Hilton Worldwide Holdings Inc. (HLT) Q1 2007 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Hilton Hotels Corporation first quarter earnings conference call. My name is Rob and I will be your coordinator for today. (Operator Instructions) At this time, I would now like to turn the call over to Mr. Steve Bollenbach, CEO.

Good morning. Thank you for joining us. I am opening the call this morning because Mark Grossman, as a lot of you know, is going to leave his position as Senior Vice President of Corporate Affairs and Communications and he is still going to be with us as a consultant and he is here today, but Atish Shah is going to take over his duties moderating these calls. I want to thank Mark for all of his hard work over many, many years and wish Atish a lot of luck on this new responsibility. So will you go ahead?

Thanks, Steve. Good morning, everyone. Thanks for joining us for Hilton's first quarter 2007 earnings discussion. Before we get started, please note the press release that we issued this morning, as well as the conference call today, contains forward-looking statements within the meaning of federal securities laws, including statements concerning business strategies and their intended results and similar statements concerning anticipated future events and expectations that are not historical facts. The forward-looking statements in the press release and call today are subject to numerous risks and uncertainties as described in our SEC filings which could cause actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release, along with our comments today, are effective only today and will not be updated as actual events unfold. This call is being webcast. You can access the webcast via hiltonworldwide.com, clicking on the investor relations link and then clicking on the conference call link. Additionally, a telephone replay of this call will be available until Monday, May 7th at 8:00 p.m. Eastern. To access the replay, dial 888-286-8010 in the U.S., or 617-801-6888 if overseas. Passcode is 28720210. Additionally, the replay will be archived on hiltonworldwide.com. In terms of the format for this call, Matt Hart and Bob LaForgia are each going to make some introductory remarks and then we are going to go to Q&A for the majority of our time. With that, I will turn it over to Matt to get started.

Thank you, Atish. Good morning, everyone. What I want to do is spend just a couple of minutes talking about the international business, and particularly our acquisition of Hilton International just over a year ago. And then Bob is going to walk you through the quarter. The acquisition of Hilton International has been a resounding success on all fronts, exceeding even our high expectations. Our team members are pumped up about having reunited the company and all the opportunities that they see. We have significantly expanded our development team. We are designing new prototypes for our select service brand, and we are training brand ambassadors for their new positions around the world. We have had early success with the deals that we have announced in China and India and we are busy working on a number of great other opportunities worldwide. We are installing our OnQ technology platform throughout our international estates and as we have said before, we expect to complete the rollout by the end of 2008. Roughly one year after acquiring HI, how are we doing financially? As you’ll recall, we purchased Hilton International for $5.7 billion. We will have sold about $3.2 billion of assets by the end of this summer, which will leave our basis in the rest of the HI business that we bought at around $2.5 billion. Then if you apply a market multiple, let’s say 14 times, on the expected 2007 earnings of the remaining business, which is mostly fees, we would get to a value north of $5.5 billion, or about 2.2 times that adjusted basis. And that of course is based on our current earnings outlook, only it does not include the real upside of the HI deal, which again is the ability to take all of our brands and expand their reach on a global basis. And that value will come over the next several years as our international development efforts begin to bear fruit. For the entire company, things are going really great. Our fee business is strong. Our development pipeline is the strongest in the industry. Big cities like New York and Chicago are in high demand. Our group business for the remainder of this year and through 2008 looks very good and the core time share business is performing very well. With that, I will turn it over to the hardest working CFO in the business, Bob LaForgia, for some color on the quarter.

Thanks, Matt. Actually, I would like to talk about four things this morning. First, I will do a quick wrap-up on the quarterly results. Second, I will provide some commentary on our updated 2007 full-year outlook, and then third an update on asset sales, and then lastly a few remarks on our capital allocation strategy. First on the quarter, we are very pleased with our first quarter results, despite what is traditionally a seasonally weak period in the hotel business. Our fee business continues to perform exceedingly well, which is reflective of strong RevPAR increases across all of our brands and solid unit growth. At owned hotels, despite group weakness in Hawaii and San Francisco, we performed better than our expectations with our properties in New York and Chicago posting very strong results. Our leased hotels also performed better than expected, reflecting strength in most major markets across Europe, but particularly in Germany and the U.K., and though reported results in the time share business were impacted by percentage of completion accounting, as expected, on an economic basis, Hilton Grand Vacations posted 30% increase in gross sales. In terms of EPS, now you have to parse through the numbers, but if you exclude the impact of non-recurring items in both periods and put the first quarter 2006 on a pro forma basis, that is assuming the acquisition of Hilton International occurred on January 1st of last year instead of February 23rd, you will see that our diluted EPS jumped a strong 33% over the prior year quarter, from $0.15 a share last year to $0.20 a share this year. Moving on to our outlook, again a lot of numbers to parse through here but we have raised our expectations for full year 2007 recurring diluted EPS guidance by $0.03 a…

Thanks, Bob. Let’s get started with the Q&A. Rob, may we please have the first question?

