Choice Hotels International Inc (CHH) 2004 Q2 法說會逐字稿

Good morning and welcome to the Choice Hotels International second quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). During the course of this conference call, certain predictive and 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 can cause actual results to differ materially. The Company's Form 10-K for the year ended December 31st, 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. Please go ahead, sir.

Thank you and good morning everyone. Welcome to our second quarter 2004 earnings conference call. Late yesterday afternoon, we reported that Choice recorded diluted EPS of 53 cents for the quarter. That is a 13 percent gain from the 47 cents reported in the same period a year ago.

For the first half of the year we reported diluted EPS of 83 cents, up 15 percent from the 72 cents reported for the first 6 months of '03. Keep in mind that the results for the second quarter and first half of 2003 included interest income from a note receivable from Sunburst, which was paid off in December of 2003.

In addition, in the second quarter of '03 we received a $1.7 million settlement of termination fees from Sunburst. Those two items represented diluted EPS of 5 cents for the quarter and 7 cents for the first half of -- and June 30, '03. So 5 cents and 7 cents for the quarter and the half.

We also reported last night that our operating income increased 12 percent, from 28.7 million to 32.1 million for the quarter. For the first half of the year, operating income rose 11 percent -- from 45.9 million to 51 million. I'm very pleased with these results. And they are driven largely by our exceptional franchise development.

Unit growth continues to hold in the 4 to 5 percent range, as the total number of domestic hotels in our system increased to 3,723 year-over-year. We experienced a net addition to our domestic system of 35 hotels for the quarter, and 87 year-to-date. This is slightly ahead of last year's first half pace of 80.

In terms of new franchise contracts, we're well ahead of last year's record pace, having signed 232 new domestic franchise agreements in the first half, compared to 186 from the same time a year ago. That's a 25 percent increase. The bulk of these contracts continue to be for conversions.

We're also seeing more activity in new construction -- 33 new construction contracts in the second quarter compared to 28 a year ago, and 60 new build contracts year-to-date compared to 48 for the same period in '03.

The new build projects continue to add higher-quality hotels into our portfolio in key markets, strengthen our brands, and encourage further investments by franchises -- in our franchises by hotel owners and developers.

More importantly, our development pipeline continues to grow. We now have 475 hotels under development worldwide, which assures us of a significant amount of unit growth for the near term. For a comparison, this time a year ago we had 396 projects in our development pipeline. So, the 20 percent increase was very encouraging.

We're also encouraged that RevPar continued to show solid growth of 7 percent for the quarter. This increase marks the third consecutive quarter of growth in RevPar. Helping to drive this RevPar improvement, which reflects growth in occupancy and average daily rate, was our ability to drive more business to our franchise hotels through our central reservation system.

Our res contribution has grown from 30 percent to 32 percent for the first half of the year, thanks in large measure to our highly effective marketing campaigns for mid-price and economy brands.

Higher call volume, improved call conversion rates, and higher numbers of reservations booked through our ChoiceHotels.com Web site all contributed to this improvement.

As we enter the back half of the year, we remain highly focused on aggressively growing our system, on improving our brands and helping our franchisees improve the performance of their hotels. Our vision is to create the highest return on investment of any hotel franchise. And that's a message that has been well-received by both our existing franchisees and potential franchisees.

We continue to offer a franchise success system of strong brands, exceptional services, vast consumer reach and size, scale and distribution that delivers guests and reduces costs for our hotel owners. By doing this, we hope our franchisees improve their return on investment.

Our franchise success system gives our franchisees a solid foundation to improve product quality and raise guest satisfaction -- 2 very important objectives for us in 2004 and 2005, and on into the future. Progress in these key areas will help build brand equity for future growth.

Overall, we're very pleased with our progress to date in 2004. And we're very optimistic on how the rest of the year will unfold. I will turn things over to Joe Squeri now, who will review our results in more detail. After Joe is finished, we will take any questions that you might have. Joe?

Thanks Chuck. Chuck commented about our strong performance in the second quarter and first half of 2004, and demonstrated that our franchising model continues to perform quite well. Royalty revenues grew by 11 percent to 41.7 million, which reflects the in increase in rooms online and the increase in RevPar achieved.

Initial franchise and relicensing fees also grew strongly, up 11 percent from 4.7 million in the second quarter of 2003 to 5.2 million for the same period this year. This figure reflects our continued solid franchise developments.

During the quarter, all 8 of our brands experienced increases in their respective system size year-over-year, with the Rodeway Inn brand increasing by 23 percent, Clarion brand growing by 10 percent and the Quality brand up by 8 percent, thanks to excellent conversion products brought into these brands.

