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Starwood Hotels & Resorts Worldwide, Inc. (NYSE:HOT)

Q1 2008 Earnings Call

April 24, 2008 10:30 am ET

Executives

Jason Koval - Vice President of Investor Relation

Frits Van Paasschen - Chief Executive Officer

Vasant Prabhu - Chief Financial Officer

Analysts

Joseph Greff - Bear Stearns

Celeste Brown - Morgan Stanley

Maria Fiorini - Oppenheimer

Smedes Rose - KBW

Bill Crow - Raymond James

Amanda Bryant - Merrill Lynch

Michelle Ko - UBS

Steve Kent - Goldman Sachs

Chris Woronka - Deutsche Bank

Will Marks - JMP Securities

David Katz - Oppenheimer

Operator

Ladies and gentlemen, please stand by we are about to begin. Good day and welcome to the Starwood Hotels and Resorts First Quarter 2008 Earnings Release Conference Call. Today’s call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Vice President of Investor Relations Mr. Jason Koval. Please go ahead sir.

Jason Koval – Vice President of Investor Relation

Thank you Trisha and good morning everyone. I would like to thank all of you for joining us for Starwood’s first quarter 2008 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’s 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 – Chief Executive Officer

Thank you Jay, and good morning. I want to thank each of you for joining us today for our first quarter call. As you know, this morning we announced some terrific results. We are clearly benefiting from our transition to the management of franchise business model and from having almost half of our profits to rise now from markets outside of the US. I have now been with Starwood for just over six months. So I would like to share my thoughts on our business by covering three topics today.

#1, first quarter results and our guidance for the balance of the year; and two, our strategic direction and the role of our new senior leadership members in driving that strategy; and three, the four financial levers that are key to driving value creation for our shareholders.

So let's turn to the first topic, first quarter results and guidance. Our team of a 155,000 associated around the globe helped us deliver EBITDA of $255 million, which was well ahead of our guidance. Half of the EBIT was driven by strong margin fundamentals combined with foreign exchange benefits. The other half was caused by the acceleration of vacation ownership profits into the first quarter from later in the year.

Diluted earnings of $0.44 a share also came in well ahead of consensus estimates as our managed and franchise revenues grew almost 18% in the quarter, propelled by worldwide company operated RevPar gains of 10%.

Company operated international RevPar increased 17% or 9% excluding the impact of foreign exchange. RevPar growth was particularly impressive in Asia-Pacific, Africa and the Middle East and Europe where we enjoyed growth of 19, 17, 17% respectively.

North American system-wide RevPar growth slowed to 2.9%. But remember, our first quarter included the full two week impact of Easter, which we estimate dragged down our results by roughly 200 basis points.

Industry supply growth, if you have been following this is remained below trend since 2001, which we believe is helping us to deliver good results despite the US recession.

Our worldwide owned hotels delivered strong growth at 10% or 5% excluding the impact of FX. These are great numbers and reflected diversification of our owned assets around the world. And, our vacation ownership business delivered solid results despite a challenging economy. Vasant will share more details on the results in the quarter and our expectation for the balance of the year.

So with one great quarter under our belt, let's look ahead. We expect to continue benefiting from the growing global fee business for the balance of the year. Our performance in the first quarter gives us confidence to raise the low end of our ranges for 2008. However, given the uncertainty around the debt and duration of the recession in the US, we feel its prudent right now to leave our high end guidance unchanged.

We now anticipate full year EBITDA to be between 1.25 and 1.3 billion and earnings per share to be between 240 and 258. We’re comfortable with this tightening range and like to start with strong global footprint along with our focus on the high barrier entry urban and resort five-star markets.

Our international platform continues to enjoy strong operating fundamentals and we are benefiting from a weak US dollar. As a reminder, over 55% of our management franchise fees are derived from markets outside the US and this percentage should increase over time as these markets go at a faster rate than the US, and as our pipeline translates into future openings in the international markets.

So now with some of the numbers out of the way, let's turn to my second topic. Specifically I would like to talk more about the strategic direction of the company and some new additions we have made to our senior leadership team.

Last week we unveiled an all associates meeting something we are calling the Starwood journey. Simply put, the journey is way of articulating our mission, values, strategy, and near-term priorities and in engaging that affordable lodging business. So for example, our journey will be driven by five strategies which we refer to as our five essentials. Starwood class brands, brilliant execution, global growth, great talent, and market leading returns. These five essentials will direct our actions and help our associates aligned across our organization.

We will measure our progress as a team based on metrics and milestones tied to each of these five essentials. Expect to hear more about these five essentials for sometime to come. I have been asked often exactly how this direction differs from Starwood's direction in the past. And there are a few key differences that I quickly point to; first, we will have an ongoing methodical look at our cost structure. Second, we will be focused on four key financial levers to create value through executing our strategy. This means for example we will not put significant resources against related diversification as a major growth vehicle. And third, as a leadership group we’re going to set a much higher abode for working as a team. And finally, we will continue to pursue asset wide structure and this means overtime selling many of our owned hotels well at this time selectively looking at opportunities to use our balance sheet, to grow our pipeline, and build our brands.