(Operator Instructions) Your first question is from the line of Bill Crow of Raymond James.

Good morning. Mark, thanks for your invaluable help through the years. Matt, could you touch on the results in Europe? The 4.8% RevPAR growth seems a little bit lower than what we would have expected. What sort of impact are you seeing from the strength of the Euro and the Pound as it relates to inbound traffic into your hotels?

We’re going to let Ian handle that. Ian, you’re Dubai, as I recall?

Yes, I am. Well, let me just say first of all in terms of the inbound traffic into London, take that as an example but anywhere actually within the Euro zone outside of the U.K., we have seen no tail-off at all. The U.S. traffic between Europe and the rest of -- sorry, the whole of Europe has been very strong in the first quarter. We have seen no tail-off at all from last year. So we remain pretty positive about the way things are panning out for the rest of the year as well, and particularly in the bigger hotels in London, Paris, Frankfurt, where we have the most of the U.S. traffic, the financial centers. I think the overall, from a RevPAR perspective, we’ve been on a local currency basis, we’ve been very pleased with what we saw in the first quarter. It continued. We’ve seen a continued improvement in rate. Occupancy has been strong, as it was through the end of last year. It has remained strong through the first quarter, and the primary driver for us in London in particular has been rate through the first quarter. In fact, if you look at the rest of Europe, take an area for example like Benelux, where we have 10 hotels, we have seen very strong first quarter, and for them it’s been up close to 20%, for example, where we have two hotels at the airport and downtown. And even the resort area like Egypt, which for us is very important because we have 14 hotels in that country, we have see double-digit RevPAR increase, again local currency, through the first quarter. So we are pretty pleased with what we have seen continuing through the start of 2007.

One final question; the data we see out of Smith Travel regarding Hawaii has been weak pretty much all year. I guess a two-part question. First of all, what do you attribute that to? Second, is that impacting your visitation to time share?

Okay, time share it is not affecting at all. On the hotel side, really the big thing, Bill, it was the fuel tax surcharge put on in Japan, and that definitely has affected the Japanese tour and travel market, and so we are having to scramble to replace that, particularly at Hilton Hawaiian Village. Waikoloa does not have as much inbound Japanese business. They have some. In Waikoloa, we are doing some CapEx projects there. We are expanding the Dolphin Quest, which will be a fantastic addition or expansion to that property, and we are updating the trams at that hotel. That hotel does not make as much money for us as Hawaiian Village but still will have some impact there. I think it is mainly handling that Japanese inbound and having to replace that, but we are optimistic, particularly Waikoloa should do better and the full year for Hawaii still looks pretty good.

Thank you.

Your next question is from the line of Steven Kent of Goldman Sachs.

Could you just talk a little bit about the Morgan Stanley transaction, what the impact would be to your RevPAR forecast and your EPS forecast, all things being equal, when that sale is completed?

In terms of RevPAR, it is not going to impact it materially from our guidance that we have for owned hotels in our current release here. In terms of EPS, that deal will be slightly accretive for the remainder of this year. By the time those deals close, it will be below $0.01 a share for the rest of this year and probably between, for a full year, probably between $0.01 to $0.02 accretive.

One of the big things, and I’ve said this before on this call, that is really an important factor going on is, for example, with the Morgan Stanley deal in Europe, they have plans for significant CapEx at the hotels that they are buying. I spent some time with them this weekend. If you remember also the buyers of some of our hotels in the Waldorf Astoria collection they bought from C&L, lots of CapEx plans there. We did the deal with the Palmer House. That is getting a major upgrade. Pittsburgh, I met with the owners in Anaheim last week and they have a major CapEx plan for these hotels. We are getting a lot of benefits with the robust sale market when the owners buy the hotels, they are making significant reinvestment in the hotels, which is going to really help us and help our brand. So we are very pleased with how all of this is working through our system.

One other quick one on your RevPAR forecast of 9 to 10. Could you just talk about the difference between the international versus the U.S.? What was the rationale for the 100 basis points difference from the last forecast? Last time, I think maybe Joe Greff asked this question. You said that international and U.S. would be roughly the same, or that it was in that forecast already but maybe you could just comment on that again.

