Q2 2006 Hilton Hotels Corporation Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen, and welcome to the Hilton Hotels second-quarter earnings conference call. My name is Oneka, and I'll be your operator for today. At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference call is being recorded replay purposes. At this time I would now like to turn the call over to Mr. Atish Shah, Vice President of Investor Relations at Hilton Hotels Corporation. Please procedure, sir.

ATISH SHAH, VP IR, HILTON HOTELS CORPORATION: Thank you, Oneka. Good morning, everyone, and thank you for joining us for Hilton's second quarter 2006 earnings discussion. Here, with me in Beverly Hills today are Steve Bollenbach, Matt Hart, Bob La Forgia, and other members of our senior management team. In addition Ian Carter, Tom Keltner, and Marc Grossman are each calling in from other locations to participate.

In terms of the format for this call, we are going to go directly to Q&A so we can quickly get to the topics that are of high interest to you. Before we get started, please note the press release that we issued this morning as well as the conference call today contain forward-looking statements within the meaning of the 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 August 1, 2006, and will not be updated as actual events unfold.

This call is being webcast. You can access the webcast via Hilton worldwide.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 Wednesday, August 9 at 8 PM Eastern time. To access the replay, dial 888-286-8010 in the U.S. or 617-801-6888 overseas. The pass code is 34899717. Additionally, a replay will be archived indefinitely on Hilton worldwide.com. So with that, let's get started to Q&A. Oneka, may we please have the first question?

OPERATOR: (OPERATOR INSTRUCTIONS). Jeff Randall, AG Edwards.

JEFF RANDALL, ANALYST, AG EDWARDS: Just wanted a couple of housekeeping items. First the year-over-year percentage change in cost per occupied room, I wondered if you could share that with me.

UNIDENTIFIED COMPANY REPRESENTATIVE: We were up probably about 8.5% in the quarter if you adjust for the -- disruptions alone, we were up about 7% and then further adjusting for the energy and marketing cost increases that we highlighted in the release that were up probably about in the 6% range.

JEFF RANDALL: Okay. And diluted share count as of the end of the quarter?

UNIDENTIFIED COMPANY REPRESENTATIVE: That was in our press release on the first page. It is 419 million shares.

JEFF RANDALL: 419. Okay. On the time-share business, the second quarter has had flat contract sales and I think that is the same spot you were at in the first quarter. Have you guys seen any weakness in time-share?

MATT HART, PRESIDENT & COO, HILTON HOTELS CORPORATION: No, we continue to be -- this is Matt -- continue to be strong. We are able to raise prices. I would say the only issue and it isn't really a big issue is just the markets that we are building in tend to be higher cost markets in terms of construction costs, but sales front, doing really well.

JEFF RANDALL: And just a follow up on that, what is the product backlog look like in terms of weeks in inventory?

UNIDENTIFIED COMPANY REPRESENTATIVE: I don't have that data as yet. We can get back to you on that.

JEFF RANDALL: Last question and then I'll yield the floor. Marketing expenses, I wonder how you all think about that as being a return on investment. Obviously, it didn't seem like you got much lift in average daily rate to offset the hit from margins. Is there much of a lag? I wouldn't think there would be in terms of the benefit in those marketing dollars?

MATT HART: No, actually I think that there is a lag. If you think about it, particularly for the Hilton brand, we hadn't done any kind of national or even regional advertising for the Hilton brand probably in 15 years. And we started that this year. We had two very successful campaigns, the A to B Campaign and Be Hospitable. We have very good recognition from all the surveys that we have done on that so I think that it does take some time. It's a thing where you have to invest in the brand, and we hadn't been doing that for some time.

OPERATOR: David Anders, Hilton.

DAVID ANDERS, ANALYST, MERRILL LYNCH: It's actually with Merrill Lynch.

UNIDENTIFIED COMPANY REPRESENTATIVE: I thought you came over.

DAVID ANDERS: Let's keep that clear. With respect to the margins, kind of as we look at the third and fourth quarters, so third quarter some of these disruptions start to grind off and in the fourth quarter, do we get the margin bump or is it permanently impaired because of the increased marketing spend and whatnot?

BOB LA FORGIA, CFO, HILTON HOTELS CORPORATION: Dave, this is Bob. In terms of the impact in the third and fourth quarters related to the disruption, you will see some impact, remaining impact in the third quarter, though, as we stated in the release. At the New York Hilton, we are done with the phase, the renovation phase for this year.

So we will see a better performance certainly out of the New York Hilton and the other properties as well, as those properties wrap up their renovation programs for the current year. In total, for the full yea, if you look at the North American margin impact of the disruption, it is about 40 bips in total margin cost.

We have stated earlier that the increase in marketing costs and energy cost, that's probably another 30 bips in margin impact for the full-year guidance. And then a new item has cropped up, and that is the area of property insurance. We just renewed our property insurance program at the end of the second quarter, and it was, to say the least, a very difficult renewal.

I don't know if there is a lot going on in the insurance industry, as you well know. I don't know that any of you have been following this, but the catastrophic events that occurred around the globe last year, hurricanes and floods and the increasing geopolitical risk, drove a lot of insurers for these types of exposures out of the market and created a capacity squeeze, and the insurers that were writing the coverage took advantage of this, imposed much stricter terms and conditions and as a result significantly higher pricing on properties exposed to catastrophic events.

So all that being said, we expect our property insurance to be up substantially for the remaining part of the year, and that is going to cost us about 30 basis points in margin.

DAVID ANDERS: Okay. But let me back up for a moment because to reconcile your North American -- we are not going to be able to reconcile North America basis point change any longer, is that correct? Because your international is going to be carrying the gap number, so we can't see, per se, your North America at year-end? Or will we be able to?

BOB LA FORGIA: Well, we give the information on the last page of the financial schedules. We pro forma all the numbers for you for the three months and the six months.

DAVID ANDERS: Right.

BOB LA FORGIA: So you should be able to get there.

DAVID ANDERS: Okay.

BOB LA FORGIA: And if you can't, we will lend a hand.

DAVID ANDERS: Thanks.

OPERATOR: Bill Crow, …