Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Starwood Hotels & Resorts (NYSE:HOT)

Q2 2008 Earnings Call

July 24, 2008 10:30 am

Executives

Frits D. Van Paasschen - Chief Executive Officer & President

Vasant M. Prabhu - Chief Financial Officer, Executive Vice President

Jason Korval - Vice President of Investor Relations

Analysts

Joseph Greff - JPMorgan

Celeste Brown - Morgan Stanley

David Katz - Oppenheimer Capital

Bill Crow - Raymond James

Shulay Ley-Pan - Lehman Brothers

William Truelove - UBS

Chris Woronka - Deutsche Bank

Will Marks - JMP Securities

Patrick Scholes - FBR Capital Markets

Operator

Good day everyone, and welcome to the Starwood Hotels & Resort’s first quarter 2008 earnings release conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over the vice president of investor relations, Jason Koval. Please go ahead sir.

Jason Koval

Thank you Kim and good morning everyone. Thanks for joining us this morning for Starwood’s second quarter 2008 earnings call. Joining me today I have

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 Resorts 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 other subsequent date. Actual results might differ from our discussion today.

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

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

Frits van Paasschen

Thank you Jay, and thanks to all for joining us today for our second quarter call. We are calling you from Sao Palo, Brazil, having spent the past week in South America, evaluating the market, as well as meeting with partners.

On many occasions, we have talked in the past about our rapid growth in Asia-Pacific, and the Middle-East. But, we also see terrific growth potential for Starwood in this part of the world.

The purpose of this call is to walk you through our quarterly results and to share our outlook for the balance of the year. That said, I want to be clear that we believe Starwood is poised to deliver strong long term growth around the world, which is why we are spending time in South America.

We continue to work towards delivering our strategy, which we refer to as the Starwood journey, and we believe, will create great returns for our shareholders. But, back to second quarter results.

Starwood’s team of more than 155,000 associates, around the world, delivered diluted earnings per share of $0.56 and EBITDA of $299 million. We beat consensus estimates by $0.04 per share, and $11 million, respectively. We also out performed our competitors in terms of revpar.

Our international presence helps power our strong results, even as the U.S. economy decelerated. More to the point, we drove fee growth of 12% in positive year-on-year growth in owned hotel EBITDA, despite the U.S. slow down and some softness in Western Europe.

In my view, this corroborates what we have been saying for a while, the Starwood of 2008 is truly different from the Starwood of 2001. We are better positioned to manage to an economic downturn, having shifted away from owning hotels, particularly in the U.S., to managing and franchising an increasing global footprint.

Specifically, over 55% of our fees, and over 80% of our incentive fees, are generated outside of the United States. Globally, 75% of our fees are top line driven. Our results also reflect a sustained focus on brand building, and are skewed toward urbanized resort locations.

So, looking back on the quarter, business slowed down abruptly in May. And we can reasonably expect that the economic downturn, and its impact on our business, will persist for the remaining of this year, and into next year.

In anticipation of this, we have been taking a hard look at our cost structure, not just at the property level, but also across all of our expenses. Philosophically, our approach balances immediate savings, with making lasting changes in our way of doing business.

At our owned and managed properties, we have taken actions to cut costs without compromising the guest experience. This includes contingency plans, such as reduced operating hours, hiring freezes, and menu changes.

Beyond that, we see further savings through methodical cost cutting and lean operating principles. These measures will soften margin erosion from decelerating revpar and importantly, reduce our cost base when the lodging cycle recovers.

Property level savings are just one of the cost reduction areas that we have at our disposal. I mentioned on a prior call, that we are taking a hard look at our corporate costs, and I would like to expand on that today.

We are in the midst of work that will allow us to streamline the organization and remove overlapping positions. Duplicative efforts are not only costly, in and of themselves, but they often lead to more work elsewhere in the company, for example, in the field and at the property level.

I am convinced that paring back our activities and redesigning our functions will reduce our cost structure in the coming months, while at the same time, making us more aligned and nimble.

As we turn to our vacation ownership business, and the decline in sales we are experiencing there, we have taken action to offset the EBITDA impact largely through cost reductions as well.

This includes closing underperforming sales centers and reducing our SG&A. The result of that, while our expected sales declines will be significantly lower than we expected, the drop in operating EBITDA should be proportionately less. To be clear, though, that is before the impact of lower proceeds from securitization.

We are also taking a specific look at our procurement practices. This involves a rigorous process of focusing on reducing the number of vendors, negotiating more favorable contracts, reducing total cost of ownership, and insuring compliance throughout the organization. In this area, we are leveraging our expertise in our internal procurement team, and building our success over past years.

