Choice Hotels International Inc (CHH) 2002 Q1 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the Choice Hotels International first quarter 2002 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer period. Instructions will be given at that time. If you should require assistance during the call, please press zero followed by star.

During the course of this conference call, certain predictive and forward-looking statements will be used to assist you in understanding the company and its results. Such statements are subject to risk and uncertainties that can cause actual results to differ materially. The company's Form 10Q for the quarter ending September 30th, 2001, details some of the important risk factors that you should review. As a reminder, this conference is being recorded. I will now like to introduce Chuck Ledsinger, president and chief executive officer of Choice Hotels. Please go ahead, sir.

Thank you. Good morning everyone and welcome to our first quarter 2002 earnings conference call. Earlier this morning I reported that Choice recorded diluted EPS of 20 cents a share, exceeding analyst expectations by 2 cents. A great quarter. Strong unit growth, lower interest rates and excellent cost control help offset a decline in royalty revenues caused by lower overall rev-par performance for the quarter. We're especially pleased that unit growth exceeded 4 percent for the quarter as we opened 62 hotels. And included in those hotel openings were 15 new construction Comfort Suites, a Sleep Inn brand hotels, which further enhances the overall quality of those brands and the entire Choice system.

On the development side, we're slightly ahead of last year's pace in new franchise contracts. Much of the activity we're experiencing is in the conversion mark, build-in conversion brands. As many of you know, in slower economic times and tighter capital markets, independent and under-performing branded hotels tend to look at more prudent brands to help them and we're certainly seeing that. We clearly benefited because we could offer the performance and support those hotels are seeking. The end of March we had 59 new contracts, representing 5,278 rooms, compared to 57 new deals last year, representing 5217 rooms. Of the 2002 contracts, 49 were conversions, up from 31 for the first quarter in 2001. So we clearly saw more conversions in the first quarter of '02.

With encouraging signs the economy is improving, we believe that we're well positioned with our brands to continue unit growth in the two-plus range for the year. Unit growth is the lifeblood of our franchising business, obviously. And we've added development as one of our CFO Joe Squeri's major responsibility going forward. Joe's been involved in the development process all along and I think he's going to add a real boost in our development function. He understands how deals work and understands what it takes to get them done. We're optimistic that our existing hotel operations will participate in the recovery, too, in the lodging industry, which we are seeing. He understands what it takes to get them done. We're optimistic that our existing hotel operations will participate in the recovery, too, in the lodging industry, which we are seeing.

As airline travel continues to rebound, we're working hard to attract more business travelers and capture more of those travelling by air. That's why we've been running a Triple Miles promotion, which has been very successful, with American, U.S. Airways, Delta and Northwest Airlines. It's given us exposure to new travelers who haven't come our way in the past and now are attracted to both our value proposition and the airline miles. This program ends this month, but we're getting ready to launch our summer promotions for all eight brands at our upcoming annual convention, which is going to be in Atlanta on May 9th. Those promotions aimed at our leisure market include an exciting free gas program for our six mid-scale brands. And for our economy brands we'll continue our partnership with NASCAR, which was very successful last year.

We're pleased that we'll have effective promotions in place for reaching more consumers this summer. Size and scale are clearly the keys to our growth. Our objectives are to further the development of our system while supporting our existing customers, our franchisees. For example, hotels in three of our brands, Quality, Comfort Suites and Sleep Inn, are beginning to enjoy the benefit of our re-imaging program. When we undertook the program last spring, we recognized that new images, distinctive new images of these brands would help separate them more from the competition and also provide these brands some new growth opportunities, both conversion and new construction.

Approaching our deadline of May 31st, 2002, to complete the re-imaging of almost 1,000 domestic hotels and we find ourselves in great shape. More than 540 out of the total have been sold in new signage with another 285 completed property surveys are ordering signage. Together with the new hotels and those brands coming online with the new signage, we have more than 640 properties out there displaying the new images today. In addition, we're effectively using the new images in all of our advertising and marketing, which in turn provides incentive for the few remaining properties to complete the changeover.

We'll continue to execute against our business model and strategy, which has proven to be the right course for choice, continue to leverage our skills and focus on delivering value-added products to our customers, our franchisees. Our franchising business model enjoys a level of predictability that certainly remains attractive to investors. Now I'd like to turn it over to Joe Squeri, who will review our results in more detail. And after Joe's finished we'll be happy to take any questions that you might have. Joe?

Thanks, Chuck. As Chuck mentioned, we're extremely pleased with our first quarter results, particularly in light of the fact that first quarter is historically the softest, and this year we're still experiencing some aftereffects of the travel decline caused by the economic slowdown.

Given how hard much of the industry was affected, we see the clear benefits of Choice's unique position as a pure play franchisor with our strong brands and our highly efficient operating structure. Our product offering with both new building conversion/hotel franchises gives the opportunity to continue to drive unit growth whatever the economic climate. As long as the capital markets for hotel construction remain tight, we expect building conversion/ hotel franchises gives us the opportunity to continue to drive unit growth whatever the economic climate. As long as the capital markets for hotel construction remain tight, we expect our development opportunities will lie primarily with conversion products. With our brand portfolio, we are strongly positioned to capture an increasing share of conversion products as evidenced by our first quarter results.

As Chuck mentioned, I have recently assumed operational responsibility for the development function. And this week we announced a creation of a new position, vice president, development of Economy brands, with , one of our top performing sales professionals leading the effort to focus solely on the franchise sales of our two Economy brands, EconoLodge and Rodeway Inn. Both of these brands offer terrific potential for growth, with EconoLodge featuring both a cost-effective new construction prototype as well as conversion possibilities. For Rodeway we believe it provides hotel owners with a low-cost adventure into franchising, giving us great potential for conversion product.

Our enhanced focus on unit growth, coupled with a more targeted development marketing program, a new website devoted solely to franchise sales and our streamline sales process is fueling our development success. We also continue to seek ways to improve the efficiency of our business in service delivery. And for us, technology continues to be the key to this improved performance. Improved reporting systems have enabled us to streamline our business operations while maintaining a high level of service to our franchisees. We continue to do an excellent job of managing SG&A expenses, which decreased in the first quarter. Again, we are seeing the payoff from significant technology investments in the corporate-wide restructuring we have undertaken in the past few years.

We also continue to drive maintenance opportunities such as partner service revenue to capitalize on the opportunities afforded to us from our extensive distribution channels. As a result, the risk profile of our business is substantially less than our owner-operator competitors. Our franchising model does not require significant ongoing maintenance capital expenditures, and as a result, the business generates a high level of free cash flow. Steady free cash flow has enabled us to de-lever while returning value to our shareholders through share repurchases.

We entered investment grade rating in 1998 and have maintained that rating even through difficult economic times. Our investment grade rating enables us to access the capital markets that attract the pricing and communicates to our franchises and shareholders the financial strength of our company. We will continue to manage our company to ensure that we maintain this rating while enhancing shareholder value.

We ask today that second quarter estimates for diluted earnings per share would be in the range of 34 to 36 cents or $1.41 to $1.43 for the 2002 year. This forecast is up from our initial guidance of $1.37 to $1.40.

We are encouraged with the apparent recovery in the lodging industry and we believe that Choice is well positioned to meet the changing travel patterns in the United States. We adjusted our marketing and communications to meet whatever the times demand, demonstrating agility and shifting programs under the umbrella of our very flexible marketing theme. As a result, we remain optimistic about the company's performance in the future. Our demand, demonstrating agility and shifting programs under the umbrella of our very flexible marketing theme. As a result, we remain optimistic about the company's performance in the future. Our financial condition is sound and we are taking the appropriate steps to ensure our business continues to move forward. And now let me turn it back to Chuck.

Thanks, Joe. And we'll be happy to answer any questions that you might have. Are there any questions?

Ladies and gentlemen, if you'd like to ask a question at this time, please press one on your phone. You will hear a tone indicating that you've been placed in cue. You may remove yourself from cue at any time by pressing the pound key. If you're on a speakerphone, please pick up the handset before pressing the number. One moment for the first question. Our first question is from from Salomon Smith and Barney. Please go ahead.

Hey, Chuck. Excuse me. Hey, Chuck. Hey, Joe.

Hey.

Losing my voice here. Just two questions. Joe, can you talk a little bit more specifically about what you guys are doing at the G&A line? We were pretty surprised by how low that number is. And is that a good run rate going forward? And then secondly, can you address share repurchase and the potential new authorization?

On the first question, I think that what we're seeing is a -- the benefits of, I said, the technology, the reporting systems put in place. And what that enabled us to do is basically go from a decentralized operating structure into a centralized structure. So we eliminated five regional offices. We centralized basically all of our operating structures and we've been able to tow the line on just general discretionary spending. I would say that the guidance that we gave last is we're looking for relatively flat to one percent growth in SG&A. And instead of a run rate for the particular quarter, because there's some variable commission costs in there, I'd say that what you would -- on an overall basis, SG&A probably should be, you know, flat to one percent going forward.

Mike, it's Chuck. I mean, a lot of that is we've had two restructurings over the last couple of years and I think we're just starting to see the benefits of that. And as Joe said, a lot of that was -- some of that's in the field and just focusing our efforts in a more direct way to our licensees. So, you know, the benefit of that is a lot of it.

I just want to make -- just so I understand, Joe, you're saying up one percent from last year or are you talking sequentially?

Yeah, last year.

Yeah.

When you look on a quarter of -- at the end of the year, yeah, one percent.

Okay.

Because there's some things that go back and forth with convention and things along those --

Yeah. Okay. With the same -- with the same it had last year.

Yeah.

Okay. Thanks.

And on the share repurchases, you know, we still have 3 -- you know, 3.4 million left. and as I said in the last call, expected that would take us through this year and probably into next. So there's no plans on the horizon to do anything -- anything different than what we're currently executing. So -- and we'll wait and see how the conditions -- conditions change. There's no plans on the horizon to do anything -- anything different than what we're currently executing. So -- and we'll wait and see how the conditions -- conditions change, but at this time there's probably adequate capacity for us to do what we want to do.

Our next question comes from Keith Mills from UBS Warburg. Please go ahead.

Good morning guys. Nice quarter.

Hey, Keith.

Thanks.

I had a question for you, Chuck. Could you tell the types of hotels that you're converting, whether, you know -- in terms of the brands that you're converting from, you know, X, Y, Z brand to your brands?

Yeah. I think it's across the board, Keith. I mean, you know, there's independents. There's some other chains. I mean, it's no different than what it's been in the past in terms of -- you know, and you could go down the list of competitors that sort of are in the same, you know, chain scale, area that we are. You know, it's no one in particular.

So it's a mix between, you know, the Marriotts, the Hiltons, the , a little bit of everybody?

Yeah. I mean, it's -- if you looked at the competitive set that we measure ourselves against for each one of those brands, that's sort of the universe. And it's not -- it's not skewed one way or another.

Right. Okay. Would you say it's coming from players that are, you know, equal in strength across their segments or maybe from the second or third tier type players?

I think it's all of those. I mean, I think it's situational. I mean, it's not a -- I don't think it's a brand common as much as it is a locational or situational -- you know, you've got a -- you had a period where, you know, business was soft and we saw some people where the brands weren't delivering come to us. And also, I think, there's independents that, you know, realize that you need the power of a reservation system and national brands to drive their business. And that's typically what happens.

Right. Okay. Partner service revenue, Joe, a little bit above what we were thinking? And I guess a little bit above last year's rate, maybe 10 percent above last year's? Is that a pretty good growth rate going forward for the remainder of this year?

Yeah. I mean, what we said last year -- I think last call we thought that partner service revenue would approximate, you know, 131/2, 14 million dollars for the -- it's not -- it's not really -- it's not as predictable as the royalty stream because it's not based on an underlying performance and an asset. It's really -- it's based on contracts -- contracts that are executed at any given point in time and how that's recognized. So, I mean, we're looking for a 131/2- to 14-million-dollar number, which would be, you know, up from the 12 million of the year before. So -- and I can't really give you any sense for predictability, but -- when it's going to happen or on the growth rate, quarter over quarter, but we tend to see more things in the third quarter and the fourth quarter than we do, you know, the first and second.

Right. And then just finally, Chuck, I was just wondering if you could comment, strategically where does Choice go from here? Some of your competitors, the brand of competitors have gone into timeshare.

(Inaudible).

Right. And then just finally, Chuck, I was just wondering if you could comment, strategically where does Choice go from here? Some of your competitors, the brand of competitors have gone into timeshare. Where do you think, you know, you bring the company going forward at this point?

Well, I think we've got a very good business. We can grow our existing space. And whether we -- you know, like our franchising business, I think it's a very good business. And I think we've certainly proven the business model, if not -- you know, over the last few years, we've really streamlined the business and we're very focused on, you know, growing. If you looked at each one of our brands and compared it against our competitive set, you know, there's room to grow in each brand. So, you know, that's why we've focused some emphasis on Economy brands. We think that we have a lot of room in those brands to grow and across the board.

So, you know, I think you'll see more growth in the existing brands. You'll see us trying to deliver values to licensees so that -- you know, in terms of hopefully lowering costs over time to them, which is what our goals is, to operate as a member of our system. You know, what we are is we're a unit growth business that uses our size and scale to leverage value. And what that means is, is that we try to find ways of driving more revenue to the hotels and have them operate at high margins.

So that's why people come to us. So, yeah, there may be a brand extension or extension meaning that potentially you could -- you know, we really haven't looked at things that are real estate intensive. If we could take our brands and put them into some kind of a timeshare thing, maybe, but, you know, I think that if that involves ownership, a lot of real, I don't think you're going to see us doing that. I like our business. I think we can continue to grow it at a very nice clip, you know, where we are.

We're going to have opportunities along the way to pick up some other hotels, either potentially brands or, you know, groups of hotels from other chains. There's been some, like, 30, you know, new brands created in the last five years and they're not all going to survive. So we continue to look out there for that. But, you know, we're clipping along pretty good here and I think we can continue to do that.

Okay. Thanks. I appreciate those comments.

Uh-huh.

Ladies and gentlemen, if there are any additional questions or comments at this time, please press one now. There are no additional questions or comments at this time. Please continue.

Okay. Well, that's all we have to say. Thank you very much for your attention and good day.

Ladies and gentlemen, this conference will be available for replay at 2:30 p.m. Eastern Time and will remain available through May 14th. The dial-in number for the replay is 1-800-475-6701, access code 634576. Again, that dial-in number is 1-800-475-6701, access code 634576. That does conclude our conference for today. Thank you for your participation. 1-800-475-6701, access code 634576. That does conclude our conference for today. Thank you for your participation. You may now disconnect.