Choice Hotels International Inc (CHH) 2003 Q4 法說會逐字稿

Welcome to the Choice Hotels International fourth quarter and year end 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 subject to risks and uncertainties that could cause actual results to differ materially. The Company's form 10-Q for the quarter ended March 31, 2003 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.

Good morning. Welcome to our fourth quarter and year end 2003 earnings conference call. As you know, late yesterday afternoon we reported adjusted diluted earnings per share for the year of $1.87, and that excludes a 9 cent gain on the Sunburst notary payment.

By any measure, 2003 was an outstanding year for us. We enjoyed record development, with 470 new executed franchise agreements. That is a 55 percent increase over the previous year. At the same time our strength in marketing efforts paid off very well in the latter part of the year. We actually had a fourth quarter RevPAR up 5 percent, which was really strong. In the year just ended, our adjusted diluted EPS grew by 23 percent for the year. Our franchising revenues, which include royalty fees, initial and relicensing fees, partner services income, and other income increasing almost 9 percent to 187.1 million.

Royalty revenues increased 6 percent to 151.3 million, while initial and relicensing fees jumped more than 30 percent to 16.8 million. Our partner services income grew very nicely as well, up 11 percent to 13.2 million. Each of these revenue streams showed strong results in the fourth quarter with our franchising revenues up more than 15 percent to 48.5 million, royalty revenues up 11 percent to 38.1 million, initial and relicensing fees up 53 percent to 5.5 million, and partner services income up close to 29 percent to 3.6 million. So we entered 2004 with strong momentum.

On another performance note, as I mentioned at the outset, we finally saw strengthening RevPAR in the fourth quarter with a 5 percent increase. Six of our eight brands showed RevPAR growth for the quarter, and three for the year overall. Helping to drive that improvement was our strong fall marketing promotion which was designed to increase membership in our Choice Privileges rewards program. As a result of our efforts, we signed up almost 500,000 new members and generated more business for our hotels.

Looking ahead, we are continuing our aggressive promotional programs with campaigns for both our mid-priced and economy brands that enable reward program members to earn free nights and airline miles more quickly than ever before. We are also continuing to enhance our Internet capabilities by improving the use (indiscernible) which our proprietary site can be used by consumers and adding more foreign language capability. As a matter of fact, in December we received the number one ranking in the Gomez performance index for hotels for transactional reliability among proprietary hotel web sites. In addition, we have forged favorable agreements with third party sites such as Travelocity and TravelWeb (ph) that give our hotels preferred placements on those sites, as well as their affiliated sites.

Turning back to development, our 2003 results demonstrate that our development message is getting through in the franchise community. Hotel owners are responding very favorably to our stated vision of generating the highest return on investment of any hotel franchise, by continuing to increase our delivering of business to hotels while reducing development and operating costs for owners. As a result, we have been able to attract high-caliber property to our systems' conversion brands, including relatively new hotels in the economy brands, and a number off higher rated hotels, three start in the quality brand. Joe will have more to say on development in just a minute.

Needless to say, we're very pleased by our 2003 results, and we believe we are very well positioned to continue strong growth into 2004. When we conducted this call a year ago, we acknowledged the uncertainty of the year ahead because of a sluggish economy, and of course, the continuing war on terrorism. But we were confident in the ability of our system to provide the brands and support services that hotel owners were seeking.

Now 12 months later, we enter a new year with a much improving economy, growing travel demand, and marked progress on the war on terror. We are confident that we have in place a franchise success system that can grow our strong brands and deliver exceptional services to our licensees.

(indiscernible) that, I would like now to turn things over to Joe, Joe Squeri, who will review our results in more detail. And after Joe is finished, we will then take your questions.

Thanks, Chuck. In 2003 we made great strides in our franchise development area by enhancing an aggressive focused sales force and (indiscernible) with a very compelling sales message. In addition, we introduced cost-effective and attractive new prototypes that position us very well as the economy improves and hotel owners look to new construction alternatives.

Hotel unit growth for the year was 4.4 percent domestically and 3.1 percent globally, very good numbers relative to the industry. Seven of our eight brands registered net growth for 2003, with the Quality brand enjoying growth (indiscernible) close to 12 percent and Comfort Suites growing by more than 7 percent, thus demonstrating strength in both (indiscernible) and new built product.

At year's end, as Chuck mentioned, we signed 470 new contracts representing 41,000 rooms, compared to 304 new deals representing 25,000 rooms in the prior year -- growth of 55 and 60 percent, respectively. This level of development activity marked the first time Choice has exceed 40,000 room growth in its history.

2003 contracts, 342, or 73 percent, were conversions. More importantly, our new construction projects more than doubled from 57 in 2002 to 128 in 2003. And as a result of 2003 franchise sales effort, Choice now has 401 hotels representing 31,000 rooms under development in its domestic hotel system. At the same time, our retention rate for franchisees remained high, with the number of terminations essentially flat. The result is a more stable franchise system that generates growing fees which contribute positively to the overall profitability and predictability of our business.

Our development opportunities for the near-term will remain with conversion products, but as the economy continues to improve, we anticipate hotel owners will take on more new build projects due to the heightened demand and restricted supply we have seen recently. Our expanded sales staff is improved by bringing a singular focus to sell all of our brands more effectively, with our recent results providing an even more compelling sales message.

In terms of brand product development, we recently introduced a brand extension of our full service Clarion brand called Clarion Collection. This extension will allow us to bring smaller boutique hotels into our system and resort, urban gateway, or major secondary market. These hotels typically are ones that already enjoy a strong local identity and are looking to benefit from the resources we can offer in terms of marketing, reservations, and franchise services. We already have added five such properties and have another five in the pipeline to bring online. This effort not only will help us domestically but also globally, as we have introduced it through our Flag Choice affiliate in Australia.

