Choice Hotels International Inc (CHH) 2004 Q1 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the Choice Hotels International Inc. first quarter 2004 earnings conference call.

At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions. Instructions will be given at that time.

If you should require assistance during the call please press star, then zero. And as a reminder, this conference is being recorded.

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 different materially. The company's form 10 Q for the quarter ended March 31st, 2003 detailed 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 first quarter 2004 earnings conference call. Joining me is Joe Squeri, our Senior Vice President of Development and CFO. Late yesterday afternoon we reported that Choice achieved diluted EPS of 30 cents, a 15% gain from the same period of year ago.

We also reported that our operating income increased 10%, from $17.2 to $18.9 million. We are pleased that our first quarter results showed such strong growth. Those first quarter, of course, is our slowest of the year. Year over year, the unit growth was 5% as the total number of domestic hotels online increased to 3,688. We experienced a net addition to our domestic system of 52 hotels for the quarter, a 53% increase over the 34 net additions in the first quarter of '03.

In terms of development, we are ahead of last year's record pace, having signed 81 new domestic franchise agreements in the first quarter, compared to 71 for the same period a year ago. And although the bulk of these contracts continue to be for conversions, we are seeing more activity in new construction with 27 new contracts in that area compared to 20 a year ago. The many industry observers are reporting growth and new construction projects and we know that our new prototypes for Comfort Suites, Sleep Inn and EconoLodge brands are generating more interest and activity for us as well.

Unlike a year ago, when the economy was still sluggish, the first quarter of '04 has shown significant strength as the effect of the war in Iraq continues to lessen. And we are especially encouraged that our RevPAR grew by 5% in the first quarter of '04, matching the growth seen in the fourth quarter of '03. This result shows us that the momentum from the end of last year is carrying over into this year as travel demand has clearly picked up.

We are seeing evidence of that demand in the volume at our call centers and in our reservations booked over the internet. Call volume in the first quarter of this year was up by almost 9%. More importantly, the conversion rate, that's the percentage of calls converted into booked rooms, has risen from about 35% to over 41%. And that's a significant increase.

In addition, revenue generated by bookings made on our proprietary website, Choicehotels.com, increased by 50% in the first quarter of this year. Overall, reservations booked through our central reservations systems are up more than 20% for the quarter which demonstrates the higher demand.

We are looking forward a very strong summer travel season. But the TIAA, the Travel Industry Association of America, is forecasting a 4.4% overall increase in travel spending by domestic and international travelers in '04. And they predict that Americans will continue to book their travel at the last minute. 64% of trips planned within two weeks of taking the trip and that the majority of trips will continue to be highway destinations and closer to home. We believe these factors position us well for the upcoming leisure season.

We will be announcing special marketing promotions to encourage summer travel at our upcoming annual convention in San Diego in early May. We are confident that these efforts will build on the momentum we have gained on the recent Choice Privileges promotions which have helped us increase membership in our guest rewards programs by 25%.

For 2004, we are focusing very intently on driving more business to our owner's hotels while helping them to reduce their development and operating costs. Our vision is to generate the highest return on investment of any hotel franchise. And that message is playing very well with both our existing franchisees and potential franchisees. These strategic priorities will facilitate our mission of delivering a franchise success system, strong brands, exceptional services, vast consumer ease from size, scale and distribution that delivers guests and reduces costs for our hotel owners.

This franchise success system gives our franshisees the foundation to improve product quality and raise guest satisfaction, two very important objectives for us in 2004.

Overall, we are very pleased with how 2004 has begun. We have very optimistic about how the rest of the year will unfold. Now I would like to turn things over to Joe, who will review our results in more detail. After Joe is finished, we will take any questions. Joe?

Thanks, Chuck.

We are pleased with the strong quarter in the first quarter. Our franchising model continues to perform very well. Importantly, our franchising revenues, which includes royalty fees, initial and relicensing fees, partner service income, and other incidental income, grew by 11% in the first quarter of 2004 from $33.4 million to $37.1 million. Domestic royalty revenues grew by 12% to $28.4 million, which speaks to the increase in RevPAR as well as a high effective royalty rate of more than 4%. Initial franchising and relicensing fees also grew strongly, up 31% from $2.6 million in the first quarter of '03 to $3.4 million for the same period this year. This figure reflects our continued solid performance in unit growth.

Seven of our eight brands have increased in their respective system size year over year with the Quality brand growing by 12% thanks to the excellent conversion product brought into that brand. We also saw our almost 10% growth in the Clarion brand which has benefited from the introduction of our brand extension, the Clarion Collection. We are optimistic about our development for the balance of the year, our product management team has developed new cost effective prototypes for Comfort Suites, EconoLodge and Sleep Inn within the past year and is getting ready to unveil new prototypes for Comfort Inn, Quality and MainStay Suites at our convention in May.

We're playing special emphasis on Mainstay, our mid priced extended stay brand, because we believe it will be a strong opportunity for this type of new construction product in today's lodging environment. We feel our sales force is well armed with competitive products for the marketplace going forward.

