Choice Hotels International Inc (CHH) 2002 Q4 法說會逐字稿

Ladies and gentlemen, good morning. Welcome to the Choice Hotels International fourth quarter and year end 2002 earnings conference call. 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 30, 2001, details some of the risk factors that you should review.

I would now like to introduce Chuck Ledsinger, President and Chief Executive Officer of Choice Hotels.

Good morning. Welcome to our fourth quarter and year end 2002 earnings conference call.

Late yesterday afternoon, we reported that choice exceeded the consensus estimate for the year, the consensus was $1.49. We beat it by six cents to $1.55. These outstanding results were driven primarily by exceptionally strong unit growth, which finished the year at almost a 5 percent increase. Given the sluggish economy and the increased demand for mid-prized lodging, our brands benefited significantly. By providing established brands and steadily improving marketing and field-based support services, we have been able to capture more market share in the development arena.

Our recurring diluted EPS grew by 24 percent for the year with royalty revenues up almost 2 percent. Our recurring EBITDA grew by about 2.5 percent for the year. In addition to the growth in royalty fees for 2002, we're pleased that our partner service revenue held about even in what prod to be a tough operating environment for our alliance partners and hotel owners.

We've worked hard to cultivate a stronger relationship with our franchisee base, and it's paid off with a strong retention rate. Our franchisees look to us to deliver products and services that provide great value and help them generate solid returns. And even though we experienced an overall decline of almost 4 percent in systemwide RevPAR, we fared much better than many of our competitors. This performance provides encouragement to our franchisees that together we can weather tough times and position ourselves to prosper when the economic climate improves. It they also seek stability in our leadership and direction, which we have delivered for some time. By offering stability in our strategic ability franchisees have confidence that Choice system is moving in the right direction.

At this juncture we face tremendous uncertainty with the impact of a prospective war with Iraq and the prospect of any significant changes in the economy. There is no question that the travel industry in general faces considerable uncertainty. But we're confident that the Choice system is better positioned than most to ride out any further downturn. Our task long with our franchisees is to make sure that we continue to capture our fair share and then some of the travelers that are out there. That's why we've devoted so much time and resources time proving our marketing and support services and building our frequent traveler programs for all of our brands. We've also focused on ensuring that we can drive business to their hotels through a wide range of channels from our central Res.. distribution to global distribution systems to online booking on Choice's website and third party Internet sites. As a result we continue to deliver strong reservations contributions to our franchisees. This year we'll place increased emphasis on guest satisfaction at the hotel level as to make sure we retain new guests that we generate with our marketing add Res.. systems. By working in partnership with the franchisees to monitor guest satisfaction and address any issues at the hotel level, we can build a better consumer reputation and generate greater repeat business.

On the development side, our plan for 2002 worked extremely well producing solid results for the year. We clearly benefited because we could offer the performance and just as importance, support the hotel in unsettled economic times. Even in an uncertain economy we're very satisfied that we can keep producing strong unit growth. Joe Squeri, our Senior Vice President of development and our CFO who is with me here, will comment in a few minutes on development. We'll continue to execute against our business model and strategy which is proven to be the right course for Choice. By leveraging our skills and focusing on delivering value-added products to our customers, we can continue our success.

2002 was a very challenging but rewarding year for us. I'm especially proud that Choice delivered a solid performance and distinguished itself in the industry in a turbulent time. Even if the current uncertainty in which we find ourselves persists, I believe Choice will continue to thrive and even prosper more as economic and geopolitical circumstances improve.

Now I'd like to turn things over to Joe, who will review our results in more detail. And after Joe's finished we'll then be glad to take your questions.

Thanks, Chuck.

2003 was wan outstanding year for us, particularly in light of the sluggish economy. The company's results underscore the benefits of its positioning as a pure lodging franchiser. We view our business as a service business, and we position our hotel products to meet demand during any business cycle. As a result, our product offering with the new build to conversion hotel franchises provide us with the opportunity to continue to drive unit growth even in tougher economic times. Hotel unit growth for the year was 4.7 percent domestically and 2.6 percent globally, well in excess of even our expectations. We're gaining market share in the development arena and will continue to pursue quality hotel products.