And in the spirit of leaving no stone unturned, there are several other measures that we can take to reduce our cost base, including stock based compensation and health care benefits.

Take health care for example, our human resources team is working on ways to offer competitive health care benefits, while providing tools necessary to build a culture of health, ultimately, reducing our health care bill. This includes a variety of wellness programs, as well as health savings accounts, to help our employees make better informed health care purchases.

So, as you can see, we are preparing for challenging times, through aggressive cost management. As I mentioned earlier, this will position us better through the downturn, and establish a low cost structure as the situation improves.

So, let’s turn now to our outlook for the balance of the year. We will order EBITDA range to between 1.18 and 1.22 billion, and now expect earnings per share of $2.17 to $2.32. This forecast reflects the decline in North American lodging that we experienced over the past eight weeks.

We aim to deliver results toward the high end of that guidance range. But, as we have said in previous calls, our information is limited to what we know today. So, given the continued uncertainty, the low end of our guidance incorporates further deterioration in conditions, as the U.S. slowdown spreads across sectors and geographies, and as the drop in airline coverage takes effect.

Our objectives, so far, is to be both transparent and conservative journeys while in volatile times. This is been providing guidance that includes not just current conditions, but our best estimate of harder times to come. Bear in mind, this approach has led us to exceed our guidance so far this year. Vasant will go into the details underpinning our revised guidance.

I would like to spend some time talking about the real story about Starwood. Simply put, our brands are positioned for sustained global growth. And here are a few examples of how we are going to continue to invest in this future growth.

First, we opened three Aloft Hotels during the second quarter, and on July 1st we opened our first Element Hotel, along with our fourth Aloft in Lexington, Massachusetts. These two new brands give us exciting growth opportunities as they turn their respective segments upside down, in the same way that W did among luxury hotels.

Beyond Element and Aloft, we are investing in development around the world inside 80 new contracts year-to-date. As a result, our pipeline is roughly the same size as our competitors, on half the base of earns.

This pipeline is also skewed towards high feed producing hotels in international markets. At the same time, we are aggressively driving a turn around of the Sheridan brand in North America, with a goal of having fewer than 10% of rooms below brand standards by the end of 2009.

This means a relentless focus on either renovating or removing off brand properties. In the short term, we may lose some fees, which we would gladly trade off for growth momentum, as Sheridan continues to hold the largest share of our pipeline.

Outside of North America, we are undertaking a similar process for Le Meridian where we continue to inject life into that iconic brand.

So, let me step back for a moment and remind you of the reasons why coming to Starwood appealed so much to me in the first place. I am convinced that the branded hotel fee business is one of the most attractive business models in the capitalist world.

The contracts require little up-front cash, and extend to the long term. This typically means predictable income strains sustained over 20 or more years. The majority of our fees today are derived from the top line, with minimal capital calls.

And given our focus on lucrative hotels in the five-star category, you will hear us talk increasingly about the NPV of our global pipeline. In our view, this is the clearest way to help investors value the growth in Starwood, Madison Franchise Business. As an example, we have talked in the past about how more than half of our pipeline, in terms of rooms, lies outside of the United States. The NPV of our non-U.S. pipeline is well over 60% of the total.

As we have mentioned in previous calls, our job as business leaders, is to realize the value of our existing pipeline as one of four financial levers to drive shareholder value. As a reminder, those four levers are, one, driving revpar premiums, two, growing our pipeline, three, controlling our costs and four unlocking real estate values.

Our ability to pull these financial levers relies on the keen execution of the five essentials of the Starwood journey. Since our last call, we have launched the journey at Starwood all over the world, with the aim of aligning our associates and soliciting their feedback. Starwood class brands, is our first essential.

And our brand teams are hard at work driving a focused slate of real innovations to drive revpar out performance and to propel our pipeline. Our revpar performance in the second quarter validates these efforts.

The brands are also better aligned than ever with our operations team, as we work toward brilliant execution, our second essential. Brilliant execution means consistently creating brand relevant guest experiences.

And in spite of cost containment exercises, so far, since the beginning of the year, our GSI scores were up in the second quarter and revpar index was up for the majority of our brand. We will continue to balance effective service delivery, while being vigilant on costs.

Global growth is our third essential. And we continue to grow our footprint around the world. As we have repeatedly stated, our pipeline is as large as our peer’s on a base of half the number of rooms.