Steve, I think what you are referring to is that we took the high-end of our RevPAR guidance range for owned hotels down from -- the high-end is 11% and we are taking that high-end down to 10%. Is that what you are referring to?

Exactly.

Basically that is just recognizing a little bit of the softness in Hawaii compared to our prior forecast. Hawaii is still going to have a great year but it is just a little bit softer than we thought three months ago. Also, probably a little more softness in the first quarter than we expected in San Francisco, though again San Francisco is going to the remaining three months of the year look really good there. That is why we took in the high-end of the guidance. Really no change in terms of the answer that I’ve given to Joe previously, that the international results are generally consistent with the overall worldwide RevPAR guidance for owned hotels.

Okay, thanks.

Your next question is from the line of Will Marks of Jolson Merchant Partners.

Thank you. Good morning, everyone. I just have a question on what ’07 would look like on the asset sales, the 10 sales that you are under contract with. You mentioned a trailing number. How much growth would you expect from those assets in ’07 approximately?

You said you’re looking for a forward multiple?

Yes, exactly.

A forward multiple on those asset sales? It would be a hair under 15 times trailing time -- I’m sorry, forward, just under 15 times.

On the guidance you gave on how accretive that deal would be in ’07, ’08, it does not seem like much but clearly it is very accretive on an EBITDA multiple basis and is the difference on the tax line, in paying off interest that is not that expensive?

It is slightly accretive on a full-year basis. Those assets that we -- they are saving at the interest line but it is also saving on the depreciation line. If you remember when we had to do a purchase account for the Hilton International transaction, so basically what we did is we put those assets on the balance sheet at full value and therefore the depreciation expense associated with those assets were also at full value. So the amount of depreciation savings, if you will, and the interest savings cause it to be slightly accretive when you take them out of the mix.

Great, and I just have one other question; I’m confused on just the EPS guidance and how it actually went up a little bit. I know I am missing something. Can you just walk through the steps with me?

Sure. We took in our -- first I’ll reiterate what I said I my opening remarks. The midpoint of the guidance adjusted for Scandic went up by $0.03 a share. The overwhelming majority of that increase is related to our leased hotels. We took down our own hotel expectations a tiny bit. Leased hotels again mostly throughout the U.K. and in continental Europe will do much better than we originally thought. And then there is a bit of benefit below the line.

Thank you.

Your next question is from the line of Celeste Brown with Morgan Stanley.

Good morning. A couple of things. First, on the European asset sales, I believe a couple of them were unencumbered. How much did that impact the multiple, if at all? And then secondly, can you give us a little bit of an update on the progress of getting new international management and franchise contracts, the non-Hilton brands, please?

In terms of the fact that a few hotels went unencumbered, this was sold more as a package so it is difficult to parse through but those hotels, the one in Germany, the Hilton Weimar, frankly didn’t make a lot of money. It is a small hotel in really a secondary market so it was not a -- if you do parse out the components of the overall price, there was not a lot of value associated with that property anyway. The other unbranded property -- the other property was already an unbranded property. It was the Los Zocos Resort in the Canary Islands. Again, it is difficult to parse through the various multiples for each of the hotels but I would say just off the top that the fact that those two went unencumbered did not impact the overall pricing that much.

On the international development front, I think it has gone really well. Most of our pipeline, as you know, worldwide is centered on North America but we have some very good full-service Hiltons that are in our pipeline outside of North America, but as we have said the big push for us is the Select Service brand. In India, we are under construction with one project. We probably have another 12 to 15 sites that we are moving in on. We are spending a fair amount of time and I think we are just about finished with what the exact prototype should be in terms of food and beverage outlets, what size the back of a house is, the room component and so on -- very exciting, and our focus there of course has been on Hilton Garden Inn. We have done a lot of work with a prototype for Hanson because we think that is going to be a big opportunity in these markets and we are particularly focused on China there. So we have a lot of activity and we are spending a fair amount of time also with owners that are interested in developing in Western Europe and Eastern Europe. We are training our brand ambassadors because we want to make sure that these brands, when they open and when they get going, are well supported. It is kind of a time of building for the future, both in terms of the people side and the product side.