Our success with the journey will come from what I believe are the best people in the industry, both in the field and at our corporate offices. But we've also made some recent additions to round out our senior leadership team. As I looked to fill these roles in Starwood, I considered three criteria; functional expertise, lodging experience, and a willingness to be part of a team.

So let's start with our most recent addition. We announced earlier this week that we hired Simon Turner to be our President of Global Development. Simon will lead our efforts to realize our global growth essential. Specifically, he will be responsible for the company's global development activities, property acquisitions and dispositions manage and franchise pipeline expansion, and real-estate development.

Prior to joining Starwood, Simon was a principal at Hotel Capital Advisors for over 10 years and served on the boards of Four Seasons and Fairmont Raffles. With 25 years of industry experience, Simon has a deep knowledge of hotel deals and development and as well as strong industry relationships that we believe will drive our global footprint and unlock the value of our real-estate portfolio.

We also recently hired Phil McAveety as our Chief Brand Officer. Phil's role will be to drive our efforts to build great brands. This includes clearly defining the guest experience we want to deliver, supporting operations and making those experiences come alive and continuing Starwood's journey of gain changing innovation. Note that we also explosively changed the title to Chief Brand Officer over Chief Marketing Officer to reflect the breadth of this role.

Phil brings over 20 years of experience to Starwood in brand development, brand communications, marketing, and advertising. He began his career in advertising at Leo Burnett. Phil also served as Vice President of Marketing for Nike in Europe, Middle East, and Africa and most recently is Global Brand Director for Camper International in Spain.

Phil has lived and worked around the globe from Holland to Hong Kong and from Portugal to Portland, Oregon. His global expertise will help Starwood as we drive ourselves towards having a portfolio with distinctive and compelling brands or what we call Starwood Class Brands.

And finally, we are adding Jeff Cava to our senior leadership team as the new Head of Human Resources. Jeff is a seasoned lodging executive who has spent more than 12 years in the hospitality world including, Harris, Promise, and ITT Sheraton. Jeff comes to us from Wendy's where he was the Executive Vice President of Human Resources. He has also served as Chief Human Resources Officer at Nike and at Disney's Consumer Products Division. In his prior roles, Jeff has made significant contributions in realigning global compensation, US-based benefits, and associate training. I am excited for him to join us on May 5th as so much of Starwood's growth potential will depend on our fourth essential great talent.

In other words, our ability to retain, develop and attract talented people to operate the 500 hotels we expect to open in the coming years. Simon, Phil, and Jeff will all report directly to me.

So as you can see, we've been busy rounding out our senior leadership team which I believe now is largely in place and as I mentioned a moment ago, one of the key criteria I used to select these executives is their ability to work as team members.

Our current experience with re-vitalizing Sheraton, I think can serve as an example of exactly what I mean. As we fix an iconic global brand like Sheraton, we've made a commitment as a management team to take major steps to improve the consistency of our Sheraton properties in North America. This means that our brand teams need to be clear about what the standards are for the Sheraton brand from the standpoint of physical plan.

Our operating team then has to work with brand leaders to identify which properties are up to standard, which need to be remodeled, and which need to be exited from the system. Operations then needs to work with owner relations and our development teams to communicate these results to owners and developers and to establish the timeline for implementation. Our ability to make these hand offs seamlessly can make us much more effective.

So, with that, let me turn to our third and final topic; Starwood's financial levers. With some of our recent additions, I now believe we've the team we need to move us forward on our journey. And this should result in generating significant value for our shareholders through each of the four levers. So let me walk you through them.

The first lever is our ability to generate superior RevPAR growth through strong brands. This can have both an immediate and long lived financial impact for our shareholders as it means we're outperforming our peers with above industry average rates of growth. I think our Q1 results are a case in point.

Our second financial lever is also result of executing on Starwood Class Brands. RevPAR premium by on a developer interest in our brands which in turn proposal long term unit growth around the world. Today we successfully build a leading global pipeline of new hotels that is skew toward the highly profitable upper upscale and luxury segments and is diversified around the world. We also have well over 100 aloft and elements in our pipeline. They can further propel our managing franchise growth rates. The challenge as you know as this process requires investing significantly ahead of the growth curve. For example, it takes several years for hotels to be built after executing a contract and several more for them to ramp up the full fees.

As an aside Phil McAveety and Star wood's 9 brand teams will be instrumental in driving the innovation and continuous improvement needed to keep our brand experience distinctive from each other and compelling for our guest and owners. The third financial lever for Starwood depends on our ability to unlock the value of our real estate. Starwood has one of the highest value global portfolios hotels around the world, and we will continue to evaluate strategies to realize its value for our shareholders. So, while the credit crunches slowed the market for asset sales, simultaneous expertise when ensured we continue to realize the value of the company's substantial real estate holders, at the right time and at the right price.