Our brand and operations teams are aligned to open these hotels on time, on budget, and on brand. And in spite of having opened 21 hotels in the quarter, and in light of the U.S. financing challenges, our pipeline increased slightly during the quarter to well over 120,000 rooms.

To be clear, this pipeline factors in our best estimates of delays and slippage in uncertain times. As the financing situation in the U.S. has deteriorated, we have become more conservative in calculating this number. So, right now, for example, about two-thirds of our global pipeline has financing in place and is under construction.

Great talent is our fourth essential. And our human resources team is driving our efforts to retain, develop, and attract talented people to operate the more than 500 hotels we expect to open in the coming years.

And as we have mentioned earlier, our human resources team is also involved in looking for opportunities to generate cost savings that will not impair our ability to drive future growth.

The fifth essential, generating market leading returns, hinges on our ability to realize global growth, unlock real estate value, and carefully manage costs. Selling real estate and prudently allocating capital, will continue our transformation to a truly asset light capital efficient model. We have seen obvious arbitrage between the value of Starwood’s substantial real estate holdings around the world and the current share price.

And speaking of share price, across many companies, it is management’s role to express their belief that their stock represents a great value. This is certainly true for us today. At a share price of say $39, our market capitalization gives it a value equivalent to roughly $300,000 per room, for the hotels that we own, which is substantially below replacement costs.

For that, we would throw in our entire fee business, growth and all, vacation ownership, joint venture hotels, not to mention bliss, for the value of our debt, or about $3.75 billion.

Turning back to capital allocation, we are actively exploring asset dispositions along the lines of our pending sales of the Lido properties, Lessen Turnberry, and the Sheridan Hamilton.

But, it is no secret that the dislocation in the capital markets is making it difficult for would-be buyers to secure financing. So, the pace of asset sales is not what we would have liked. That said, we are in a great position, with a solid investment grade rating, and strong balance sheet.

At the end of the second quarter, we were at our targeted leverage ratios, but had almost $2 billion worth of liquidity and cash, plus capacity remaining on our credit facilities. So, for asset sales, this affords us the ability to wait for the right price, the right partner, and the right management contract.

Proceeds from asset sales, as well as free cash flow, will be a source of cash for additional buy-backs, or other attractive investments, as we comfortably stated in our stated leverage range.

So, to summarize, I want to reiterate our view of the world today. Revpar decelerated rapidly during the second quarter, but our diversified portfolio around the world and our focus on cost, will position us better for the down turn than our competitors.

Given what we see today, we believe that we can still hit the high end of our guidance range, but we revised our guidance to account for trends that may further deteriorate. Either way, we have taken action in the face of a difficult environment. We also continue to focus on the Starwood Journey to sustain our growth trajectory.

And with that, I would like to hand the call over to Vasant, for some more details on the financials, and our guidance, Vasant.

Vasant Prabhu

Thank you Frits and good morning everyone. I will start with a quick overview of the state of our business around the world and then provide some more details on the assumptions underpinning our guidance for the balance of the year.

Not surprisingly, the two major issues we face, as all of the businesses do right now, are the weakness of the U.S. consumer, and the impact of the credit crisis. The slowdown we see, continues to be consumer led. As such, our hotel business is weakest in markets that are heavily leisure driven, like Hawaii and Phoenix, although Orlando has stayed strong.

In general, resorts are weak in the U.S., and in U.S. dependent markets like Mexico. We are also seeing this impact at our Italian hotels, where we have always had a strong and loyal U.S. consumer base.

The consumer based weakness is impacting our vacation ownership business too. But fails tracking below our expectations in Hawaii and at our resorts in the Western U.S. and our fractional products. Here again, Orlando has continued to perform well, despite the overall consumer weakness.

On a different style front, while there is general anxiety that permeates across sectors, our business is most impacted in sectors hit by the credit crisis and the consumer slowdown, i.e., Financial services, consumer durables, and retail, and anything related to residential real estate.

As you have seen on the Smit Travel Numbers, we did see mid-week travel decline, starting in May, and the cities in the U.S. most dependent on the hardest hit sectors, were not, surprisingly, the most effected.

Overall, in the U.S., new group bookings are declining, although cancellations are not up and we are still facing a positive territory for the balance of year and 2009. Travel in state is slowing down, and could slow further, as the airline cutbacks happen in Q4.

We are starting to see a few non- U.S. markets also being impacted by these same factors, like London, Paris, and Tokyo. And some countries like Spain, the UK and Ireland have similar force residential bubble issues, like the U.S.

