -- transaction volumes might flow because of credit market issues. Are you seeing them?

Arne Sorenson

Well, I'm not sure if we really seen it yet, but I think it's still the right caution. We have, on a franchise property we receive a relicensing fee, when a hotels trade from one owner to another. And that fee stream has put along in the high single-digits maybe up to $10 million a year, something like that year-after-year, year for a long time.

Is not really gotten much focus from anybody because it's been a fairly low number, obviously on a single quarter it might only be a couple of million dollars. In 2006, that started to step up, in 2007 it was really, it moves significantly more like the $20 million range and it did that because 100 of our limited services hotels were trading hands, sometimes in big portfolio deals, but many of you are familiar with.

And we expect that to step back down in 2008, what fuels a lot of those portfolio deals was availability of high levels of cheap debt and that's not available in the market today, as consequence we think it's pretty obvious, we see a fewer of those transaction. So, we'd guess those relicensing fees are going to step back down more towards the historical levels.

Jeff Donnelly - Wachovia Bank

I could just ask one last question. Are you seeing trends emerge I guess I will call it in luxury group booking for 2008, groups meetings like Ritz-Carlton?

Arne Sorenson

Not much, this is some anecdote obviously coming out of the finance world. I think finance is a more significant group customer and the higher up you grow in the chain scale and obviously there are financial institutions that are suffering a bit and focused on expenses. So we hear a bit about some caution from some of those customers, but we are not seeing in our data an increase in cancellations yet. So, obviously we will keep watch them.

Jeff Donnelly - Wachovia Bank

Thank you.

Operator

And we'll take our next question from Bill Crow from Raymond James. Please go ahead sir.

Bill Crow - Raymond James

Good morning, guys.

Arne Sorenson

Hey Bill.

Carl Berquist

Hey Bill.

Bill Crow - Raymond James

Most of the questions have been answered, but let me follow-up on Jeff's question if you look just at the US Full Service Hotels and the changes the development pipeline. Is that a positive or negative in last few questions they're coming out or more going in?

Arne Sorenson

I think through the end of the year we still have more going in than coming out.

Bill Crow - Raymond James

Okay.

Arne Sorenson

I should just -- we should just pause and stop there we -- I'm not sure we know exactly how everybody counts their pipelines. And it's I think our approach generally though is to count real definitive transactions. So, a hotel which entered into our pipeline in the fourth quarter -- if you are talking about a new build hotel probably had been in discussions between our developers who do these deals for us and our partner, for a number of quarters prior to the fourth quarter.

And so in many respects those deals while this financing may not have been contracted for prior to the fourth quarter, it was probably arranged. It was probably at least a non-binding commitment from a financial institution. So we are gratified that we were still adding our hotels than we were declining. I am not sure any of us should take that as a sign that the debt markets -- that this industry is acting in a way that's immune to what's going on in the debt markets.

Bill Crow - Raymond James

Well, fair enough. Speaking on the debt markets in the fourth quarter, when did you complete the timeshare notes sale and have you seen or heard anecdotally about changes to the environment since then.

Arne Sorenson

Well, I think we can say roughly first of November. I don't remember the precise date and I know the week after we completed we've got some chatter back from the market that it was good and we were when we did. And things got worse after that, of course we heard from some of our competitors out there that they did not give fourth quarter deals off and which may have been driven by that market.

What we're hearing from the financial institutions therein and in part is because of the decade plus that we've been selling this paper and we've got a great track record with it. That we can still get a deal off but the question would be about spreads. I think at the moment what we're hearing is the spreads would be a bit higher than they were even in November and in November they were a lot higher than they were in second quarter deal that we did in 2007.

The guidance that we have got, what we, sort of and kind of implied in the guidance we’ve have given you this morning. I think if we did the deal today based on where the spreads are, maybe we have got $2 million or $3 million or $4 million of risk in our second quarter gain number from the timeshare note sale. But not a lot more of amount. So it’s not massive.

Bill Crow - Raymond James

That's helpful. It's helpful we will finally be nitpicking the G&A forecast for the year went up by $30 million or $35 million relative to prior guidance. Anything in particular that's driving that?

Arne Sorenson

We wouldn't accept $30 million as being nitpickings. So don't be so bashful about that. We see a bit of an opportunity because we have got the two new brands we have talked about and we have staffed up to do with those brands. We have staffed up particularly additions faster then we anticipated because of the overwhelming response from our partners.

And we have also stepped up our efforts around some of the lobby and rooms renovation activity for not just the new brands but for the brands we had in our portfolio for a long time. And to some extent we see a great opportunity, given where our competitors are to step up our service levels to our owners franchisees. We haven't seen a business model which is about receiving high fees in exchange for providing high value.

Our competitors for mix of reasons probably will put a lot of pressure on the value that they provide their owner’s franchisees. And we want to make sure that we effect accelerate or leave in this space and believe that spending some more money around these kinds of initiatives and delivering services is exactly the right thing for us to do.

Bill Crow - Raymond James

Okay. Thank you.

Arne Sorenson

You bet.

Operator

And our next question will come from Celeste Brown from Morgan Stanley. Please go ahead madam.

Celeste Brown - Morgan Stanley

Hi! Good Morning.

Arne Sorenson

Hey Celeste

Celeste Brown - Morgan Stanley

Couple of questions for you. First on the timeshare demanding [faster] than the western part of the US, is there more of a regional buyer there for the housing market and sort of Southern California would have a bigger impact or is it sort of same kind of distribution nationally as you would in some of your other timeshare resorts?

Arne Sorenson

Well, I think it probably is a bit more regional. I suspect that is piece of it.

Celeste Brown - Morgan Stanley

And then, second, we heard that some of the bigger, some of the bigger hotel developments out there being held up by tax incentive financing not coming through because of the, sort of dire straits from some of these local jurisdictions or, are you seeing any of that in your pipeline and if so is that included in the 80% you have talked about being fully financed?

Arne Sorenson

We have not seen that in any of our projects, now we don’t have much that includes just financing. I think some of our competitors may have a couple more of those convention centers, excuse me, conventional centre deals. That is certainly something to watch.

Celeste Brown - Morgan Stanley

Okay, and then finally, I know you guys don’t forecast, you are not currency forecasters, but have you adjusted for the expected dollar strengthening at the back-half of the year, have you done any hedging, that’s reflected in your guidance?

Arne Sorenson

We have done some hedging. Now typically our approach would be a bit opportunistic but would be to lock in the bulk of our euro and pound denominated cash flow at about the beginning of the year for the next year. I think as we got to the end of the year and saw the strength in the euro and the pound, most of our cash flows in those two currencies have been locked in at the rates that were then in the market.

Celeste Brown - Morgan Stanley

And have you done anything with the Canadian dollar?

Arne Sorenson

Have we? I guess we have. Yep, same thing.

Celeste Brown - Morgan Stanley

Okay thank you.

Arne Sorenson

I know I think generally other currencies we have not. Partly they become expensive to hedge because they're less liquid and partly it's because our cash flows coming out of those markets are also less significant.

Celeste Brown - Morgan Stanley

Thank you very much.

Arne Sorenson

You bet.

Operator

And our next question comes from Will Marks from JMP Securities. Please go ahead sir.

Will Marks - JMP Securities

Thank you. Hello Arne, hello Laura.

Arne Sorenson

Hi.

Will Marks - JMP Securities

I have some questions. My questions is on the portion in your CapEx that you dedicate to purchasing property to drive [major] fees and then disposing of that. Just putting the context of the current economy how should we look at that in 2008?

Arne Sorenson

I don't think there is much built in to the capital forecast that we have given in the guidance which is about opportunistically acquiring existing hotels. It'll be great if we found some opportunities. So in a sense I not sure you all have to hear this, but in a sense we would love to find that attractive pricing existing assets that we could step in and acquire.

Convert to one of our brands and by attractive prices what we mean there is there are prices that which can turn around and resell that asset subject to multi decade management contract and extract all of our capital. We will continue to kick tires and see what's available.

Obviously some buyers who have been active in this industry we would expect to be much less active in these kinds of debt markets which short-term are going to be less relevant to our decision about whether we step in equation with this asset. But we obviously have to factor that in terms of anticipating what our actions would be. So we'll keep looking we'll find opportunities we would intensely seize them.

Will Marks - JMP Securities

It sounds like you see a disconnect between, where in general stock prices have gone in that lodging industry and in cap rate which I though appeared to have risen. Would you agree with that?

Arne Sorenson

I certainly would see a disconnect between the public valuations and the private valuations. We've seen on obviously a massive and immediate lurch in public valuations and lodging assets and lodging companies. And it's really hard to justify the valuations that the markets are giving. We haven't seen the same kind of movement in cap rates on individual assets.

I mean your question implies that there hasn't been any -- I think we would guess that there probably has been some fairly modest but probably some increase in cap rates, it's hard to get much of a beat on those, because there been so few transactions that have been the priced in the current markets. And we have to watch and see how that develops over the next quarter or two.

Will Marks - JMP Securities

Great. Thank you Arne.

Arne Sorenson

You bet.

Operator

And our next question comes from Josh Attie from Citigroup. Please go ahead, sir.

Josh Attie - Citigroup

Hi. Please tell us at what level of worldwide RevPAR growth do you think you need to keep the incentive fees flat this year?

Arne Sorenson

Worldwide RevPAR growth. I would guess it's in the two to three range, but it’s a bit of a guess, here is how we get there. At 3% or 3.5% without any new hotels delivering incentive fees we should maintain roughly flat profit margins in percentage term and therefore some increase in dollars of profit and therefore of incentive fees to us. As you start to slip out of that you'll start to see some margin degradation in percentage terms.

But you can take a little bit before you actually click through and have declining dollars of profit. Probably by the time you have 2% you've not only seen percentage margin decline at the hotel level, but you probably seen same-store dollar contribution to incentive fees to us. Cross over that line and they maybe begin to decline.