Assets sales are one sort of cash to fewer continued stock buybacks. We will continue to look at other opportunities as well to reduce our share count. As you’ve noted, for example, we brought back another 3% of our shares this quarter.

We will also continue to focus or efforts on high return projects in our vacation ownership business by leveraging synergies with the hotel business, our strong brands and our world class vacation ownership team. Our fourth financial lever is to focus on controlling our cast. We’ve initiated a thorough review of our spending and a sustainable reducing cost improving productivity and reinvesting against priority such as brands, innovations and growth. From this exercise for example, we determine that we needed to reorganize our North American division, so we could function as a true division and that is an extension our global headquarters. This reorganization better positions NAD to support our dynamic growth in the coming years. The revise structure more closely approximates, but we already have in place an Asia Pacific, Europe, Africa and the Middle East and Latin America. These other divisions have done a great job of balancing collaboration between internal functions supporting our external partners, streamlining decision making and setting priorities.

To this call we join Sheraton more than 30 years ago has been tapped to lead our North American division. Our focus on cost so far has lend to a double digit reduction and our corporate G&A, and we now expect the whole division on G&A roughly flat across the company, not counting the impact of foreign exchange. This will allow us to enjoying improving economies is our business growth.

So to summarize, I would like o leave you with two governing thoughts. One, about the year, and the other about Starwood direction. As relates to 2008, in our view the US economy have roughly slowdown in the last December of last year. We pointed out on our fourth quarter call that that slowdown was not yet having a material impact on our performance in the US. Enrolling now see science of a slowdown over four months into the recession. ReVpar has not drop significantly. We nevertheless expect harder times could materialize, and we’re prepared for this and have factored in harder times into our guidance range. I also want to reiterate that Starwood is less acceptable to the US market then we ever been before and less dependent on the US than many of our major e competitors.

As far Starwood's direction, we have a clear idea of the strategy we’re pursuing as embedded in the five essentials of the journey. We also now have the right team and place should do the hard work to realize our aspirations for the company and to generate substantial value for our shareholders. And with that, I would like to hand the call over to Vasant for more details on the financial guidance.

Vasant Prabhu - Chief Financial Officer

Thank you Frits, and good morning everyone. Our first quarter significantly exceeded expectations. Our results this quarter demonstrate what we have been saying for a while that the Starwood of 2007 and 2008 shares very little in a common with the Starwood of 2000 and 2001.

In 2008, we will derive 35% of our EBITDA pre-overhead from owned hotels versus 70% in 2000. Our fee business now accounts for 45% of our EBITDA. We will have 800 million in management franchise revenues in 2008 versus 280 million in 2000.

In 2008 over 55% of our fees are directly from international market versus 40% in 2000. In 2008 almost 50% of our owned EBITDA was derived from international market versus 30% in 2000. The transformation of Starwood through the sale of significant real estates over the past two years has created a company that is substantially less exposed to the US cycle then it was in 2000 and 2001.

With the transformation of Starwood has in much more than the sale of real estate, we have today a substantially stronger brand portfolio ,a larger global hotel network, and one of the largest and highest quality hotel pipelines in our sector. Our system has 900 hotels at the end of this quarter significantly more than in 2000. There are 500 more hotels with a 120,000 rooms in our pipeline with over 50% outside the US and 70% in the high fee upper upscale and luxury segments.

Our brands are also substantially stronger. Sheraton leaves outside the US and has improved considerably in the US. Western is the most sought after upper upscale brand in the US. We’ve added a very attractive new brand Le Meridien which is very popular in Europe, the Middle Eastern Africa with over a 115 hotels and tremendous long term potential in the US. W remain the envy of most of our competitors who are all trying to create an equivalent brand with limited success. St. Regis has established itself at the high end of the luxury segment. Our luxury brands W. St. Regis and the luxury collection have grown from 59 hotels in 2000 to 91 today, and over 17 the pipeline, and we have launched two exciting new brands aloft and Element with well over a 100 hotels in the pipeline and more than a dozen opening this year while four points has been revitalized.

So the Starwood of 2008 is not and will not perform like the Starwood of 2000 and 2001 as the first quarter has demonstrated and we expect future quarters will. So why did we exceed the midpoint of our guidance range by as much as 50 million? As Frits indicated, half of out performance was in our vacation ownership business, the additional 25 million of EBITDA in the first quarter was largely due to mix of higher margin inventory that they sold in the quarter, some timing of expenses and some items that are recorded in Q1 that we had anticipated in future quarters.

As a result, we are not changing our expectations for the full year for SVO. Business trends remained in Orlando and Cancun, in Hawaii we are now sold out in (Inaudible) and selling only our Princeville Kauai project from all our sale centers. As in the last few last quarters it has slowed down the pace of sales in Hawaii and pricing is lower since the Princeville projects has a lower price point. Well that’s we have sold 8.8% more contracts in Q1, originated revenue declined due to lower mix of higher price point Hawaii sales. We did get some good news this quarter in Hawaii, we have now received approval to move ahead with phase III of our Maui project, we are the construction permitting process and currently anticipate restarting sales of Maui inventory in the second quarter of 2009. With Maui moving ahead and (Inaudible) under construction uncertainty surrounding inventory availability in our vacation ownership business over the next three years has been substantially mitigated.