But, the slowdown is not here across the board in the U.S. And large parts of the world are growing very strongly. In the U.S., markets such as Chicago and San Francisco are holding up well. In cities like New York and Boston are benefitting from international guests taking advantage of the weak dollar.

As maybe expected, natural resource dependent economies around the world are doing very well, but no sign of any change in trend. In Africa and the Middle East, where we have over 100 hotels, and derive 15% of our fees, 20% plus growth rate in local currencies continue.

This is also the case with Asia and Japan. In South and Southeast Asia, Q2 local currency revpar was in the mid teens across most countries. China has been impacted by visa restrictions, leading up to the Olympics, and dislocation, of course, by the earth quake, which we expect will abate as we past the Olympics and growth resumes.

Other natural resource economies around the world like Australia, Brazil, Chile and Argentina are also holding up well. As expected our global footprint is helping, nevertheless, as our guidance indicates we are projecting a softer second half than we had previously anticipated driven by the deterioration we saw in the U.S. starting mid-May, the issues in continental Europe in particular Italy and Spain and in our vacation ownership business.

Moving onto our guidance. We have lowered our guidance by 70 to 80 million in EBITDA. The reduction is roughly evenly split between our hotel business and our vacation ownership business.

In our hotel business, in North America, our guidance resumes flatish revpar in Q3, which is helped in September by the holiday shift. For Q4 we are resuming a 3 to 5% revpar decline.

On the global business, we are factoring in a slowdown of 300 to 400 basis points in Q3 from second quarter levels and an additional sequential 300 to 400 basis points drop in Q4.

As Frits has indicated we have a comprehensive set of cost reduction programs under way at the hotel level and in overhead costs to mitigate impact of the revpar slowdown.

Our reported revpar benefited by 500 basis points in Q2 due to the continued weakness in the dollar, which remains weak as we speak. Other items anticipate some strengthening of the dollar in Q4. So these are the revpar cost assumption that underpin our EBITDA guidance for the hotel business.

In the vacation ownership business, we are lowering the guidance range by around $40 million. Roughly half due to a lower securitization gain and half from lower sales. As in the hotel business, SVO has undertaken a significant cost reduction program to limit the bottom line impact of the sale shot (inaudible) to $20 million.

On the securitization front, market conditions are volatile. Given market conditions, we anticipate selling fewer receivables than we had planned previously. Advance rates and spreads at current market terms will reduce the gain we recognize to 10 to $15 million versus 30 to $35 million we anticipated earlier.

The lower advance rate will mean we have a higher retained interest, a lower gain now but more interest income over the term of the note as long as default are not worse than forecast.

Default rates went up slightly; remain in line with our long-term experience in this business. We have included the securitization gain in our Q3 guidance as we are launching the sales profits now and expect to get it done before the end of the quarter, market conditions limiting. So that is what underpins our guidance range.

Finally, a quick word on debt level, cash and buy backs. Our net debt level was up modestly in Q2. Our ratios are in the ranges of our long-term goal and we remain committed to retaining our investment grade rating. But we have cash coming in later this year from the securitization and asset sales.

As previously announced, we have signed deals with deposits on Turnberry, Scotland, and the three hotels around Venice. Closing is proceeding as planned and we expect to get approximately 400 million in cash from these sales and sales of a couple of smaller hotels by the end of October.

With these sales and the cash from securitization our debt levels will be coming down. We have assured almost $1 billion in 5 and 10 year debt over the last 12 months on excellent terms and our liquidity position is very strong.

As such, we have the flexibility to continue to take advantage of opportunities that come our way in the current environment to both invest in growth or buy back stock.

In summary, we expect that business conditions will be challenging for the next few quarters. We are focused on managing our cost structure as demand contracts, while preserving investments that will drive long-term growth including investments in our brand and investments in our pipeline.

With our global footprint, strong brand and a large and high quality pipeline we remain as bullish as we have ever been about our long-term growth potential.

With that I will turn the call back over to Jay.

Jason Korval

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

Kim, we are ready for the first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Joe Greff from JPMorgan

Joseph Greff - JPMorgan

Morning guys. Question on timeshare. What is your expectation, and I am sorry if you said this Vasant, but what is your expectation for contract sales for full year '08? And on the topic of cutting costs in corporately and at the hotel property level, how much do you think in the aggregate there is that you can take out on a fixed basis? Obviously a big chunk of that is going to be variable. Thank you.