To summarize the year's performance at year end we had signed 304 new contracts representing 25,657 rooms compared to 300 new deals last year representing 25,223 rooms. Of the 2002 contracts, roughly 79 percent of these were for conversion hotels. More importantly, at the same time, our retention rate for franchises improved with 2002 terminations down 14 percent. The result is a more stable growing franchise system that contributes positively to the overall predictability of our business. Our development opportunities for the near term will remain with the conversion products. Our enhanced focus on unit growth coupled with a more targeted development marketing program and the streamlined sales process is definitely paying off. Even in a slower development arena we believe we are well positioned with our brands to continue unit growth in the 3 percent range. Unit growth drives our business, and we are completely focused on being the best development company that we can be.

On the operating side, we continue to do an excellent job managing our cost structure. Overall SG&A decreased 2 percent during the year. Our EBITDA margins as a result expanded to 68.1 percent to 67 percent in 2001. Our business requires very little capital investment, very little incremental overhead. We continue to operate very efficiently allowing substantially all of our revenue gains to become operating profit.

For the 2003 year, we announced yesterday that the first quarter estimates for recurring diluted EPS would be in the range of 23 cents to 25 cents, or $1.65 to $1.68. This forecast assumes that RevPAR will increase roughly 1 percent in 2003. Obviously, should industry conditions worsen due to unforeseen events, these estimates would change. Nonetheless, our segment and our hotels have shown an ability to outperform the industry in soft economic periods. Because our revenues are annuity based an our operating cost structure can be easily adapted to meet changing demand we remain optimistic about the company's performance even during these challenging times. Our financial condition is very sound and we have a solid strategy to ensure that our business continues to move forward.

Now let me turn it back to Chuck.

Thanks, Joe. We'll be happy to answer any questions that anyone has.

And ladies and gentlemen, if you do have a question, please press the 1 on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. You may remove yourself from the queue at any time by depressing the pound key, and we ask if you're using a speaker phone if you would please pink your handset before pressing any numbers. Once again, if you do have a question, please press the 1 at this time. And we have a question from the line of Gloria Fu with J.P. Morgan. Please go ahead.

Hi. Good morning. Just a couple questions. First off, your SG&A expense sequentially was a lot lower and I kind of wanted to get a sense of, you know, what's going on there? And then also, could you, uhm, speak to what is happening with trends thus far in the first quarter especially with, you know, more it -- war jitters and all?

Gloria, from the cost structure, we've gone two restructurings in the past couple of years basically taking us from a decentralized operating environment to a really focused operating structure. So in the last quarter, we start to see benefits in each of those years, in 2001 we were probably operating at the peak of those operating costs. We took a large charge at the end of last year. And we were really focused on making sure that our variable costs stayed very low and that we could do everything we can to keep our fixed costs continually declining. As far as what we're seeing in January, I think that generally, RevPAR is softer than we expected. On the opposite side, we're seeing similar results as to what we saw last year, is that our development side was positive. I mean, we'll probably close transactions in the first month of January, which is up substantially from the year before. So we're optimistic that we can kind of continue to gain market share in the development side but from the RevPAR side we're seeing what everybody else is, and that's fairly soft the first two months.

What, uhm, is your expectation for SG&A in '03? The total expense?

There are a couple of things that are going to go on next year. We're adopting our stock option accounting in -- next year so that will probably be a charge of just under $2 million. So I would think that SG&A is going to be pretty flat to probably up one percent or-to-reflect that additional charge.

Okay. And then could you also, uhm, have you guys done any share repurchase thus far in the year?

We've done couple hundred thousand shares. Around I guess $21, $20, something like.

Thanks a lot.

And once again, ladies and gentlemen, if you do have a question, please press the 1 at this time. And we do have a question from the line of Keith Mills with UBS Warburg. Please go ahead.

Good morning. It's Will Trulove, actually. I have three questions. The three questions are, in terms of your Internet strategy, and your central reservation systems can you talk about how you're implementing, you know, not only your proprietary Web page but also other Web pages going forward to try to drive business? The second question is, what do you plan about thinking about in your dividend policy? Right now you're not paying one. You are doing a lot of share buy-backs. Do you think that meet change if there is a tax law adjustment to the dividend payment? And third, could you talk about the kinds of terms you are offering on conversions versus the kind of terms you are getting on new builds? Just wondering why you're able to get so many conversions right now.