Can I just add a bit of color to that as well, Celeste? The Conrad continues to be really strong out here. I’m sitting in Dubai at the moment. I was speaking at the Arab Investment Conference this morning, which is the equivalent of Berlin over here in Dubai. A great deal of interest out here and as Matt said, one of the things that we did when we did the deal in India was that was a deal we had been working on for like 18 months. We are very focused on the 10 markets that we said we would take the focus serviced brand to in making sure we partner with the right people, because this is a long-term play, so we’ve been pretty selective as well. The level of interest is fantastic. It was great here today. We signed a lovely Conrad in Abu Dhabi which we built on the Corniche, which is the prime real estate area of Abu Dhabi, which is an up-and-coming emirate state. In each of those 10 markets that we said we were focused on, we now have active local speaking developers in development offices working with potential local partners and being pretty selective about how we focus on the growth of the Garden Inn, Hampton by Hilton and Double Tree products, so there is a lot of stuff underway in each of those 10 markets that we said we are going to focus on.

Your next question is from the line of Harry Curtis of JP Morgan.

I wanted to focus a couple of questions on the domestic market, if I could. Year-to-date, it looks like domestic occupancy is down a little bit and I am wondering if that is voluntary or to some degree, involuntary. If it is voluntary, are you wanting to bring in more transient business as opposed to lower rated groups? The second question is the domestic air pocket in pricing that we’ve seen in the first quarter. Do you think that it improves over the next three quarters or do you think it stays about the same as in the first quarter?

On the first one, I would just go back to what Bob said. We really just saw some unexpected weakness in Hawaii and that’s a very big market for us. That did pull down our occupancy numbers just a little bit but no, we are not seeking any kind of change in our market mix. Our outlook, as I said earlier for group business, which is probably the best leading indicator for the rest of the year, is very strong. We are seeing good strength in occupancy and a fair amount of pricing power for 2007 and 2008. I think when you look at our results comparatively across all of our brands, I thought we had a great first quarter.

When you look at just the domestic side, do you think that the next three quarters is a sequential improvement on the first quarter?

Yes.

With that in mind, it seems to me that really by the summer when you close on the Morgan Stanley assets that you could be at your target leverage ratio, don’t you think your stock is a great value here?

We do.

How about buying some?

We’ve been pretty consistent for a long time saying that we want to get to the target debt-to-EBITDA ratio. We think having that investment grade rating is very important to a company with our size and stature and we want to be consistent with all of our stakeholders.

That’ll do it for me, thanks.

Your next question is from the line of J. Cogan of Banc of America Securities.

Good morning. I have a few questions. As it relates to the buy-back, since we were just talking about that, Bob, did I hear you say that by the end of the year you think you are going to get to that desired ratio? You obviously know even more about what is going to happen with respect to the Caledonia and the other six domestic sales. I was kind of curious; when you line that up against your current EBITDA guidance, does it take you that long to get to that ratio, which I know is a little bit different than just the simple LTM debt-to-EBITDA number on a consolidated basis, or perhaps could it happen a little bit earlier in the year? And then I’ve got some RevPAR questions after that.

Just to stay consistent with what we said, saying that we will get to the adjusted debt-to-EBITDA and we laid out this calculation at our investor day. It is not a simple debt-to-EBITDA calculation. We will get there by the end of the year. Now, pinpointing exactly at what point in time, we are not going to do that. We would just like to stick with what we said -- by the end of the year, we believe that we are going to get there with all of the asset sales that we have on the docket right now.

Okay, and then as it relates to RevPAR, I was wondering if maybe you could just quantify some of the markets in the first quarter. For example, if Hawaii was a little bit softer, what was the RevPAR number in Hawaii? What was the RevPAR number in New York? I know San Francisco was up 8% for the market so I was kind of curious if you could talk a little bit more about how you guys did relative to that. And then if maybe Chicago, too. We’ve gotten a lot of questions this morning on it. I think people would be helped by just having a little bit firmer numbers on some of those key markets.

We traditionally do not give out specific RevPAR numbers for markets. We lump them in to either owned or system-wide. But maybe a couple of facts, if you’d like them. Our own hotels for the quarter saw a 6% growth in RevPAR. We did talk about the fact that there were -- we had some less than expected results in Hawaii and San Francisco. If you just take out those two markets out of our mix, which are pretty substantial markets, particularly Hawaii, RevPAR would have been up about 11.5%. So they had a significant impact on the overall reported.

That’s a pretty significant impact. As it relates to the renovation activity, because that is also something that we’ve talked about broadly but just don’t have enough data probably. Can you talk a little bit more about what your expectation is second quarter and beyond? I noticed in the press release, it seems to indicate that New York Hilton, for example, is still going to have some renovation activity going forward. I thought that was supposed to be closed, wrapped up by the end of the first quarter. Maybe talk a little bit about the Waldorf and the Hawaiian Village and help us see how you are getting comfortable with these RevPAR numbers for the quarter and for the balance of the year. Any additional color on that would be helpful.