Vasant Prabhu

Hi Joe. On timeshare, you have seen house sales tracked in Q2, our real estate sales were down about 26% in Q2 versus last year. I think we are assuming that the trend does not change if anything in our guidance we will assume it is possible that things could continue to soften.

As Frits indicated, there is a whole range of cost reductions in the timeshare business. Some costs do come down when sales do not happen but we have also taken other cost actions in the G&A and quite taken a big reduction in their overall cost structure.

So the bottom line impact of the sales decline is essentially less than what any flow through would suggest.

So I think our guidance sort of assumes that not only do conditions not improve but we are assuming they will get a little worse. Of course, as things are better than we expect right now, we will do better than our guidance.

Frits Van Paasschen

On the cost side, let me start off by just talking about methodology for a second. For the corporate G&A spending, what we are looking at is essentially all of our activities and then reconstituting our organization based on the best location of those activities in the organization.

So instead of going out with a command to reduce costs by a fixed amount in different areas, we are actually taking a pretty thoughtful look at this, which as a new management team, gives us a chance also to talk about how we want to work together and how we want to structure our organization philosophically.

On the property level what we are doing similarly is taking a few example properties and going through each and every activity and then comparing that to a baseline model of what we think our operating costs should be.

For both of those things, for this year, 2008, the cost reductions will be of some substance as we get into the fourth quarter. The real benefit will be as we get into 2009 and we have a 40 year run rate there. And we will be better informed to be able to tell you what that looks like for 2009 as we get into setting guidance out for that year.

Jason Korval

Next question please.

Operator

And that will come from Celeste Brown from Morgan Stanley.

Celeste Brown - Morgan Stanley

Hey guys. Good morning. As you think about Hawaii and some of the discussions that there have been in that airline industry about maybe a structural permanent reduction lift, do you think about reconsidering your plans for building out that market from a timeshare perspective?

Frits Van Paasschen

The short answer is we are committed to Hawaii and particularly the Ka'anapali development. What we are looking at is what the appropriate pace of sales given what we see to be as a likely pull back in demand based on some of the factors that you were talking about.

Vasant Prabhu

Yes, in fact one other thing on that is from everything we know, there really is nothing else happening on island of Maui in terms of new development for timeshare which puts us in a very good position in terms of having a very scared commodity on the beach on a great resort. So we think it is a great project but as Frits we will modulate the pace of construction based on the pace of sales.

Jason Karvol

Next question please.

Operator

And that will come from David Katz from Oppenheimer Capital.

David Katz - Oppenheimer Capital

Hi good morning. Just a couple of things that caught my eye; incentive fees we are up 18% and sorry if I missed it but wanted to know the drivers are. And then luxury in North America seem to be down and the W was up slightly. And I guess a couple of those just sorted caught my eye as being counter intuitive. Could you just color those in for me if you do not mind?

Vasant Prabhu

Yes the incentive fees, David hello, the incentive fees as you know the international contracts have post dollar incentives. So out of our total incentive fee base, almost 85% actually are derived from outside the U.S.

So incentive fees benefit more from ForEx without a doubt because international contracts dominated the incentive fee stream. That is one thing. The second is in general as you know the international business has grown very well, which means more incentive fees. So that is why incentive fees were up.

Your second question was -- what as the second question?

Frits Van Paasschen

Luxury properties.

Vasant Prabhu

Oh luxury property is still only a function of greater footprints. Those are smaller footprints so you can have disproportionate impacts from specific hotels. There is some renovation activity going on in W right now.

The W Times Square is under renovation and the W New York is under renovation at the same time. So there is some impact from that. So it is all very footprint specific.

Frits Van Paasschen

Yes and I think just to reinforce what Vasant is saying. The incentive fee growth, I think, just reflects the fact that we continue to see strong growth overall in the non-U.S. markets and a sustained weakness in the U.S. dollar to boot.

And then to Vasant's other point, the W footprint largely today is U.S. based and I think reflects the slowdown that we are seeing there and you have the loss small numbers in place.

So work at a couple of properties can make a big impact on that. Although I would have to say in general the luxury business in North America looks soft and that it is not terribly surprising given all the things that we have been talking about.

Jason Korval

Next question please.

Operator

Next question will come from Bill Crow from Raymond James.

Bill Crow - Raymond James

Good morning guys. Couple of questions, quick questions here. If I read kind of between the lines Vasant, you were talking about using your cash to reinvest in the pipeline and your brands and pay down debt. It did not seem like there was much emphasis on future share repurchases.

If you guys could just kind of articulate your desire to continue at the same pace or how that pace may change. And then Vasant, if you could just touch on the tax rate; it has driven positive surprises last couple of quarters. Maybe you could just give us some idea on the variability there.

