Choice Hotels International Inc (CHH) 2003 Q1 法說會逐字稿

Good morning and welcome to the Choice Hotels International first quarter 2003 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 certain to risks and certainties that could cause actions to differ materially. The company's Form 10 Q for the Iquarter ended December 30th, 2001 detail some of the important risk factors that you should review.. I'd now like to introduce Chuck Ledsinger, President and Chief Executive Officer of Choice Hotels. Please go ahead.

Thank you. Well, good morning and welcome to our first quarter 2003 earnings conference call. Late yesterday afternoon we reported that Choice recorded diluted EPS of 26 cents, exceeding analyst expectations by 2 cents. We reported that our operating income increased 7.4% from $16 million to $17.2 million and both of these numbers reflect a strong performance in a quarter that is historically our slowest of the year. As you all know, unit growth is the life blood of a franchising business, and we are encouraged by the fine start we are off to in '03. We are especially pleased that the unit growth exceeded five percent for the quarter as the total number of domestic hotels, year over year, increased to 3516. We experienced a net addition to our domestic system of 34 hotels, double the number of net additions in the first quarter of '02.

In terms of development, we are well ahead of last year's pace, having signed 71 new domestic franchising agreements in the first quarter, compared to 59 for the same period a year ago. Although the bulk of these contracts continue to be for conversions, we are pleased that the number of new construction contracts doubled from 10 to 20 on a year-over-year basis. Although it's obviously do discern any type of trend toward new construction, we do see it as a hopeful sign and believe that our recently introduced prototypes from Econolodge, Comfort Suites and Sleep brands will encourage more activity.

There is no question that the war in Iraq has had an effect on economic activity in the first quarter and will have some lingering impact on the second quarter as well. But now that the military action has been virtually concluded, we're hopeful that the economy will begin to show some signs of life. Although, system wide, REV par declined one and a half percent for the first quarter, we are pleased seven of our eight brands were able to show slight to moderate increases in ADR, which reflects the brands' ability to maintain their value proposition. Of the eight brands, Comfort Suites, Sleep and Rodeway registered slight to modest gains in REV PAR.

In terms of the immediate future, we are cautiously optimistic about a solid summer season for leisure travel, especially now that the war in Iraq has wound down and the terror alert has been lowered. We saw a recent study by the Travel Industry Association of America that predicts that a record number of Americans will be traveling at home this summer, with 81% indicating they plan to travel in the spring and summer. Many of those travelers will make their trips by car, RV and motor coach, all of which benefits the highlway location of many of our hotels.

The survey also shows that the sluggish economy remains the most important factor for leisure travelers who have decided to curtail their travel plans. Of those travelers who changed plans because of the economy, 43% are traveling closer to home, 37% are taking shorter trips, and 26% are changing their hotel type to get a better rate. We believe these factors position us well for the upcoming leisure season. We also will be announcing some special marketing promotions to encourage summer travel at our upcoming annual convention in the next couple of weeks.

For 2003, our goals are very simple. We want to use our vast marketing reach to build more brand awareness and drive more business to our hotels. We want to make sure we are giving our franchisees the tools and support that they need to succeed, and we aim to give our brands a consistency and consumer appeal to keep them growing and attractive to hotel guests.

Size and skill remain keys to our growth. Our objectives are to further the development of our system while supporting our existing customers with value-added services and technology. In the past few years, we've brought a much sharper focus to delivering exceptional service to our franchisees. Now that we have a much better foundation in place to grow our system, we'll work with our franchisees on improving guest satisfaction and brand consistency at the hotel level. Our business model and strategy continue to be on the right course for Choice. We believe we are off to a good start in '03 and we're determined to continue that success.

Now I would like to turn things over to Joe Squeri. Our Senior Vice President of Development and Chief Financial Officer will review our results in more detail. After Joe is finished, we will take your questions.

As Chuck mentioned, we are extremely pleased with our first quarter results, particularly in light of the fact that the first quarter is historically the softest, and this year we are experiencing the double impact of the war in Iraq and the slow economy in the travel market. Operating income was up 7.4 percent on revenue gains, excepting marketing and reservation fees of seven percent, the company generating gains in all areas of its business. Royalty revenues grew five percent for the first quarter, despite a one and a half percent of decline in domestic REV PAR. Strong domestic unit growth and a positive contribution from our Australian subsidiary, Flag Choice Hotels, were enough to overcome the REV PAR decline. Initial and re- licensing fees increased from $2.1 million to $2.6 million, on total deal flow of 71 contracts, up from 59 a year ago. , Choice reached the 3,500 domestic hotel milestone, with six of our eight brands enjoying sequential year-over-year growth.

Our Quality brand, which has quietly become one of the company's best scoring products, is rapidly approaching the 500 hotel mark. Our new construction Comfort Suites product realized a 12% gain in units and now has more than 350 open and operating in the United States. Importantly, termination fell 35% in the quarter, contributing to our unit growth performance. We also experienced solid growth in our partner service revenue of more than seven percent for the quarter.

Looking ahead from a unit growth perspective, application activity continued to be strong. As of March 31st, we have more than 280 applications for hotels in house, a sizable increase over the 181 applications we had at the same time a year ago. However, industry REV PAR performance continues to be uncertain, and as a result, the benefits of our strong unit growth are somewhat dampened. Nonetheless, strong unit growth in a down economy positions us exceptionally well for an economic return.