We also remain very committed to MainStay Suites, our extended-stay brand. We are focusing more intently on our sales effort there and the potential we believe it represents to the marketplace. We believe we are well positioned with our brands to continue unit growth in the 4 to 5 percent range. Unit growth remains the lifeblood of our franchising business, and we bring a single-minded discipline and focus to execute against our sales plan. We remain committed to improving the efficiency of our business and service delivery in order to drive even more value to our franchisees and improve the return on their investment.

Our hotel operators are using our proprietary property management system to improve RevPAR through better management of room inventory and better synchronization with our central systems. The investments made in previous years at the hotel level are showing a positive return for these owners.

Our preliminary RevPAR number for January -- preliminary RevPAR number for January indicate that the positive results we experienced in RevPAR growth in the fourth quarter of 2003 are continuing into the next year. We announced yesterday that first quarter estimates for diluted earnings per share would be in the range of 26 to 28 cents, or $2.00 to $2.03, for 2004. This forecast assumes RevPAR will increase about 3 percent in 2004 and that our diluted share count will remain at its current level.

With our annuity based revenues and an operating cost structure that can be easily adapted to meet changing demand, we are confident that Choice Hotels can continue its strong performance. Our financial condition is very sound and our strategy has proven to be solid.

Turn back to Chuck.

Thanks, Joe. Now we will be glad to take any questions that you have.

(OPERATOR INSTRUCTIONS). Harry Curtis, J.P. Morgan.

Two questions. RevPAR guidance of 3 percent in '04 -- in January, are you starting out at a rate that is higher than that?

We are a little higher in January. (indiscernible) we're looking out at -- hopefully we are conservative with that 3 percent. But we've got -- we will have a tough quarter comparison because we were so strong this year (indiscernible) moderate it a little bit.

The second question that I had is, is your mix changing? And what I am wondering is -- is the fact that you guys are really a lower cost alternative, is it attracting more budget-conscious business travelers?

Yes, I think we're seeing some of that. We don't, we can't -- we don't really track; we have to go back and look backwards and see what's happening there. One indication of that is the strong -- the promotion was really driven through our Privileges program, which tends to be skewed more business. So we added 500,000. That's a 25 percent increase in our program in the fourth quarter. We're going to continue that promotion on into the first part of the next couple of months this year. So we think that we have switched some. We are seeing some more, and that certainly rewards the more frequent traveler, which tends to be -- skews more to the business side.

And is there any noticeable rate difference?

Our rates have been good. I don't know that I could tell you the breakdown between business and leisure, you know, right now. I think you will see -- you do get a little bit more pricing ability with the business traveler than the leisure. They are a little less price-sensitive.

Keith Mills, UBS.

Hi, actually it's Will Truelove. Just a couple of questions here for you, following up a little bit on Harry's question about RevPAR. What about December -- because your first quarter results are -- for RevPAR are December, January and February, correct?

That is correct.

So how did December turn out?

December was good, it was up around close to 4, 5 percent -- probably 4.5 percent for the month, and (indiscernible) looking robust, as well.

The second question is -- how about availability of capital for new builds? Is that becoming easier or is it about the same? Any kind of change there?

I think it is a combination of things. I think the developers that we are spending a lot of time with have a fair amount of access to local bank and capital in their markets. So for good projects, we are seeing that they are getting done. As we mentioned, new construction was up. I'm feeling very optimistic in the first quarter so far that new construction is starting to come back even stronger. So I think it's a combination of capital somewhat loosening, but us being more focused with the guys can get the product done, and then being as satisfied as they have ever been with the prototypes and the focus on returns. So it's a combination of both those efforts.

Do you think that -- how do you see the mix changing in terms of the new additions this year between conversions versus new builds?

I think it will be subtle more than anything else. I think it is still a conversion market, to be honest. We mentioned in our remarks that we are going to -- we are going to relaunch MainStay and look aggressively at that product. We've added some more sales guys to focus solely on Sleep Inn. So we think the opportunities for new construction are there. We also think the opportunities for conversion are there as well. So what you saw last year was just a gross up of all of our activity and the swelling of the new construction products. So it is good for us, (indiscernible) the new construction products when they come online are higher margin products for us. So I don't really see it changing materially. If we were 75, 25 last year, we'll probably be somewhere, maybe a little bit inside of that. But I don't see it changing at this point significantly.

One final question, if I might. On your cash flow statements, for the past few years you've gotten a sizable amount of cash from the marketing reservation fee receivables. I'm just wondering, does that sort of reverse itself in the coming years? Because don't you -- isn't that the kind of money where you have to eventually turn around and spend it on the marketing fees? Could you walk us through that, a little bit about the cash flow?

Let me just say that what is providing the repayment of that was basically the investment that the Company made initially in the front end profit management, which was the front office system. So effectively, we developed that ourselves. It was a software development process. So that is being repaid by the -- predominantly it's coming from the technology and reservations fund. Yes, there will come a point in time when that does reverse itself. The funds -- that fund pays back capital investments over time, but those are not -- won't be of the magnitude going out past 2005, you know, that we will see now. There's a slight repayment from the marketing fund for some advances that had been made several years ago, and that will continue. But that's only a couple of million dollars. So we'll see it for another couple of years, and then it will tail off.

Good quarter.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions.

Okay, thank you very much, appreciate it. Thanks for your attention and see you next quarter.

This conference will be available for replay after 12:30 PM today until March 12 at midnight. You may access the replay service by dialing 1-800-475-6701 and entering the access code 716169. That does conclude your teleconference for today. Thank you for your participation. You may now disconnect.