The other half of our out performance was from our hotel business. Given the uncertain economic environment - based on the sharper slow down in the US business than we actually experienced. The Easter shift impacted North American system RevPAR by as much 200 basis points. Despite the Easter shift RevPAR growth had branded owned hotels came in at over 8%. Margin improvement was impacted by energy and food cost which we are dealing with.

The international business stayed very strong, in local currency, company operated RevPAR in Asia increased 9.4% and as much as 15.6% in the Middle Eastern Africa. Most of Europe remained robust and what is the low season the only soft spot was Italy, and the dollar continued to weaken adding abut 50 basis points to worldwide RevPAR versus what we had expected in our guidance.

Tight cost control in SG&A, the quality of our owned hotel portfolio and the global scope of our system helped the hotel business outperform our EBITDA expectations by 25 million in the quarter.

Moving on to expectations for the second quarter and the balance of the yea, we expect 5 to 7% RevPAR growth at a branded owned North American hotels. As you can see this represents a sequential slowdown from the first quarter trend. Our worldwide company operated RevPAR growth of 10 to 12%is higher than our Q1 guidance of 7 to 9% and Q1 actuals of 9.6%. This does not represent a change in the underlying local currency RevPAR growth expectations, but rather the fact that the dollar has weakened since the end of 2007 and has remained weak pushing up our dollar RevPAR growth and fee growth.

So Q2 guidance anticipates a slowdown in the US trend and relatively unchanged trend outside the US. In our vacation ownership business, we have pulled down Q2 expectations by about 5 million given the acceleration of income into Q1 in the business.

For the full year, expectations for our owned hotel business remain unchanged. Our worldwide company operated RevPAR guidance has been raised to 8 to 10%. This reflects the fact that we will have first half RevPAR growth at the high end of this range.

For the second half local currency RevPAR growth expectations are largely unchanged from prior guidance. Also assumed in the worldwide RevPAR guidance range is an expectation that the dollar will strengthen from current level in the second half. Inline with the increase in worldwide RevPAR growth we have increased our fee growth range to 12-14% and raised the low end of our EBITDA guidance to 1.25 billion and maintain the high end at 1.3 billion.

While securitization markets remained unsettled, we continue to assume in our guidance a sale or receivable in the fourth quarter, we expect that pricing will not get back to levels we have seen in the past. It is still however, economically preferable for us to sell the receivables even it's spread the wider as long as they are within an expectable range.

As such we anticipate that the gain will be lower in the 30 to 35 million range versus prior expectations of a 40 to 45 million range. We’re maintaining our full year guidance range for our vacation ownership business, but given the lower gain forecast we expect that we will come in at the lower end of this range.

Moving on to asset sale liquidity and buybacks, we have signed purchase and sell agreements with deposit on sales of over 200 million in hotels which will close later this year. We have additional sales with additional with anticipated proceeds of another 300 million in process and expect that these sales will also be also be completed later this year. We have ample liquidity with no maturities of debt this year, we’ve just converted 375 million of our revolver into a three year term bank loan giving us more flexibility.

While our net debt to EBITDA is 2.9 times, our gross debt to EBITDAR, the way the rating agency calculated is actually 3.4 times approaching the low end of 3.5 to 4 range we indicated was a long term target. With proceeds from assets sales and with ratios of these levels we have the capacity to remain steady buyers of our stocks as we were in the first quarter.

With that I will turn this back to Jay.

Jason Koval – Vice President of Investor Relation

Thanks Vasant. We would now like to open the call to your questions. So interest of time and fairness please limit yourselves to one question at a time and then we will take any followup question you might have as time permits. Trisha, we are ready for the first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will go first to Joseph Greff with Bear Stearns.

Joseph Greff

Good morning everyone. Vasant just one quick question for you on the buyback, how valuation or price sensitive are you want to buy back. And then if you guys can just talk about pricing on 2009 group business on the US , what you’re experiencing and what is the pace now versus a year ago?

Vasant Prabhu

In terms of buyback I mean, as you know, we have directed it on three or four fronts. One, know we have been buying on the basis of getting back to what we indicated to you our target leverage levels, so we are approaching those. We also said that the intend of our buy back would be based on what alternative opportunities are available, and you’ve said it wouldn’t be problematic and you have seen us in the past accelerating buybacks when the stock price we thought was at more attractive levels than you should expect us to do the same in the future. So we are always looking at what we think the intrinsic value of the business is and pacing our buybacks based on that. So that will continue. In terms of group pricing, overall our pace is good. It's probably in the 4 to 5% range. Pricing levels are probably -- rate increases are probably tracking a little lower than they might have been in prior years, but the overall business momentum feels good. Cancellations are down as you heard from others. So that would be sort of where the group business is.

Jason Koval

Next question please?

Operator

Will be from Celeste Brown, Morgan Stanley.