The New York Hilton, we wrapped up at the of last year for that component but there is another component continuing this year. Overall, if you make the adjustment for renovations in both periods, our North American RevPAR would probably be impacted by I would say 40 to 50 percentage points overall for the end of the year.

Basis points?

Yes, I’m sorry.

Okay, so apples-to-apples, you should be able to do 50 bps better if it hadn’t been for that.

Yes.

So are we going to see more impact or less impact relative to what we saw in the first quarter over the next few quarters?

That depends. This particular quarter, the first quarter, we saw a higher impact compared to last year. The second quarter we’ll see lower impact, third quarter a little higher impact and a bit of a higher impact in the fourth quarter but overall for the full year, the impact of disruptions on our EBITDA will be less than we had in 2006, but still a big number.

At the Hilton New York, we’ll be just about finished -- we are just about finished there now. That was the rooms project and you won’t hear anymore from us there. We are looking at some very interesting food and beverage concepts at the Hilton New York but the rooms project, which has been very successful, will be completed just about now.

Got it, and then my last question is if the second quarter is going to see relatively less impact year over year, should we be expecting then to see better North American owned RevPAR numbers than you just put up? Have you, for example, been able to fix the Hawaii situation to some degree that you were alluding to before? As you look at some of these other key markets should 2Q come in better than 1Q?

We don’t give quarterly guidance here. What’s happening, J?

Just asking questions.

Why don’t we let Atish handle that one? Let him start earning his pay.

We’ll just stick with the no quarterly guidance for now.

Thanks.

Your next question is from the line of David Katz of CIBC World Markets.

Good morning. A couple of questions, and I apologize, Bob, if I missed it. Did you disclose what the net proceeds were on Scandic and some of the other recently announced deals, what those net proceeds would be?

Yes.

Okay. If it’s in the release, then we’ll go find it.

It’s in those releases, yes.

Are there other owned hotels that you have, let’s say like the Waldorf, that you would consider either selling or bringing in a partner on at this point, and further reducing your capital base on them?

When we had our investor day, as you recall, we did identify that there were about 30 hotels or so that were in the category of eventually for sale. We said about half of those hotels were sellable and about a third of the hotels in total were inside the U.S. and two-thirds outside the U.S. Just to parse through the numbers a little bit, we will have about -- after the sale of these hotels, the 17 hotels, the 10 European assets, plus the Hilton Caledonian and then the six domestic assets, after those are done we will have about 40 owned hotels in the system. 10 of the hotels we have identified as brand builders, assets that are really important to own and control. Hotels like the Hilton New York and the Hilton Hawaiian Village. The remaining 30 hotels, again as I mentioned about half of those are saleable and there are some bulky assets in that group. We have one asset, the Hilton in Sydney, Matt was just down there. Great hotel, expecting a very strong year 2008 there, so we may look to sell that hotel at the end of next year. Same goes for a great hotel we have down in Sao Paulo. It is a brand new hotel, still ramping up. We’ll maybe take a look at that next year as well. We have another asset in that saleable category, the Caribe. Still evaluating our options there. There is some potential. We are renovating the hotel. There’s some potential for development there. We are going to be taking a look at these assets and our strategy is really still the same as it has always been. We are going to opportunistically look to sell these assets over the next few years and we are going to get up and get out of them at attractive prices, align ourselves with owners who are committed to the brand and get some great management contracts out of them.

One last one -- is there any set of circumstances out there that we could consider where you might make an acquisition?

We have this theme of being strategically complete, meaning that we are at all the price points we want to be at. We are international now. We’ve got great growth opportunities, so it is really hard for me to imagine that we would find a large group of assets or a company to acquire because the only thing that would ever attract us to that would be some sort of super bargain purchase, and I don’t think those really exist. So it is a long answer but I don’t see this company making an acquisition.

Thanks very much.

Your next question is from the line of Jeff Donnelly of Wachovia Securities.

Steve, considering in that vein, we’ve seen probably $20 billion or so in portfolio and company transactions in just the last two or three weeks. Any conclusions you are drawing from those events and is it prompting you guys to rethink selling some assets or even parts of Hilton that might not have been on the table previously?

Probably not rethinking selling anything that we would have sold before. I would say it is more encouraging because we stay with some big and valuable assets that we would like to, for strategic reasons, sell the asset and take back a fee generator, a management contract. But absolutely it is encouraging to see these very, very high prices being paid for assets that are not really as nearly as good as some of the assets we still want to sell, so it is encouraging.