As a result of these increases, our domestic hotels system crossed the 300,000 room threshold in the second quarter, a significant milestone for our Company and one that we're very proud of.

SG&A expenses were virtually flat in the second quarter after showing an increase in the first quarter. Our franchisee margins have improved significantly year-over-year, up 170 basis points for the first 6 months. This increase reflects our intense focus on growing revenues, and our disciplined approach to effective cost control.

We continue to generate strong operating cash flows. Cash flow from operations was up 18 percent for the first 6 months. Our margins continue to improve. And our free cash flows are more than sufficient to support our business needs, as well as our ongoing share repurchase and dividend programs.

We're optimistic about our ability to sustain this performance, given the exceptionally strong franchise development that is driving our business. Not only are we seeing a significant increase in franchise application activity, we're also seeing a rise in the number of applications that are converted into executed contracts.

Year-to-date, the number of applications received have increased by almost 40 percent compared to last year. As a result, our development pipeline continues to grow.

We announced today that third quarter 2004 estimates for diluted earnings per share are expected to be in the range of 75 to 77 cents, or $2.10 to $2.13 for the full year, assuming second half 2004 RevPar growth of 4 percent. This represents an increase from our previous guidance of 2.04 to 2.07 per share.

As we continue to build on and enhance our reputation through the franchisor focus on its customers and their return investment, we also maintain a strong balance sheet and a proven strategy that gives Choice excellent flexibility to adapt to shifts in market or economic conditions. Let me turn it back Chuck.

Thanks Joe. That's all of our prepared remarks. We would be happy to take any questions that anyone might have.

(Operator Instructions). Will Turlev (ph), UBS.

Good quarter guys. I have a couple of questions. Chuck, you mentioned -- your global pipeline up 20 percent. Can you sort of break that down for us to a domestic pipeline, and the change that we've seen year-over-year?

I will let Joe take it. I -- (multiple speakers)

Yes, we need to shoot that out. It's pretty comparable. I think the numbers were 396 or something along those lines. But I would say that the domestic pipeline's up around 18 to 20 percent as well.

Okay. That's very good. And the second question is, you know, I'm glad to hear you guys focus on getting the high return on invested capital for new franchisees. Can you sort of tell us what a new franchisee specifically is targeting for return on invested capital, and how high you want take it?

Well, what we've done, Will, is try to design -- this is a broad-based program, obviously. But, one way to do it is obviously -- if you look at a new build and try and target -- looking at it from a developer standpoint, the person who's going to own the hotel and what type of required return makes sense for them.

So, we've engineered products that deliver kind of low teens unleveraged returns. Then, depending on the amount of leverage, can get the returns up into the high teens and even higher sometimes. So, that's really the methodology. Instead of taking system average performance, system average building costs -- design products that deliver those type of returns. Those are very handsome returns for an owner.

Okay. And then, I promise, my final question for you is -- Marriott mentioned on their conference call that they're seeing a little bit of a slowdown in conversion as demand has somewhat picked up.

But yes, obviously, you are offsetting that with the growth in new build. When you look at your pro forma opening schedule, if you will, going out into the future -- do you see that the new builds come on-line just as, possibly, conversions might start slowing? So you continue this kind of external growth going forward? How can we think about that?

Yes, I think you'll see some shift. I mean, historical patterns for us have been in new build cycles. There is a larger percentage of new build than there is -- has been over the last couple of years. That's a function of -- you know, we have new build products and we have conversion products.

So the shift starts to happen. And we're seeing it already with some of these new build brands like Sleep Inn. Our Sleep Inn business is picking up nicely. Comfort Inn, Comfort Suites, Sleep Inn, our MainStay, are predominantly -- almost exclusively new build. And Quality has been more of a conversion brand. Econo -- we have a new build prototype, but mostly conversions there. And Clarion has been historically more of a conversion brand.

So yes, we're seeing it. We will see it. And I think that we will still have a pretty robust conversion activity. But hopefully, we'll be able to have more new builds going forward.

The other thing I would like to say too, on that note, is that the quality of hotels that we've been converting, on average, are higher than the median for the system. So, we've been able to upgrade the quality level of the system by these conversions. So it's not like we're bringing in lower-end type properties and growing just based on that. That's not a good way to grow the brand for the future. So, we're focused on brand growth. But we're also focused on brand equity -- meaning quality.

Great. Thanks a lot gentlemen.

(Operator Instructions). And we have no additional questions. Please continue.

All right. Well, that's all we have to say. So, thank you very much for your attention and we will look forward to talking to you next quarter. Thank you very much.

Ladies and gentlemen this conference will be available for replay after 2:30 PM today through August 28, 2004 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 736857. (Operator Instructions). That does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference. You may now disconnect.