Celeste Brown

Hi guys. Good morning. A very strong first quarter and a lot of moving pieces. I guess the question is, net-net with everything that's happening, do you feel a better or worse about hotel demand and hotel trends for 2008 than you did when you last gave guidance?

Frits van Paasschen

Well, I think we feel that we know more, which is to say that we had a strong first quarter and that allowed us to take up our sense of what the lower end of our guidance should be. On the other hand, there is still a decent amount of uncertainty about what the back half of 2008 looks like from a US economic standpoint. Our read on the situation though is that the US economy slowed down in December and here we are four-and-a-half months later saying, we are seeing a deceleration in the business, but we are not dropping off the cliff. So early indications for the year we would say are very encouraging.

Jason Koval

Next question please.

Operator

David Katz from Oppenheimer.

Maria Fiorini

Hi. This is actually Maria Fiorini for David Katz. I just had a question regarding your guidance and I know Vasant you touched on this, but you are raising your RevPAR guidance, you are raising your revenue guidance, but your bottom line is not increasing. So can you talk about what do you think that margins are going to do in your system and if you think they are going to decline?

Vasant Prabhu

I mean, as I indicated, we are doing two things in our guidance for the second half. Sequentially if you sort of go through the numbers, we are actually projecting the RevPAR growth in the US actually to continue to slow. So the growth in the US in the second half will be lower than the 8% we saw in the owned hotels and whatever we saw on the managed side, sequentially that growth will be lower. On the international side, we are sort of assuming the trend is unchanged from what we expected at the end of the year last year. But what we are projecting is, we have had two quarters now where the dollar has actually been weaker than it was at the end of last year. We are in fact continuing to sort of expect that in the second half the dollar may strengthen while in the long run we think the dollar has problems, it's very possible. This is not something that we necessarily are any better out than anybody else, but you should know that our guidance anticipates some strengthening of the dollar in the second half. Margin wise, there are some cost pressures we talked about. So we are not expecting anything dramatically different.

Jason Koval

Next question please.

Operator

Smedes Rose, KBW.

Smedes Rose

Hi. You just touched on this a little bit, but I was surprised in the first quarter that your North American hotels owned it's quite well at 8% of RevPAR and 6% total revenue growth, but no margin growth. So, is there something specific going on in the cost side in the first quarter?

Vasant Prabhu

Yeah, I can point a two or three things. We did have some hefty energy price increases. That is a little bit of the function of where your footprint is at any point in time and whether you are coming on or off contracts. So our energy costs actually went up 12%, which was more than the expected. We did have food inflation of about 5%. Our food SMB performance in the first quarter was not as good as we would have liked, partly it was the peculiar attitude of the quarter where we had the whole month of March, where because of the shift in Easter there is little or no RevPAR growth. So that sort of makes the averages look a little laud. So our SMB performance was affected by the fact that SMB growth was not so great because of March and because of food inflation and some of these contracts have been negotiated going back a while. So we will pass that on as we go ahead and we are clearly focused on cost. Overall, other than those items and a couple of small things from last year, we did just fine on flow through. So I would say we were probably a little behind on the SMB side.

Jason Koval

Next question please.

Operator

Bill Crow, Raymond James.

Bill Crow

Hey, good morning. I hate to beat the dead horse, but again on the margins. Vasant, most of us considered 3, 3.5% RevPAR growth to generate kind of stable flat margins but it seems to much higher in your case, where do you think that breakeven is from a RevPAR to a margin. And then question one B is, if you could just give a little more color to the assets sale that you’ve alluded to, are those US? Are they outside the US and what is your – is there any status update on Sheraton Manhattan? Thanks.

Vasant Prabhu

You shouldn’t read too much in to margin when the first quarter because of the some of the peculiarities of this particular first quarter and first quarters in general. First quarters tend to be small quarters given that our own hotel footprint, so its in mostly in colder climate, so it’s a very low small quarter or small numbers can move things around, number one. Number two, the averages in the first quarter are a little misleading because you had growth in January and February and then you had March which was a very peculiar month, because when you get to close to RevPAR growth in March which involves, you go the other ways on margins. So when you take averages it sort of is a little misleading. So those are some factors you should consider.

In a normal quarter, our wage rate are going up about 4%, energy is certainly pressuring the cost some and food inflation is pressuring its some. So I would say you know at 6% in the first quarter we sort of struggled to eek out a little bit of margin growth, in a normal quarter you probably are talking about 4 or 5% where we should be able to get to you know, in revenue growth, we should be able to get to close to flat margins. Our margins are actually up a little bit, but as you’re seeing from some of the other companies you heard from know they were down quite substantially.

And you had a question on assets sales. You know, we are seeing demands for certain kind of assets as especially if they are very unique, one of a kind especially on international assets. So we don’t have to do any assets sales, our goal has always been, we know what we want to keep, we know what we’re to sell, and it all depends on the price. So I would say that we feel very good about what we have in the market today and we’re selectively looking at other things we might put on the market.