Any way for us to, or any estimate you can give us of even the number of properties or dollar value that you would now think you might explore?

I think what Bob just ran through is the right number. Basically, we had this notion that we’ve got 10 big important hotels that we need to own and totally control because they are important to generally the Hilton brand. Outside of those, really we would over time like to sell all of those and take back management contracts on them. Some of them are -- a group of them are encumbered with a mortgage instrument which I think burns off in ’09 or something -- 2010, so it is difficult to sell those but we have a number of hotels like Bob said, in Sydney, Sao Paulo and San Juan that are big hotels and worth a lot of money. It is our strategy to sell those and take back contracts. We don’t feel any pressure to do it and in answer to the question, to see the market is still very vibrant is really good news in trying to execute against that strategy.

A question, if I could, on the time share business. Are you guys able to tell us what the cash earnings for that division looked like in Q1 versus the prior year, and maybe elaborate on what specifically you attribute the lower unit sales to? Was it tour volumes, closing rate, or just price increases?

In terms of cash earnings, we are not going to be able to give that number. I think what you could say is that for the full year, even though our GAAP guidance will show a 20% to 25% reduction in profit, I could say on an economic basis, our profits will be up, probably in the 15% range. The unit sales, it is kind of a -- this is a complicated business to begin with. The accounting is complicated. The entire business is complicated, so the unit sales we did report in the quarter, we were down 8%. Actually, if you just look at the total transactions coming out of time share, we are actually up about 6%. Let me just tell you the difference between the two. Unit sales is just what it says -- we sell a unit for one week and that is a unit sale. In the quarter, we had a significant number of upgrades, and that is why there is a difference between unit sale transaction and a non-unit sale transaction. A lot of our existing owners of older products upgraded to the higher-priced newer product, particularly in Hawaii. This is typical when these new projects come up in a market where we have an older product where our existing customers get all excited about it and they come in and they want to buy the newer product. In the first quarter, we saw a pretty significant number of upgrades -- about 23% in fact of our sales volume in the quarter were upgrades. Last quarter, for instance, it was 13%. I think that is one reason. You have to look at the total volume of transactions as opposed to just purely the unit sales. The other reason is that these newer projects are slow to ramp up. We just received approval to begin the sales in our new project a the Waikiki Inn, or at the Hilton Hawaiian Village. We call it the Waikiki Inn project. We just received approval to sell that project in January and we just received approval to sell our third project in Orlando, our [inaudible] project in February. We are kind of getting caught up here. The good news is that we have been so successful in selling time shares over the last few years that now we are kind of in that phase where we are ramping up on newer projects.

That’s helpful, and just one last question for you, Bob; a small point, but your guidance is based on average diluted share count that is about 2 million shares or so higher than current levels. Anything specific that you can attribute that increase to?

I think it is just a normal stock compensation activity for the year. I don’t think there’s anything -- the 2 million -- I didn’t look at the difference, frankly.

Just Q1 was 2 million shares higher than Q4 already, and for year-end it is another 2 million higher. I wasn’t sure if it was something else that was going on.

I think it is just normal stock compensation that was granted in Q1.

Thanks.

Your next question is from the line of Joe Greff of Bear Stearns.

Good morning. Steve, you mentioned before, you talked about acquisitions. What about developing additional brands? If you look at Hampton, Hampton’s ADR at least in the 1Q was above $100. Do you think you need another brand at that lower price point level? And then I have a couple of follow-ups.

Let me address that. We have looked at that really carefully, because you are right; Hampton Inn started as our mid-price product and I think our average rate there is about $90 or so, so it has kind of moved out of that. We looked at Red Roof when that was kicking around a couple of months ago. It is really tricky. When you get to a lower average rate, you talk about really have a lot of volume going out there to really have an impact. And then you worry about the impact issues that we have on our existing owners. At this point, we just -- we have so much opportunity with the brands that we have and so much fantastic growth. I think we are going to open 255 new hotels this year with no money from us. It is just hard to get excited about redirecting your efforts towards another product line. Having said that, I think that an interesting business line that has developed, particularly on the east coast of the United States, is the all-inclusive market. It has kind of a bad name in the U.S. because of Club Meds many years ago but the high-end, all-inclusive market looks like it is a pretty popular concept, and it actually reminds me of what time share was in the mid-80s. The big companies really kind of looked at it but really didn’t look at it that carefully until all the customers were voting with their feet and then we all got into it in a big way. So we have nothing planned there. There are no imminent deals or anything but to me, that is -- maybe it is not exactly a new product line but it is an interesting business evolution that I’m sure many of our customers are discovering, so it is something that we need to look at.