We announced yesterday that second quarter estimates for diluted earnings per share wouldl be in the range of 39 to 41 cents. Our four-year forecast remains unchanged at $1.65 to $1.68 for 2003. These figures asume continued unit growth in the four percent range and more stable REV PAR performance throughout the summer season. Our forecast for four year REV PAR at this point is flat to a slight decline for the year . Now, let me turn it back to Chuck.

Thanks, Joe, and now we'll take any questions that anyone has.

if you wish to ask a question, press the one on your touch tone phone. You'll hear a tone indicating have you been placed in queue and if you pressed the one prior to this announcement, we ask that you please do so again at this time. You may remove yourself from queue at any time by pressing the pound key. If you're using a speaker phone, please pick up the handset before pressing any numbers. Once again, if you have a question, please press one at this time. One moment, please, for our first question. We have a question from the line of Harry Curtis with JP Morgan. Please go ahead.

Hi, guys, a couple quick items. You mentioned in your press release that your share count was 36 million shares at the end of the first quarter?

That's right.

That's fully diluted, and a little bit lower than the average shares?

That's the weighted share outstanding number, at the end of the month, not reflecting the impact of options.

Not reflecting the impact of options?

Right.

Okay, so as we stand, today, is it about the same, roughly 36.7 million shares fully diluted?

Yes. There's 36 million at the end of March that are outstanding, so I guess when you start at the beginning of the next quarter, the impact -- that number is going to go down a little bit and you are going to add back, I guess, 700 to 800,000 as the impact of diluted shares.

Okay. The second question is, I'm still a little fuzzy on whether you think that the second quarter REV PAR will be about the same or somewhat worse than the first quarter?

We think it will probably be softer, Harry. Remember, that we're- lag a month on the reportings of - first quarter is December, January, February. March, we are about where our competitors set generally and April has been choppy. So, we are thinking from a REV par standpoint that the second quarter will probably be a little softer.

It's the end of the war. Have you seen any evidence of recovery?

We are seeing some pickup in the RES volume, but we don't have a lot of visibility going out. We just -- you know, people are making -- you know, we never have a lot of visibility because of the way reservations are made and the high skew on leisure. We have seen a little bit, but I will tell you, it's choppy. Easter and the spring breaks have had a kind of a strange effect in terms of trying to get any trends, I think, for the month, but it's choppy.

Okay, very good. Appreciate it, thanks.

Next, we have a question from the line of Keith Mills with UPS Warberg. Please go ahead.

Actually, it's Will Trulov. Good morning, everybody. I have two questions. One, just so we know, can you give us a REV par by month of the second quarter of 2002, your March through May, so we get a sense of where the comparables sort of trend out on a total portfolio basis? And the second question is, can you talk about your recent initiatives in terms of lowering the cost of some of your new builds, particularly, the Sleep brand and the Comfort Sleep brand, and how that changes the cash on cash, and what your goal is for new builds in those type of new brands for 2003 and 2004?

The REV par question, I don't have in front of me here, although we have the quarters. Actually, the press release has by brand rev par. I think you are -- you are asking for second quarter actual rev pars? That what you are asking for?

Yes, if you could give us to us by a month to month kind of deal. What will happen in March 2002, April and May, which is your second quarter for REV PAR?

We'll have to provide that supplementally. I don't have that with me right now.

Okay.

The second question, the idea was to lower the construction costs to such a degree that we could -- and we said this in our presentation - to target an unleveraged cash-on-cash return of between 10 and 12%. And the idea was that, in some our brands, such as Sleep Inn, it had started to drift upstream to reach a rev par target which really was difficult to achieve. So we basically valued engineered our prototype, took out things that didn't really matter to the guest experience, and were able to considerably lower the construction costs from the mid 40's down to inside of 40,000 without land per key and those -- it's basically a simple model. You apply the construction costs in an average unit to what you would assume via an achieved stablized rev par, and that's where we mapped out our model. So, I mean, obviously, we thought that in order to be more competitive in a new construction environment, we had to have brands that had very, very compelling ROI propositions, and we think we have been able to achieve that with two of our hopefully, going to be two of our most successful new construction products, Comfort Suites and Sleep Inn.

Do you have any goals set forth for new reconstruction on those now that you have sort of redesigned them for cash on cash returns of 10 to 12 percent now?

No, we are a sales organization, we sell as many as we can. I don't have any targets. It's kind of difficult to predict that. A lot of it has to do with, on the new construction site, particularly, just the availability of capital. There hasn't been much around, so the new build cycle has been slower and we currently have been doing more conversions during this period.

Sure, let me ask a follow-up, if you don't mind. How much of the new additions in the first quarter were conversion-related versus new-build related?

Well, we did 20 new construction, thereabouts, and I guess 71 deals in the quarter. So 51 conversions, 20 new construction, and we did 10 new construction the previous quarter, so doubled our effort, and I think that had- a couple of things. It had to do with the reorganization of our sales force, plus, it had to do with some new prototype designs.

If you go back three to four years ago when there was a more robust new build environment, we were doing 60-plus percent of the contracts for new builds. I would expect that to change over the next couple of years as the new builds come back.

Great, thanks a lot, gentlemen.

Sure.

Next, a question from the line of Michael Retorra with Smith Barney. Please go ahead.

We are all set, thanks.

Thank you, ladies and gentlemen, if you do wish to ask a question, please press one on your phone at this time. We have no further questions at this time, please continue.

Okay, well, thank you very much. We appreciate your interest and we will talk to you soon. Have a good day.

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