Vasant Prabhu

Yes, on the buybacks, I think you heard from both Frits and myself that we expect steady buybacks to continue. The fact that we have cash from asset sales coming in is helpful. We have more capacity left under our (inaudible).

So I think our goal is we have the flexibility to take advantage of the current environment if opportunities come up whether those opportunities are in terms of a stock that we think is attractively purchased or other opportunities out there that can grow our business.

As far as the tax rate goes, we are always looking at initiatives that can improve our tax rate from where it is. And as those fall into place, for example, a big initiative this year was moving our intellectual property overseas.

That has a big tax benefit for us over the long-term. Some of it is being reflected in our tax rate this year which is probably the largest reason why our tax rate, at this point, is lower than where our prior guidance was because that was all put in place at the end of the first quarter this year.

Frits Van Paasschen

Yes Bill, just to amplify something here for a second too. This is Frits . The growth of our pipeline and our fee business in general, the cash that we have to put against that is almost entirely as in SG&A expense.

And so there is very little capital associated with the growth of the fee business. And so I think you could see fairly transparently what our costs are to do that. It is not as though we have to look at additional funds from overall sources and uses of cash basis to grow the pipeline, which is frankly why we think it is such an amazing business from a value creation perspective.

Jason Korval

Next question please.

Operator

Our next question comes from Felicia Hendricks from Lehman Brothers.

Shulay Ley-Pan - Lehman Brothers

Morning it is actually Shulay Ley-Pan (ph) for Felicia. Can you please let us know what the FX impact was in the quarter on your North American revpar from Canada and Mexico?

And regarding your revpar guidance can you give us a sense for what international revpar growth could be in 3Q in '08 and what you are assuming for a FX benefit there? What we are trying to get at is are you assuming revpar growth internationally before FX for the second half?

Vasant Prabhu

I am not sure I fully understood the whole question. In terms of the revpar, impact on revpar in Q2 from ForEx, we benefited to the tune of about 170 basis points in North America.

And North America for us is just Canada and the U.S. That ForEx benefit in North America actually begins to drop off and turn slightly negative in the fourth quarter because the Canadian dollar strengthened as you might know in the second half of last year.

As far as the international revpar and ForEx impact goes, if I understood your question right, you could see that the dollar has stayed weak. The ForEx benefit from the weak dollar is a little lower in Q3 than it was in Q2 because last year the dollar weakness really started to get worse in the second half of the year.

And as we get into Q4 the ForEx benefit drops some more and we are assuming there might be some strengthening of the dollar in Q4. So that is implied in our guidance right now.

Jason Korval

Next question please.

Operator

Our next question is from William Truelove from UBS.

William Truelove - UBS

Hi good morning. Two here. One about the Sheridan revitalization program, what risk is that given that we are going into downturn? Will the third party owners be able to fund it? How flexible will you be? Because during the previous downturn the Sheridan revitalization program sort of fell apart. So I wanted to know what is going to happen this time.

And then have you ever considered using additional hedges to currency given the amount of certainty already in the business? If you increase your hedges could that not at least eliminate some of the volatility in your earnings guidance? Thanks.

Frits Van Paasschen

Yes, so this is Frits. Hi, William. In terms of the Sheridan revitalization, we have close to our 100 renovations underway or planned in North America as part of that. And then there are about 30 Sheridan properties that we want to exit. Exiting the properties should not be an issue under any circumstances. It is just a question of time and we phase those in and are following a plan for doing that.

In terms of the renovations, a lot of those underway. And so while there may be some slippage we do not anticipate it to be very significant but we will obviously keep you posted on that.

So far and we have been watching this quarter by quarter now for the last three, we have managed to stay on the program that we have had. So if we move away from that we will let you know but so far we seem to be able to continue the pace on that.

On the hedging side, we have looked and managed to take some hedge positions particularly against the Euro and the Canadian dollar. And the purpose of doing that is, as you pointed out, to balance out some of the volatility in earnings.

We obviously have enough to focus on in managing our business and do not, in addition to that, want to try to be foreign exchange speculators. So we are taking some hedge positions to manage that and taking advantage of the fact that the dollar is very weak right now particularly against the Euro, making sure that we benefit from some of that next year at least at the level it is today.

As we did that for this year, obviously since the dollar weakened, it actually went the other way for us, which if you follow my logic means it should balance out even better for us next year even if the dollar were to strengthen. I do not know, Visant if you want to --

Vasant Prabhu

I think that is absolutely right. I think in the end over this time frame there will be less volatility at least between the Euro and the Canadian dollar.