Great, thanks, Matt. Bob, just housekeeping stuff; you reference in the press release for the domestic properties that insurance costs ate into same-store margins. Can you talk about when some of your bigger, larger insurance programs renew and what is your expectation for renewal pricing there?

The biggest one we have renewing is our property insurance and that renews on June 1st. We are -- we have not priced that out yet. We are in the middle of doing that. Our guys have been going around with the brokers and going the marketing. We will see. Right now, we have not factored into our guidance any decline in property insurance rates. We are hearing that rates will come down this year, just anecdotally but we’ll see when we get there. We are still right in the middle of that process.

Great. Then, if you could just remind me, I think you mentioned at the analyst day in December, a 1% change in owned hotel RevPARs domestically translates into what EBITDA?

I am going to have to rerun the numbers based on all of the asset sales that we have done, so maybe on the next call we will cover that off.

Great. Thank you.

Your next question is from the line of Will Truelove of UBS.

I have four questions for you. First of all, you mentioned your forward-looking indicator for demand was group booking trends. Could you give us a little more color as to how that is playing out? What happens if they might be able to book but attendance falls short? How effective is that indicator? My second question then is on time share marketing expenses as a percentage of revenues. How is the look-to-buy ratio or anything? Is there any kind of change in the trends of the consumer oriented buyer happening there? My third question would be on the deferred tax liability. Obviously it has gone up since you bought Hilton International. As you sell assets, are you worried that that liability becomes a true cash expense? I will follow up with one more.

Let me do the first two and then Bob, you can do the third one. The group trends for the rest of this year and for 2008 are very encouraging. Occupancy expected, or the actual bookings up in the mid-single digits and we expect the overall RevPAR to be up in the low double-digits. So we feel good about that. We don’t see the fall-off that happened several years ago. It seemed like that was a big thing but we don’t quite have the issue of no-shows of groups that we did a couple of years ago. The people that booked seemed to honor their commitments. On the timeshare, I think the biggest change that we have is we are going more upscale with our product offerings. Just to remind you, we are only in four markets. We think that we significantly lower our risk profile in the time share business by focusing on those markets. We are able to keep our people, build careers for them. We know the customers. We know exactly what they are looking for and we develop properties to meet those expectations. But generally, the average price points have gone up quite a bit. We are selling some units in Hawaii now for $100,000 a week, depending on the unit and where it is, so it is a different sale. But we have made the right adjustments. We have increased the service levels to meet those expectations of the guests and we have not seen any real change in our percent marketing costs as an indicator of any more difficulty. It is just a different approach that we take. Higher price point, but still the same margins for the business.

On the deferred tax liability, it is not something that we disclose what the cash liability is as opposed to the book liability. It is not included in any of our disclosures. We comply with generally accepted accounting principals in terms of our disclosure of our book deferred taxes and it is just not a number that we put out there.

Okay, that’s good. Finally, just in terms of the way you are quoting some of the multiples on sale, do you use sort of the last quoted currency price when you are dealing with Europe, or do you use an average currency rate, and why do you choose one versus the other?

Well, since the numbers are reported based on an average currency rate, when we quote the multiples we use an average currency when we come up with the EBITDA portion of that equation.

Thank you so much.

Your next question is from the line of Jeff Randall of AG Edwards.

Good morning. I wondered if you could comment. The first one, the corporate level G&A outlook for 2007 in light of building infrastructure overseas. The second question, if you could cover the strength of the limited service segment domestically and remind us what percentage of limited service is representative of Hilton's EBITDA. Lastly, you talked about these new prototypes for some of the brands. I wondered if there were any environmental or green initiatives contemplated with any of these new prototypes? Thanks.

The limited service portfolio for the first quarter, I think we outline all of our brands and I think we had an outstanding result in terms of our RevPAR gains versus our competitive set. I think it was across the board. So that is one scorecard that we’re very happy with. And then the scoreboard that probably matters even a little more is how those very positive results turn in to more and more developers, owners and investors wanting to invest with our brand. So our -- we’ve been saying this for some time. Our pipeline is stronger than it’s ever been. We are at over 800 hotels, 110,000 new rooms, and those are contracts that we have, deposits with owners. That is a real pipeline. How that breaks out, the large majority of it is in North America and the majority is limited service. So of 110,000 rooms, roughly 70,000 is limited service, roughly 40,000 is full service. About 5% are conversions, 5% are new builds. It’s going great.

Can you speak to the percentage of limited services contribution to Hilton's ’07 EBITDA?

We don’t really break this out. It’s approximately 20%.