Frits Van Paasschen

Yeah Bill, this is this is Frits, and just to add to the comment on margin I think you have to anticipate for this year that core US inflation is probably more like 4 or 5% and so, the push on where you can start earn margin back is definitely more challenging this year, on the other hand it gives us renewed focus on controlling our costs of the property level also. So I think the situations is a little bit different from it’s been in previous years.

Jason Koval

Next question please?

Operator

Amanda Bryant Merrill Lynch.

Amanda Bryant

Thank you. I just want to know how much of your overall corporate G&A expense line is impacted by fluctuations in foreign exchange?

Frits Van Paasschen

At the corporate level? It is not a line

Vasant Prabhu

Yeah the SG&A line as reported of course include our divisions and so, rule of some you could assume let see about 40% of it is denominated in a foreign currencies roughly, if that number is not exactly accurate we will let you know, but I would guess about 40% of what’s in the total SG&A line would be impacted by non-US currencies.

Jason Koval

Next question please?

Operator

(Operator instruction). We go to William Truelove.

Michelle Ko

Hi this is actually Michelle Ko for William Turelove. I was wondering if you could tell us what the next proceeds where for the assets sale after debt reduction, and also if you could give us a little bit more details about the selling environment, and how the pricing is in the US versus Europe?

Vasant Prabhu

That have know in proceeds yet from asset sales what we had in the press release was that we have deposit’s and sign contracts on around 250-260 million in sales that will close later in the yea . So those proceeds will come in we think in the fourth quarter. There happened to be sales in Italy where there are certain procedures to follow before they can closed, these are the Hotels that we talked up I think we had a announcement earlier in Venus. Your question was on assets sales in general, but in the US it’s very hard to get financing, small deals can still be done, large deals that depends on assts back or CLO type financing are hard to do CMBS type financing are ought to do, that’s remains the case, there is still a gap between the bid and ask. People like us feel no pressure to sell any hotels unless we can get values that we think are values we would realize in more normal market conditions. So outside the US it’s a different picture depending on the market and depending on the asset. There is still demand for as I said earlier, unique hard to get to real estate.

Jason Koval

Next questions please?

Operator

We will go to (Patrick Scope), JP Morgan.

Unidentified Analyst

Hi good morning. In the 7.8% RevPar results for North American owned, how much of that benefit from foreign exchange from your Canadian hotels, I believe about is it 20% of your North American portfolio is in Canada?

Vasant Prabhu

Right. I think if you take Forex out that 7.8 would have been closer to 5.6 or 7. So about a couple of hundred basis points there is a benefit from the fact that we do own hotels in Canada.

Frits van Paasschen

Which also by the way affects the margin equation, we were talking about earlier.

Vasant Prabhu

Right. Because, you don’t get flow through on just Forex changes.

Jason Koval

Next questions please.

Operator

Steve Kent, Goldman Sachs.

Steve Kent

Hi good morning. Frits, I was intrigue by some of the discussion you said about some of the new metrics you are using internally. So a couple of questions there, first is managements compensation going to be based on achieving some of these and what are exact metrics for you and your senior management that you are going to be looking at? And could you give us some dollar values to controlling costs and real estate holdings that might give us some sense as to how far you can go here?

Frits van Paasschen

Yes, Steve, let me give you a philosophical answer to the questions first and that is, I believe it’s very important for the senior leadership team all to be compensated on the same metrics so that there is absolute alignment and that those should be simple straight forward metrics that reflect on creating shareholder value. That would be for if you will the team portion. I think for the individual pieces we can walk you through that in detail, but rest assured if you were a brand leader it would be on the performance of our brands whether that’s RevPar index or brand profitability. For example if you were ahead of development, you might be compensated on the basis of the quality and the quantity of the pipeline as its being generated. And if you are in operations looking at both our efficiency and at the same time our ability to deliver on guest satisfaction. So you can start to see how -- for each individual department what those measures would be, but at the same time all these things have to roll out to the some other parts. And then I will look at an annual EBITDA target and our EPS targets will be front and centered what the whole team is thinking about.

Jason Koval

Next questions please.

Operator

Smedes Rose, KBW.

Smedes Rose

Hi, and just a follow up. You announced a few weeks ago this Sheraton initiative, would Starwood contribute dollars to help owners meet four of these hotels faster I think similar to what Marriott did a couple of years ago. And if so can you quantify kind of the amount and the timing if you would plan to do anything along those lines?

Frits van Paasschen

We are owner of a number of Sheraton properties and we are committing a few hundred million dollars of our own capital expenditures towards this. As we look across the system what we are asking our owners to do should be provide them with great returns even in a more difficult environment, and where that’s not the case then those are properties we probably feel more comfortable walking away from. We are not going to ask our owners to do things that don’t make great economic sense for.

Jason Koval

Next questions please.

Operator

Chris Woronka, Deutsche Bank.

Chris Woronka

Hey good morning guys. I just wanted to ask you about the time share sales as they are going right now. You mentioned you are kind of up on units, but the pricing little bit lower. I mean as we look forward to '09 how does that play out in terms of margins, I mean, that we need to make more of these sales to kind of hit the same level of EBITDA or how should we look at that generally? Thanks.