Jason Korval

Next question please.

Operator

And that comes Chris Woronka from Deutsche Bank.

Chris Woronka - Deutsche Bank

Hey good morning. Wonder if you guys could comment a little bit on the, in terms of timeshare the contract sales you made in the second quarter. When do the bulk of those become recognizable into earnings and what is the typical lag across your whole SVO system in terms of when the contract sale might be made and when you recognize the profits?

Vasant Prabhu

There is a schedule in our data pack that gives you an idea of how much was deferred in any particular quarter. And what you will see is that there is not much being deferred at this point because many of the projects that are being sold like Orlando and Hawaii are pretty much close to being fully done.

So, at this stage, what we are selling is going straight into being recognized as sales with very little deferral dynamics in play. That schedule and I do not know what page it is, will give you an idea of at any point and time how much of our sales within the quarter were actually recognized in the quarter.

Jason Korval

And Chris, I can walk you through that after the call, okay? Next question please.

Operator

And once again it is star one if you have a question today. Our next question is from Will Marks from JMP Securities.

Will Marks - JMP Securities

Thanks. Hello Frits , hello Vasant. A quick question on just clarification on asset sales. Can you refresh us on their -- what is in the press release and what, Vasant, you mentioned on the call about the additional sales, just kind of sum it all up if you would?

Vasant Prabhu

Sure, I think we announced earlier this year that we had a signed, purchase and sale agreement on two hotels on Lido Island and one small hotel outside Venice , those are going to close, we believe, in October and it is proceeding well.

And then in this quarter, we announced that we had purchase and sale agreements on some additional hotels including The Westin Turnbery in Scotland and the Sheridan Hamilton that Frits referred to. So those are the hotels that we expect the cash to come in by October and that approximately is in the $400 million range.

Frits Van Paasschen

Beyond that obviously as I mentioned in my text earlier, we continue to look at opportunities for asset sales. And as with the securitization discussion we had around the fourth quarter last year, we need to find the right balance between market realities and our desire to do this.

And as we mentioned earlier too, we can do this from a position of strength. And so we will continue to look at opportunities. And if those come to pass and are realized well obviously we would be happy with that.

Jason Korval

Next question please, Kim.

Operator

It comes from Patrick Scholes from FBR Capital Markets.

Patrick Shultz - FBR Capital Markets

Hi good morning. When looking at your room counts for Le Meridian, it looks like you lost several thousand rooms quarter over quarter. Can I get a little bit more color on that?

Frits Van Paasschen

Yes, I do not know if I am going to go into specific properties for you but when we acquired Le Meridian about two and a half years ago we got what was, we believe, a fantastic brand with a footprint in some very interesting geographies notably southeast Asia, the Middle-East, northern Africa as well as Europe.

But what we also saw was a real mix in the quality of those properties. And so as with Sheraton in the U.S. we are going through a process of triage recognizing some Le Meridians are at brand standard today. Many can get there and quite a few also will not.

And so what you saw there in the reduction in the number of rooms is simply our making disciplined choices from a brand perspective and cutting out those properties that even with an investment could not get to a standard that we would like to associate with Le Meridian.

The good news of that is that in addition to making our brand more consistent, the fee levels that we were realizing from those properties are pretty de minimis. So what we basically get is a great investment in the brand without a lot of downside in foregone fees.

Jason Korval

Next question please.

Operator

Our next question comes from Celeste Brown from Morgan Stanley. Ms. Brown your line is opened. Please go ahead.

Celeste Brown - Morgan Stanley

Hi Vasant, would you mind laying out your fees by geography? You gave Africa and the Middle-East and you have given us some numbers in the past but if you can just walk us through it globally that would be great.

Vasant Prabhu

Yes, I am going to do this from memory and Jay may correct me if I am wrong. Our fees are roughly 55% non-U.S., 45% U.S. Out of that 55% it is roughly evenly split about 15 from Europe, 15 from Africa and the Middle-East, 15 from Asia and the remaining 10 from the Americas.

So we are really well diversified of base of fees exposed to loss in currencies. Some of which we actually think could appreciate again for the dollar even if the dollar strengthens versus some other currencies.

There is a lot of talk about certainly Asian and Middle-Eastern currencies strengthening versus the dollar. Even as the dollar might strengthen against the Euro or the Canadian dollar.

Celeste Brown - Morgan Stanley

Okay. Thank you.