Today we announced the second quarter 2004 estimates for diluted earnings per share will be in the range of 50 cents to 52 cents or $2.04 to $2. 07 for the full year. Which is an uptick from our previously released first quarter results. We remain very optimistic about the company's performance for 2004 and into the future. Our strong balance sheet and solid strategy gives Choice the flexibility to adapt to any shifts in market or economic conditions.

Let me turn it back to Chuck.

Thanks, Joe. I will be happy to take any questions now, if anyone has any.

Thank you. Ladies and gentlemen, if you would like to ask a question. Please press star then one on your touchtone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key.

If you are using a speaker phone, please pick up your handset before dialing. And once again, that's star one for any questions or comments.

Our first question comes from William Truelove with UBS. Please go ahead.

Good morning, gentlemen.

Good morning.

Good quarter. I was just thinking about, you know, the external growth at Choice, which has been phenomenal for the past few years. Do you have any thoughts or concerns about the impact of rising interest rates or the cost of new construction with the higher material costs as impacting external growth at Choice?

Well, I mean, in terms of interest rates, I mean, of course, I mean, obviously, the thing that's good. You usually see a correlation between positive economic growth and interest rates. And as you know, RevPAR usually moves in that period.

As RevPAR moves, you typically see new demand for hotel projects, and since supplies have been down for so long, I think banks and private management has been waiting for the recovery of the demand, and I think they're seeing that. They are seeing that in full - hopefully starting to kick in right now.

In terms of material costs. I mean, it has been a concern. Our emphasis has been to try and mitigate material costs and just overall amenity creep that we see in the industry, by trying to design cost effective prototypes and programs to ensure that we deliver on our mission. So, while that is a concern, I think that it's been substantially mitigated from our standpoint because of the efforts of our product management team and group and then design and some of the ingenuity that they placed in designing our products.

Okay. Fair enough. What about the SG&A costs? I was just a little - they came in a little higher than we thought. It's been a little volatile over the past few quarters. I was just wondering, is there any better way of modelling that going forward? Is the current number a good run rate to use?

No. No. I think there - Part of that, Will, is some basic -- you know, Sarbanes-Oxley costs, some costs like that. There's some -- also, from time to time, we will run incentive type of variable comp based on the, on development incentives and things like that and we had a little bit of that in the first quarter. But that's sort of a one-off type expense. So I would expect that to moderate over the year. But there aer - part of that is - are some built in costs that are -- you know, related to audit fees. You know, things like that. Insurance. It has gone up a little bit.

Alright. One final question, then. When you guys bought back shares in the first quarter. Are you buying those through just via open market or are you buying those from insiders who are selling such as like Mr. Bainium?

I mean, to kind of give you a - you may know this. But the rules on treasury share repurchases have changed pretty dramatically. And the company has to effectively-- first question is. Those purchases have been an open market purchase. And they are done, for the most part, through 10-B-5 plans, where you pretty much give some instructions to a broker, and they execute it on your behalf. But all of those have been open market purchases.

Okay. Great. Thank you so much, gentlemen. Have a great quarter.

Thank you.

Thank you. And for any further questions or comments, please press star one at this time. We do have a follow-up from William Truelove. Please go ahead.

I didn't want to take all the call, so - I do have one extra question, then. Do you have expectations in terms of external growth related to conversions and then a growth rate related to new builds? Do you have separate kind of expectations with those two?

Well, I mean -- you know, without giving away budgets, forecasts, strategies and things like that, we have business plans that roll up. We have separate sales forces that target individual opportunities.

So there are internal guidelines. I mean, I would expect that in this type of environment that I would start to see more new construction product over last year. But not in the aggregate. So you may start to see some shifts. But, you know, we have been successful in just increasing our overall demand for our product and increasing the gross number of deals that we've done.

I'm looking for a trend that we had in the first quarter to continue for the balance of the year. And if we can continue to sustain these kind of RevPAR trends and this kind of positive momentum, I think people will be more willing to commit to products and hopefully, some of our newer products, with the relaunch of MainStay and Comfort Inn prototypes.

As then you move towards more new builds, correct me if I'm wrong, that would also positively impact your average royalty rate, right? Because they would be signing on at a higher rate?

That's correct.

Yeah, that and I think you saw in the initial deal fees. We did ten extra deals but our revenue is up substantially. The average contract fee for those is materially different than conversions. And then contrary to that, your conversions come on, obviously, a lot faster. So you get more royalty fees. I think we look at every one of our brands, and we aggressively sell each of our products. And it's incumbent on us to become creative and to start looking at brand extensions, new products and the like. We are optimistic about our ability to execute.

Right. Thanks. Thank you. And once again, if you have a question, please press star one now. We have no further questions. Please go ahead with your closing remarks.

Okay. Well, the only closing remark is thank you very much for participating in the call, and we will see and talk to all of you soon. Good day.

Thank you, and ladies and gentlemen, this conference will be available for replay after 2:30 P.M. today through midnight, Saturday, May 22nd. You may access the AT&T Executive Playback service at any time by dialing 1-800-475-6701 and entering the access code 726066. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.