Vasant Prabhu

The interesting thing about the time share business as you know, is there is a percentage of completion aspect to it and then there is originated sales. And all the things we have been reading in the US economy or originated sales numbers are actually doing quite well, certainly relative to expectations. The foot side of that is there has been a mix shift here and the mix has been driving that change in pricing. So what you are not seeing is for like-for-like which would have a bigger impact on margins. So we actually feel pretty good about margin given where our guidance is and given the mix that we have.

Vasant Prabhu

Yeah I think as Frits said I mean the reason the pricing looks lower is because we have less Hawaii inventory being sold as you know because we ran out of Maui inventory and Hawaii was a higher price point. So as Frits said I think it’s important to emphasize we are not lowering prices for the same type of unit, the mix is shifting. There is a certain amount of price points sensitivity, so we are selling more of the island view inventory, lets say rather than ocean view because its a lower price point. But we are not lowering prices, that’s not the reason why the pricing looks lower.

Jason Koval

Next question please?

Operator

Will Marks of JMP Securities.

Wills Marks

Hi good morning, just a follow up on Sheraton. With 200 or so North American hotels and it looks like RevPAR growth was system wide. North American was 1.8%. How does that compare now like kind on a RevPAR index and what are your goals? Where do you think you can go from here?

Frits van Paasschen

Yeah I think the important things to think about with Sheraton is with 200 properties in North America, we were looking at remodels for about 100 of those right now. And as I said a few also will exit the system. So that should give us a pop in RevPAR performance relative to the market. I am not sure where at a point where we’re going to quantify that.

Jason Koval

And next question please

Operator

Patrick (Inaudible) JP Morgan.

Unidentified Analyst

Hi another question here. As far as your timeshare notes, if you’re looking out in the market right now what sort of a spreads are you seeing on that and roughly what would your principle amount of your notes sales would be or would you expect in the fourth quarter?

Vasant Prabhu

Well you know our original sort of expectation was we would have somewhere 400 million of notes available for the sale in the fourth quarter. We are obviously monitoring the markets everyday and every week and what we found s the markets are not on the trend line they’re volatile.

So things improve, windows open and shut very fast, and that’s why happen to us whether a window just shut down as we were getting ready. So I think our view is we are looking to do it before the end of the year in the fourth quarter but we will monitor the market every week. Spreads are wider, we had anticipated a widening of about a 100 basis point from were we did the last financing.

On new expectation on the gain assumes more like a 200 basis point widening from where it was. We have done a lot of more work on this and we have some ideas on the ranges in which it is still economically viable to do this, but if it is well outside that range we probably will not do. So we’ll be monitoring the markets and decide accordingly.

Frits van Paasschen

Yeah I think the think that we remind here is, we don't have a liquidity issue. So our decision as to what we do will be purely driven by what's in the economic best interest of our shareholders, and you can think about 3 broad scenarios for this. One is the world goes back to the way it was before. The second is the world does not do that but the market opens and the spreads are just different from where they were. While the third is the spreads they are still at a point where it doesn’t make sense to do it. And the notion that the worlds is going to back to the way it was before, I think is something that maybe more of a wish than realty. The idea that the markets maybe so skittish that spreads aren't there is possible and the kind of the mid-placing between where the spreads still makes sense for us but they are not that we originally guided.

It is our best guess of where the world is going to be but as Vasant pointed out, this is changing picture and we'll see where we are, and as I said because we can make this decision based on economic best interest and not pressures of liquidity, you know, we have the luxury of doing it that way.

Jason Koval

Next question please

Operator

Celeste Brown - Morgan Stanley

Celeste Brown

Hey Vasant, it was great to news to hear that you have got the approvals on Maui which I guess were at some point in question. Can you help us think about time share, over the next couple of years, since it has been so many pieces that have moved in and out and I think just sort of flying blind in terms of how the – how you are progressing and you haven't given guidance but just directionally, how time share should progress over the next couple of years.

Vasant Prabhu

Sure. If you think about the time share business there are three major centers of activity. There is Hawaii, there is Orlando, and there is Mexico. So for the next three years, we are all set with Mexico inventory. It’s in Cancun, its in sales and it will last for three or more years. In Orlando, we have plenty of inventory which keep adding phases. So, Orlando's been a steady performer for 20 years and that will continue. There are no inventory issues there. Our big question mark was Hawaii. So what's happened there now is our big project there was Maui where we did Phase I and Phase II. Unfortunately as you know we experienced delays in Phase III, so we couldn't start selling Phase III when we finished selling Phase II. Instead we've been selling our Princeville projects. So our Princeville project we think will carry us through this year and early into next year. And in the second quarter of next year we'll start selling Maui. So we think now visibility in terms of our inventory available for sale in the time share business for the next three years is good.