Okay. This is Chuck. I'll take that sort of in order. The Internet strategy is -- is, uhm, really hasn't changed. We have a very focused effort. Obviously what you try to do is you try I to drive more business to your proprietary websites and so to make that as sticky as possible, and part of what that means is that you try to offer rates that are competitive with what anybody else has out there, meaning that you try to, you know, drive as much business as you can to your own site by not offering lower rates someplace else. So we're in the process of putting a -- you know, a low rate guarantee or lowest rate offer on our proprietary website, and, you know, that's a step. We certainly do business with all of the major, you know, providers. And so part of that is, you know, is key words, you know, getting in the -- your positioning on those sites as to where you are located, you know, all of those types of things. And it's, you know, it's clearly a growing piece of the business. It's a growing piece of everybody's business, and the challenge is to be sure that your licensees are getting the highest price they can for their rooms, So that's the strategy is to find ways to drive that. Secondly, dividend policy. Yeah, it's a lot dependent on tax policy. I mean, I view share repurchases as a tax efficient way to return capital to shareholders. And if there is a -- another way to do it through a dividend, I think we would consider that. I'm not saying we would do it, but we would certainly consider it. We continue to see -- our business generates, you know, fair amount of free cash flow, so we will return that to the shareholders in the most tax-efficient way that we can. And then on conversions, I'll let Joe answer that. Let me just preface it by saying, I mean, part of what we're seeing is we have brands that are desirable in this type of an environment. We worked real hard for the last couple of years on our service delivery in the field. And so, you know, I think we've got a great formula for someone coming in. Yes, there are incentives to , you know, to help and I'll let Joe talk about that specifically.

With respect to conversions, I mean, there's really three things. There's some economic incentives but to be candid we don't really view those as the determining factors in whether a hotel is going to join our system. It's always been kind of interesting to me why someone would join a -- align themselves with a company for 20 years for a $15,000 cash refund. Its a pretty long-term contract. So I attribute that to -- in addition to what Chuck mentioned about obviously the quality of our assets. Number one, the sales focus. We took a pretty dramatic steps during the course of the year to increase our focus perfectly on conversion hotels, namely quality Quality, Clarion, Econo Lodge and Rodeway. We increased our sales force roughly 50 percent to address the need that we saw in the changing market conditions. We have a lot of market opportunity. A lot of our nearest competitors have -- have basically saturated the market. And the economy side, on Econo Lodge, its closest competitor has 2100 hotels and we just crossed 700 this year, so we think we have tremendous opportunity with Econo Lodge to go and really attack that market. And then I think finally, for those that are not even in franchise affiliation, I think people are starting to look now exactly about looking at the benefits of becoming associated with a franchise company. We talk a lot in our trade advertising about safety and security and stability. And when people are going through some very, very difficult times, they look at the franchising model and see the benefits of it and when they look at market opportunity and brand that they can affiliate with, we like to think that our singular focus on hotel franchising and customer focus is really a determining factor in them coming to us. So we put a lot of people out there, we thought there was a lot of demand, we're seeing that demand and we're doing everything we can to drive as many hotel products to our system.

Okay. Just a follow-up on the Internet question. About how much of your central reservations are derived from your proprietary website versus, say, third party independent websites currently?

Yeah, I would say that on the distribution basis, we're getting probably 8 to 10 percent from our own website, and then the call centers and the remaining GDS contributors would probably get us to where we're showing contribution to our hotels in the high 20 percent.

Thank you.

And again, ladies and gentlemen, please take this opportunity to ask any questions by pressing the 1 on your touch-tone phone. And gentlemen, there are no further questions in queue.

Okay. Well, thank you very much. Good day.

Ladies and gentlemen, this conference is available for replay. It starts today February 13 at 12:30 p.m. Eastern. It will last until March 6 at midnight. You may access the AT&T Executive Playback Service at anytime by dialing 1-800-475-6701 and entering the access code 671783. That number again, 1-800-475-6701. And the access code, 671783. That does conclude your conference for today. We thank you for your participation and you may now disconnect.