We will have a bit of offset though because unit growth particularly for international hotels, which tend to pay incentive fees from the day they are opened or nearly the day they opened, will offset some of that and so even by the time we get to our RevPAR number that shows declining same-store incentive fee contribution. We are be growing a little bit or holding flat. So and that's I bit of talking into it. It is not a calculated number. So take it very much as an approximate number.

Laura Paugh

Josh if I could add to that. If you think about the broader fee question with the 4% to 5% unit growth kind of in the bag for 2008 and RevPAR growth pretty strong outside the United States. Total fee revenue would tend to grow even if RevPAR growth were shorter than that or smaller than that. And implicitly it would imply that Marriott's margins on our business, on our P&L would continue to expand even if RevPAR growth is more modest than that.

Josh Attie - Citigroup

Okay. Thank you.

Arne Sorenson

You bet.

Hey, Bambi, this is our last question if you got some missed on the queue.

Operator

Yes, sir the next last question will come from Smedes Rose from KBW. Please go ahead ma'am.

Arne Sorenson

Hi, Smedes

Smedes Rose - KBW

Hey, I went under the wire now. You have answered most everything but I just wanted to go back to your expectation of being able to sell timeshare notes. I meant the folks we've talk to really are saying that market has shutdown now. So what is giving you confidence such you can sell these and what is sort of the worst case scenario, I mean, to just keep these on your balance sheet for longer perhaps, the way that is the way one of your competitors has done, and then just the second part of if you can talk a little bit about usage of pipeline further out may, had some hurdles for full service, I mean, will you guys be willing to step up and work with developers, with more equity or mezzanine financing in order to keep that pipeline accelerating?

Arne Sorenson

Yeah, two really good questions. Let us take the second one first about our participation to keep the pipeline going. It sort of goes back to, I recall the conversations we had in 2001 and when we started 2001 the company looked very different than it does today, we have well over a billion dollars of guarantee exposure to our partner’s hotel. We had well over a billion dollars of loans and funded to our partners and we probably had another $500 million of unfunded commitments to our partners so like, $2.5 billion.

As of the beginning of 2008, the total in those categories compared to that $2.5 billion is probably more like $500-$600 million, dramatically lower. That is in part, deliberate on our part, probably mostly deliberate on our part, but hugely a function of the capital that is gone into the industry in the last few years which has paid off a lot of the stuff we had funded for. We got this question a lot in 2001 and the way the question is framed suggests, do we throw in money to solve, to meet a unit growth target. And it was not the case even then; it certainly is not the case today that we think about it that way.

Instead what we would think about it is a partner comes to us and the project is economically compelling even given the uncertainty in the market and structured properly so that there's decent equity in the deal and the returns are good and it fits with our brand, we will be prepared to participate if we can do it in a way that creates value for our shareholders.

But we won't participate simply to reach predetermined growth target and as a consequence while we will participate in some of these deals because they will be compelling enough some of them where we'll be asked to participate we won't and I think the odds are that we will see some of that full service stuff washout because of it. We're not going to fill in the gap.

Smedes Rose - KBW

So that's it is fair to say then you would not expect your total exposure to get up any thing like where it was in 2001.

Arne Sorenson

Not if we sense some big portfolio deal that's really compelling that for us.

Smedes Rose - KBW

Okay

Arne Sorenson

Okay and then in terms of time share notes we what are we relying on? We're relying on what we hear from the folks who are expert in this market, good bankers who'd helped do many of these transactions over the last decade plus, there are a few different structural ways of going about selling these notes and some of those structures, this condo deal we've not used in the past couple of years but may be tools that will be available to us.

But I think your question is a good cautionary one these debt markets are squarely at best and we will not take for granted that this deal is going to get down until it's closed. But we are optimistic as we sit here that we will be able to get it done. If it doesn't get closed it is not a cataclysmic event for us. It will cost us if you will in the quarter in which we don’t close that deal, again that we've identified in our guidance.

That obviously will tie up a bit more capital in that business until we turn around and sell those notes. But generally, retaining those notes are accretive because the cost of debt, incremental debt that we will have because we haven't received the proceeds from the note sales, is less than half probably in this market, the interest return we receive on that notes that we hold. That's still not the business that we prefer to be in and as a consequence will keep moving toward sell them but again its not, its probably no the end of the world if we end up , having to delay a bit.

Smedes Rose - KBW

All right. Thank you.

Arne Sorenson

Okay. Thank you all very much. We appreciate your time this morning and your interest in our story. It is what we said I suppose at the moment in the economic cycle where we have more question than we've had before but we think as we described this morning that there are tremendous opportunities rest in this market and a model that should allow us to deliver great results I am certain no matter what comes.

We thank you very much for interest. Wish you a good day.

Operator

This does conclude today's conference. Have a wonderful day.

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Source: Marriott International Q4 2007 Earnings Call Transcript
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