In terms of the P&L implications of all that we rather wait until October to give you specifics on that. You should know that there's obviously percentage of completion that drives all this. So for example when we start sales of Hawaii in the second quarter of next year percentage of completion levels will be fairly low through most of next year and the way the accounting works now a days in the early months of a project you know you actually lose money.

So, rather than talk about specific numbers we'd save that for later in the year but we would urge to sort of not to get ahead ourselves at this point. What's good is the visibility certainly has improved and the uncertainty has gone away.

Jason Kavol

Next question please.

Operator

David Katz, Oppenheimer.

David Katz

Hi good morning. I wanted to just circle back on the pipeline issue and our presumption is that the world has evolved the last few months and some of the projects in there maybe a bit more at risk, and to the degree you can give us some color on, are there some projects that have fallen out that are of some higher value that are being discounted and sort of just talk about the sort of the quality of that pipeline at this point?

Frits Van Paasschen

Yeah David, just on the broadest level the pipeline numbers that we quote in our view we factor in, our best estimate of the probability of completion of assigned projects. So we've handicapped those numbers based on our best view of the way the world is and how it’s evolved. I think if you pass the world into a few different ways, outside of the US let’s not forget the world is still booming. If you go the Middle East or the Subcontinent or China right now, construction and in the world economy and the growth of infrastructure continues on an extraordinary pace that you can really only appreciate it if you go out and see it. And that continues to be great for us.

Inside the US at the limited service level those projects are ones that Vasant referred to earlier are eminently financeable and given the favorable supply demand dynamic that we've seen over the last 7 or 8 years, we have a lot confidence that those projects will continue.

The place where there is likely to be some softness is in the full serve area and the larger projects in the United States given the liquidity and capital situation that we've all read and heard so much about. And as I said to you at the beginning of this comment we've factored in a drop off factor for those in the numbers that we’ve given you and exactly which ones and how much delayed is something that’s a lot harder to predict. But and again from our view given the favorable supply demand picture that we've already been witnessing for the last 6 or 7 years, if things back down a little a bit the upside for us with the strength of our brands or locations that we have could be a very interesting RevPAR scenario for us in the next 2 or 3 years if there is a fall off on the US full serve pipeline.

Vasant Prabhu

Okay and just a couple of things I might add to that in terms of numbers. As Frits said, we are really not seeing much fall off. And we said conservative we didn't change our pipeline estimates for this quarter even though as you saw we signed 43 new hotels. We opened 10 hotels. So in theory that’s 33 more hotels that are now executed deals in addition to what was in the pipeline. So we're monitoring it, we’re being more cautious in terms of our pipeline estimates. I think our experience is no different from what you've heard from the other competitors that a big chunk of the 400 or so signed deals we have right now in the pipeline will open by 2010 almost 75%. More than half are under construction. No real issues outside the US as Frit said, and it looks to us like more than 75% seem to be in good shape financing wise in the US at this point.

We’ll be monitoring it and we're taking a very cautious approach to how we define our pipeline will tell you about it.

Jason Koval

Operator, are there anymore questions?

Operator

(Inaudible) J. P. Morgan.

Unidentified Analyst

Hi, another followup question on the foreign exchange impact on the RevPAR for your second quarter guidance for North America 5 to 7%, how much foreign exchange benefit is baked into that from the Canadian hotels.

Frits van Paasschen

I think you should assume that it is in that couple of hundred basis points range.

Unidentified Analyst

So, in light of that, okay so it would be somewhat below.

Frits van Paasschen

Its 150 basis points in the North American owned hotels that we've assumed as Forex benefit.

Unidentified Analyst

And what do you assume Forex benefit for the same-store company operated worldwide?

Frits van Paasschen

Oh, that would be higher. That would be closer to be more like 400 basis points or so.

Vasant Prabhu

So, in other words, it is considerably lower than what it came out in the first quarter which reflects our conservatism about the Dollar over the course of the rest of the year as well as the fact that the Dollar strengthened as you ran into the third and fourth quarter the last year at the same time.

Frits van Paasschen

The Dollar versus Euros started at 147 and now it is closer to 160. That's one metric. The Canadian Dollar hasn't changed very much. Those are the two largest currencies, so about 400 basis points.

Jason Kavol

Operator we have time for one more question please.

Operator

All right, that will come from Celeste Brown - Morgan Stanley.

Celeste Brown

Hi guys. Paasschen, what is the impact of the benefit from the construction instruction that you don't have this year that you had last year in the second quarter in terms of RevPAR.

Frits Van Paasschen

Oh, in the second quarter it is very small. It was during the third quarter we had the biggest impact. I would say in the second quarter it is sub-50 basis points.

Vasant Prabhu

Probably even less than that.

Frits Van Paasschen

And probably closer to 100 as you move into the third quarter Right.

Jason Koval

Alright operator, well that wraps up today's first quarter call. 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 with additional questions. Good bye.

Operator

Once again, we thank you for your participation. This does conclude today's conference call and you may disconnect at any time.

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Source: Starwood Hotels & Resorts Worldwide, Inc. Q1 2008 Earnings Call Transcript

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