Okay, and then corporate level G&A outlook for ’07?

You can expect, Jeff, that our run-rate that we had -- when you look at the first quarter, that is basically going to be our run-rate in corporate expenses for the remaining quarters, give or take a few million here or there.

Okay, great, and then my last question, just on the new prototypes, are you guys doing anything from a green initiative standpoint there?

Ian, can you handle that one?

Yes. Actually, not specific to the prototypes, but let’s just say generally in terms of some of the international developments we’ve got. One of the benefits of owning the Scandic brand for four or five years was that was a very environmentally friendly brand. It had a lot of initiatives within the company that were transferable to our international operations. We have done that and incorporated it under a program which holistically we call We Care. That basically from the design and build of hotel through to operations incorporates a lot of initiatives which are environmentally friendly. We’ve won a number of awards for those. One specifically that we have taken on top of that most recently, you may or may not have seen this, but in the U.K. we just forward contracted all of our electricity to be carbon neutral, which we have been able to do because of the scale we have in the U.K. That falls under the initiatives that we have for We Care, and We Care looks at even things like how we direct some of our CapEx during the course of the year in terms of energy reducing initiatives, but it also looks at the ways we dispose of waste and how we train our team members to be conscious of environmental waste within the hotel. It all falls for us under the initiative of We Care, and all of the limited service or focus service brands that we introduce outside of the U.S. will fall under the same umbrella.

But I guess We Care doesn’t extend to the U.S. effort?

We are looking very carefully at exactly how we combine U.S. or North American efforts with international and spending a lot of time. Number one in terms of making sure we are doing the right thing and sharing best practices, but also how to market our efforts properly too.

Great. Thank you, guys.

We have time for one more question.

Your final question is from the line of Anna [Macion] of JP Morgan.

On your guidance for 2007 for the full year, are you including the pay-down of debt when you calculate your interest expense? It seems that if I just annualize your net interest expense that you had in the first quarter, it is actually lower to where you are guiding to, and if I take your net proceeds from the standing sale of roughly $1 billion at your average interest rate, my interest expense is substantially lower.

Our guidance does assume the application of the Scandic proceeds toward debt reduction.

I’m confused, because if I look at your average expense then, not including interest income, you already have 116 in the quarter, so I’m assuming that if I annualize that, then that is where your guidance is today. What am I missing?

I don’t know. We’ll have to work with you just to see exactly what you are missing but we do provide a full reconciliation of our expectations of our earnings. Maybe that is what you are looking at, the schedule at the back of the earnings release.

Yes, that’s what I’m looking at and that’s why I’m confused, as I would assume that $1 billion of debt pay-down is pretty substantial, just from the Scandic sale alone. If you use your average interest rate of roughly 6% or 7%, then you should save like $60 million on an annualized basis, and then if you prorate that for the year, that’s like $30 million or $40 million, depending on when the pay-down occurs.

You know what I don’t have with me to help you is our prior interest expense guidance. So perhaps we can do that offline.

Sure. I guess just one more question. Can you talk about what you are seeing on the expense side? It seems like you are seeing insurance coming down and on a per room basis, how much cost increase last quarter?

First of all, on insurance, we addressed that earlier. We do -- it is a little bit too early to tell right now in terms of where insurance rates are going to be, particularly on the property insurance side. Hopefully we will have better information on the next call when it comes to insurance. Most of the other costs I think we are doing fine on. Having settled the union issue last year, wages are going to be up roughly in that 3% to 4% range. Energy costs, that’s always an interesting one but that could be up. We expect that is going to be up roughly along the lines of inflation this year compared to the increases that we have seen previously. Now of course you never know where that is really going to go, where the price of oil and where the price of gas is going to go. But we are forecasting about again a 3.5% increase. In terms of costs per occupied room, for North America it was up 7.3% in the quarter. We expect that will come down in the remaining quarters of the year because first of all the comps get a little bit easier, particularly on the insurance side, number one, and number two we did have some union costs that were in last year’s numbers that will not be in this year’s numbers. So we expect that number to come down more along the lines of inflationary increases of costs per occupied room compared to what it was in the first quarter, particularly assuming that the property insurance rates come in more or less at the same level this year as they did last year. Hopefully, like I said earlier, we will see a reduction then.

Thank you.

Now I would like to turn the call back over to management for closing remarks.

Thanks, Rob. We appreciate everyone joining us today and we’ll be talking to you in the future. Thanks again.

Ladies and gentlemen, thank you for your participation in the presentation today. This concludes the presentation. You may now disconnect and have a great day.