Jason Korval

Next question please.

Operator

Next question is from Felicia Hendricks from Lehman Brothers.

Shulay Ley-Pan - Lehman Brothers

Hi. If you cannot securitize to timeshare receivables by the end of the year, what would be the alternative? Would you just keep them on your books? What is the plan there?

Vasant Prabhu

There are a couple of alternatives. I mean we are pretty confident we will get the securitization done. Of course the market has confounded most people's predictions and we have seen a tendency of them being open and shut. We have a great success in the debt issues we did in the very volatile market and I believe we will succeed with the securitization as we expect.

If we do not securitize, we could do what is called a convert, i.e., we get access to the cash so there would not be a gain recognition. That is one option. The other is to just keep it on our books and enjoy the interest that we get from it.

Jason Korval

Kim, are there any other questions?

Operator

Yes. Our next question is from William Truelove from UBS.

William Truelove - UBS

I have a follow up on timeshare. Could you tell us in terms of your pipeline, what percentage is coming from Hawaii versus other markets?

Vasant Prabhu

Timeshare, the business is roughly 40 to 50% Hawaii, a big chunk in Orlando and then the rest of the western desert kind of market and Mexico.

Jason Korval

Next question please.

Operator

And that will come from Patrick Scholes from FBR Capital Markets.

Patrick Scholes - FBR Capital Markets

Hi just a quick question on the second quarter results with Canada. In constant dollars what was your revpar growth from your Canadian owned hotels?

Vasant Prabhu

I do not know if I have that precise number here.

Jason Korval

Hey Patrick?

Patrick Shultz - FBR Capital Markets

Yes?

Jason Korval

I will look that up and give you a call after the call, okay? Because we do not have it right in front of us.

Patrick Shultz - FBR Capital Markets

Okay. Thanks, Jay.

Operator

Our next question is come Chris Woronka from Deutsche Bank.

Chris Woronka - Deutsche Bank

Hey, good morning. Just going back to the share repurchase for a minute. I understood what you said about the cash coming in later this year but you have got $134 million left. Do you have to have that cash in hand before you would consider going back to the board to ask for more? Is there a magic formula you need to be at a certain point in time in terms of the leverage level or are you somewhat flexible on that?

Frits Van Paasschen

There is some flexibility there. Our feeling is what we would like to do is run through the authorization, see where we stand in terms of cash in and a few other factors and then go to the board and ask for other authorization.

So the fact that we have not asked for an authorization now should not be terribly concerning. It is just a question of art, having decided we would rather run through this before going back to the board.

Vasant Prabhu Prabhu

It will be consistent with what we have done in the past. So there really is no difference than what we have done in past. We have always gone back to traditional authorization once an existing authorization was exhausted.

Jason Korval

Next question please.

Operator

That comes from Bill Crow from Raymond James.

Bill Crow - Raymond James

Frits, this is kind of a personal or philosophical question. But are you frustrated at all that the last few quarters have been so focused on timeshare and would that prompt your decision to deemphasize the growth of timeshare in the future?

Frits Van Paasschen

I consider that more of a philosophical and business question than a personal one. In my view, we, as management, for all the obvious reasons, are going to continue to make decisions in the best interest of our shareholders.

And the reality is not so much just that we have had a difficult year relative to expectations for timeshare but with the cost of construction with the challenges we have with securitization and with the challenges we have with the U.S. consumer, we are at a different pace and outlook for that business probably than we were several months ago.

And as we mentioned previously in this call, we have taken considerable efforts to right size the business accordingly. I will go back to something I have said in previous calls though; also we do believe there are synergies with this business.

We do believe we can find projects that generate good returns for our shareholders and we consistently have both the best brands and the best team in the business. So what I am saying, I guess, in short is we have a strong business in a business environment that has gotten considerably weaker and one where even if the U.S. consumer comes back, the construction costs side and the securitization issues may persist.

And we need that much more disciplined about where and how invest in the growth and then sustain the timeshare business over time.

Jason Korval

Next question please.

Operator

And that is all the time we have for questions today. Mr. Korval, I will turn the conference back to you for additional or closing remarks.

Jason Korval

Great thanks Kim. Patrick, per your question on Canadian FX it was -- it added roughly 100 basis points. So excluding the FX from our Canadian owned the results would have been around 4%.

So, I appreciate your time today on our second quarter call. Please feel free to contact me directly for any other follow up or questions that you might have. Goodbye.

Operator

And that does conclude our conference call today. Thank you all for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Starwood Hotels & Resorts, Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts