Choice Hotels International Inc (CHH) 2002 Q3 法說會逐字稿

Welcome to the Choice Hotels International third quarter 2002 earnings conference call. At this time, all participants are in a listen-only mode. However, later in today's conference call, we will be conducting a question and answer session. Instructions will be given to you at that time. If should require assistance with an operator during today's conference call, please depress the zero, followed by the star, and you will be assisted offline. As a reminder, today's conference is being recorded.

Also, during the course of this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. The company's form 10-Q for the quarter ended September 30th, 2001, details some of the important risk factors that you should review.

I would 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 third quarter 2002 earnings conference call. Joining me is Joe Squeri, our Senior Vice President of Development and CFO. Yesterday afternoon, we reported that Choice recorded diluted EPS of 54 cents, an increase of 20 percent that exceeded consensus estimates by two cents. Our net income was up 11 percent for the quarter, compared to 2001. These results underscore what we've been saying for many quarters now, the fundamental nature of our franchising business gives us a strong position for driving unit growth in virtually any economic scenario.

We're very pleased with how well our unit growth figures have held up. We had advised you in previous calls that we anticipated unit growth to run between two and three percent for the year. Well, it's done a little better than that, with two consecutive quarters exceeding four percent, we should achieve growth closer to the four percent annual rate. We're feeling the growth.

Well, simply stated, our franchise system has achieved a high degree of performance and stability, even during tough years, which in turn has led more developers to consider our brand for conversion and for new construction. In the current development climate, investment dollars are scarce. Those are that are going to hotel products with recognized performance. Owners of mid-priced and economy hotels are looking to us at Choice to provide well recognized brand names, effective marketing and road systems, and extensive field support that'll help them succeed when the times are tough, like we've been seeing.

In addition, the investments we've made in revamping our franchise services structure and delivering effective technology solutions are paying off in terms of growth and providing more value to franchisees. For the year to date, strong unit growth, improving royalty revenues, growing initial franchise fees and excellent cost control combined to produce very solid results. Looking ahead, our product and service offerings, our brand and many segments, and our many drive-thru locations give us the opportunity to continue to drive unit growth and royalty revenue, whatever the economic climate.

We see the clear benefits of Choice's unique position as a pure play franchiser with our strong brands and highly efficient operating structure. Even if it takes another year for real recovery to come to our industry, we believe Choice can continue to produce solid results. I've just come off a series of regional meetings with our franchisees and can report to you that their mood is pretty good.

Each fall, we hold these meetings in conjunction with our franchisee associations. We get a firsthand reading on how the business is doing in various parts of the country. It's clearly choppy. You know, there's markets that are up and markets that are down, even within -- it's only zip code related. But generally, the mood was very good. And this year's meetings confirmed that our programs are well-received by franchisees. They like the marketing programs, they like the ads that are out there, and they continue to represent a great market for us in terms of future development.

Currently, we have two fall promotions running to drive business to our hotels. Our Get Together sweepstakes promotes leisure travel for all eight brands, while we also have a double airline miles promotion running for business travelers. And both of these will run through the end of the year and we expect them to help us build even more overall consumer awareness for our brand. These results and initiatives illustrate we continue to execute well against our business model and strategy, which has proven to be right course for choice in virtually any economic setting.

Our focus remains on delivering value-added products and exceptional services to our customers. Our franchising fee for services model provides a level of predictability that keeps our stock attractive to investors. And now I'd like to turn things over to Joe Squeri who will review our third quarter in more detail. After Joe's finished, we'll then take your questions. Joe?

Thanks, Chuck. As Chuck mentioned, we're extremely pleased with our third-quarter results, which puts in very good position to finish the year in strong shape.

Our performance this year has largely been driven by unit growth, which is a combination of both new units and strong franchise retention. Domestic unit growth was 4.2 percent for the quarter, as we now have 3,434 properties open, an increase of 138 hotels over the same time a year ago. We believe we're well positioned with our brands to continue unit growth in the four percent range for the full year. Now, , we're running at about six percent ahead of last year's pace in terms of new franchise contracts, and about 30 percent ahead on applications.

We're very much focused on stimulating new unit sales and improving the returns our franchise hotel has generated for their owners. Much of the activity we are experiencing is in the conversion market, where many of our brands offer the performance and support that independent and other branded hotels seek in challenging times. This performance demonstrates the strength of our business and our ability to grow, regardless of the economic climate. At the end of September, we had signed 211 new contracts, representing 17,936 rooms, compared to 199 new deals representing 16,312 rooms in the same period a year ago.

Of the year to date 2002 contracts, 169 were conversions, substantially up from 123 conversions for the first nine months of 2001. We have realigned our franchise development team to create a more brand-focused sales effort, which in turn will drive greater consistency in our brands. We believe that our distribution product and service offerings position us well across the board to generate even more unit growth.

We are committed to capitalizing on our development strengths and opportunities, but at the same time, our peer franchising policy states our commitment to grow our system in a manner that is fair to our existing franchisees, who represent a critical base for future growth. While we continue to grow the business, we also strive to improve the efficiency of our business in service delivery.

We continue to do a good job managing SG&A. We're making necessary investments in strategic areas such as franchise development that will support the business. As we have said before, and as results have clearly demonstrated, Choice's franchising model generates a predictable and high level of free cash flow because of the low level of capital expenditures needed to run the business. This steady free cash flow enables us to be opportunistic in returning value to our shareholders through share repurchases.

Since we began our share repurchase program in June of 1998, we have purchased 26.4 million shares of common stock at an average price of $16.40. as you already know, we announced on Monday that our board has just extended that authorization by another 5 million shares. Our fourth quarter estimate for diluted earnings per share should meet current expectations of 37 cents, and we have increased our full year estimates for 2002 to the range from $1.47 to $1.49. We expect full year EBITDA to approximate 117 million for 2002.

Now, I'm going to turn it back to Chuck.

Well, thanks, Joe. Well, I really feel that Choice remains well positioned to meet whatever travel patterns emerge in the United States, given the wide variety of economic scenarios, and we've certainly seen that over the last few years. And consequently, we have great confidence in our ability to continue our strong performance in the future. So now I'll open it up if you have any questions.

Certainly. Ladies and gentlemen, if you wish to ask a question, please depress the one on your touchtone phone. You'll hear a tone indicating you've been placed in queue. And you may remove yourself from the queue at any time by depressing the pound key.

Once again, if you wish to ask a question, please depress the one now.

Our first question will be from the line of from UBS Warburg.

Good morning.

Good morning.

Good quarter, first of all. About the domestic growth, which is very impressive here, but I noticed that the average royalty rate growth is sort of selling, and I assume that's due to the conversions. So can you talk about the dynamic between growing your portfolio and trying to manage the growth in the average royalty rate? Is there some kind of tradeoff that goes on there?

Well, yes, a little bit. I mean, but mostly it has to do with the mix of brands. So, you know, it's -- you're right in that the conversions to some extent depending on where they are -- in other words, they may be -- if they're in Econolodge and Quality, they don't have has high a rate as a Comfort Suites, you know, new built Comfort Suites or a conversion Comfort Suites, or even a Comfort Inn. So it's probably more of a -- it's the mix in the properties.

Also, you know, we've been increasing -- that royalty rate has been climbing over time. It will continue to inch up, but there will be a point in time when, you know, it sort of hits a stasis. It won't continue, but I think we've got a little ways to go there.

OK, great. Thanks. And the increase in the new contracts that you're signing, are you finding one or two brands are more -- driving more interest than some of your other brands right now in terms of the growth or in that new application process?

I'll let Jim answer that.

Well, I think it's -- I'll go on specifics. We've received this year 456 applications, which is a 30 percent increase from last year, 352, and that's an increase of same on a room level, too, about 29, 30 percent. And what we're seeing is continued interest in Comfort on some of its -- on a conversion side. But a very, very strong interest in Quality, Clarion, and Econolodge. And what we did was, in order to capitalize on that opportunity, we've increased our sales efforts, increased our salespeople, to specifically go out and target opportunities with those brands. And I expect that that trend would continue well into next year.

I think the other thing to be said there is, is that Suites is exclusively new build, and Comfort Suites is predominately new build. So in conversion markets, those are going to the brands that, you know, we're going to focus on. And that's been the case this year.

OK, thank you so much.

Sure, thank you.

Thank you. Once again, ladies and gentlemen, if you'd like to ask a question, please depress the one.

And we do have a question from the line of from JP Morgan. Please go ahead.

Good morning, guys.

Hey, Harry.

Couple of questions. First of all, can you talk about the sequential decline in partner services revenue, and just remind us how that's comprised?

Well, part of that, Harry, is really volume related based on, you know, a little bit softer environment overall, meaning that, you know, the hotels frankly are -- there aren't as many as there was. So meaning for supplies and other types of things that are being bought, that is off a little bit. It's still a very strong business, and, you know, it continues to do well. We've beefed it up a little bit this past year in trying to get some longer-term strategic alliance type partners, and that is very , but it takes a little while to do it. And the softer economic environment overall has impacted that a little bit, too. And the vendors that you deal with may not have the, you know, as much to deal with as they did in the past in terms of their promotional, you know, approach to things, although we're still finding plenty of very interested vendors.

The way it works, basically is, is that Choice buys is one of the major elements of that, and that's an endorsed vendor program where a licensee that they choose to buy through endorsed vendors, you know, buy through Choice buys, and a small percentage of -- you know, we negotiate contracts with those vendors for pricing for our licensees and so -- and when they do buy there's a very small percentage that goes back to the company, back to Choice buys.

The -- the second question that I had related to a more recent demand levels. Have you seen any significant change or decline in particularly leisure or retail demand since the August-September timeframe?

Well, I don't -- I'll say, overall, the business is OK. I mean, you know, we're coming up on some tougher comparisons relative to our competition, meaning the overall industry, because the upscale was so depressed last year. But, you know, it's hanging in there reasonably well and I haven't seen a fall off on the leisure side, per se. You know, October's looking like it's going to be OK. You know, it's going to be up a little bit. So I think, you know, we've seen a reasonable performance, I think, Harry, and I haven't seen a falloff, you know, that I can point to.

OK, and then the last question is, can you talk about the status of cash pay on the Sunburst note receivable?

Yes, it's scheduled to -- our first interest payment is do in January of 2003, and we expect to get that paid.

OK. Very good. Thank you.

Thank you. Once again, ladies and gentlemen, if you have a question, please depress the one. Allowing for a few moments, no one has queued up. Please continue.

Once again, no one has queued up gentlemen. Please proceed.

OK, well thank you very much. I appreciate your attention, and we will talk to you soon. Good afternoon, or good morning, rather.

Thank you. Thank you. Ladies and gentlemen, today's conference is available for retail starting at 12:30 PM Eastern time today, and running through Wednesday, November 20th, at midnight. During that time period, you may access the AT&T Executive Playback Service by dialing 1-800-475-6701 and enter the access code of 655961. Once again, that dial in number is 1-800-475-6701. Your access code is 655961. That does conclude your conference for today. We thank you for your participation and for using AT&T Executive Teleconference Services. You may now disconnect.