Choice Hotels International Inc (CHH) 2004 Q3 法說會逐字稿

Welcome to the Choice Hotels International third quarter conference call. [Operator instructions.]

Ladies and Gentlemen, if I may have your attention, 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-K for the year ended December 31, 2003, details some of the important risk factors that you should review.

With that being said, I would now like to introduce our host, President and Chief Executive Officer of Choice Hotels, Mr. Chuck Ledsinger. Please go ahead, sir.

Thank you. Good morning, and welcome to our third quarter 2004 earnings conference call. Late yesterday afternoon, we reported that Choice's diluted EPS was 73 cents for the third quarter of 2004, which represents a growth of 11 percent over the third quarter of '03. Adjusted diluted EPS that excludes debt extinguishment costs in '04 -- and interest earned in '03 related to a note receivable from Sunburst Hospitality, which was repaid in December '03 -- increased 16 percent to 74 cents. We also reported that our operating income increased 7 percent, from $39.8m to $42-1/2m for the third quarter, and 9 percent year to date through September, from $85.7m to $93.5m.

The fundamentals of our business are very strong. What really stands out about this quarter and the year is our ability to continue the exceptional franchise development that has marked our performance in the past few years, and is so critical to our business and financial success.

Year to date, net domestic property additions were 160 hotels, up 34 percent from last year, and new domestic hotel franchise contracts were up 20 percent to 354, off of an exceptionally strong year last year. As a result, our development pipeline has grown to nearly 500 hotels worldwide, which positions us well for future growth that drives royalties and earnings. We now have more than 4,900 hotels open worldwide, representing just over 400,000 rooms. The 492 hotels we have under development represent an additional 39,000 rooms. I'm optimistic that we well be able to look back on 2004 as the year that Choice exceeded both the 5,000 hotels and 400,000 room milestones.

This past quarter, we enjoyed year-over-year net domestic unit growth of 5.4 percent, pushing our total number of domestic hotels open to 3,796. This pace of growth now is the strongest we've seen in the past five years. Looking ahead, we're seeing heightened interest in our brands from hotel developers who are impressed by our franchise services infrastructure and our aggressive marketing and reservation programs. In particular, we are seeing more interest in our new build brands, which Joe will talk about a little later.

One disappointment this quarter was the 2 percent growth in RevPAR. While the summer began strong, August was a difficult month for us. Weather-related issues and the timing of this year's Labor holiday had a negative impact on our RevPAR. However, September, which is reflected in our fourth quarter, bounced back strong, with RevPAR up close to 13 percent. We continue to see a positive trend, and we believe RevPAR for the fourth quarter will be between 6 and 7 percent.

Our marketing programs continue to deliver business to our franchise hotels, and also build more consumer loyalty. Revenues for our call centers is up more than 10 percent year to date, and revenue through our choicehotels.com Web site is up almost 40 percent for the same period. In addition, our call conversion rate -- that is, the number of reservation calls that get converted into booked rooms -- in now approximately 40 percent compared to 35 percent a year ago. In addition, Choice Privileges, our frequent travelers rewards program for our midscale brands, now how more than 3m members, up 1.1m from a year ago. This program gives us a solid base of customers for more targeted marketing programs.

Free cash flow generation continues to be a strength of our company. Over the past five years, we've created a substantial amount of value through an aggressive share repurchase program, and more recently through dividends. For example, last month our board of directors declared a quarterly cash dividend of 22-1/2 cents per share of common stock, a 12-1/2 percent increase from the dividend of 20 cents per share that was initiated last August. This dividend increase underscores both our board's and management's confidence in our prospects for future growth, our strong free cash flow, and the quality of our earnings. We are focused on continuing this track record of building shareholder value, and will deploy our free cash flow consistent with that philosophy. Ongoing dividend increases and opportunistic share repurchases will continue to be our primary vehicle to execute this strategy. How much we allocate to each will be a function of both our operations and market conditions.

Now I'd like to turn things over to Joe Squeri, who will review our results in more detail. After Joe's finished, we'll take your questions. Joe?

Thanks, Chuck. As Chuck mentioned, the basic fundamentals of our business continue to be strong. Chuck's already talked about our outstanding unit growth. Of particular significance is the fact that our increased yield flow has resulted in a 22 and a 20 percent increase in initial franchise and relicensing fees, respectively, for the three and nine months ended September 30.

Furthermore, our domestic development pipeline continues to grow, increasing from 338 hotels at the end of the third quarter 2003 to 397 hotels as of September 30, 2004, an increase of 17-1/2 percent. Similarly, the worldwide pipeline is up 15 percent to 492 hotels.

Our application flow remains quite strong, up about 18 percent year to date, and we continue to be able to convert many of them into executed agreements. We're extremely pleased with the overall volume increase in both conversion and new construction deals. Conversion deals and new construction projects are up 18 percent and 28 percent, respectively, year to date through September. For the year through September, we've executed 254 conversion contracts and 100 new construction contracts, which is a ration of about 70 to 30. This trend is encouraging because it demonstrates that our brands are attractive to developers of new hotels, and as these properties open, they further strengthen the quality of our system.

Our new construction sales have also benefited form the addition of more sales executives focused on the Sleep Inn and MainStay Suites brands. Since the realignment and expansion of our franchise sales force focus more intently both on specific brands and segments, we've been able to achieve superior results both in terms of the number of hotels added and in the improved quality of the product entering the system.

Our franchise development has benefited as well from the improved new-build prototypes of several of our brands, which have produced more cost-effective hotel products for developers that deliver a higher return in investment. At the same time, these products are geared to give hotel guests what they truly value.

We now are embarking on an ambitious program to reimage Comfort Inn, our flagship brand of almost 1,500 domestic hotels. The new signs will begin to appear shortly, and we expect to have most of the system reimaged with new signs by the summer of 2005. In addition to new signage, we're implementing improved brand standards that insure we meet customer needs, and are creating focus on enhancing the consistency of all the hotels in the brand. Based on our previous success with the reimaging of Quality, Comfort Suites, and Sleep Inn brands, we believe this program for Comfort Inn will provide a significant boost for owners of those hotels.

In addition, we're on track to launch our new brand, supported by its own dedicated sales force, in the beginning of 2005. Targeted at a higher-end consumer, we believe that we can successfully leverage our developer base and provide even more options for our hotel guests. We expect these hotels, when open, to generate substantially higher average royalties per year than our existing hotel contracts.

Our development organization continues to perform well, and as a result, we are quite confident of our ability to continue to drive strong franchise development and continue to grow from a 4 percent to 5 percent range.

We announced yesterday the fourth quarter estimates for diluted earnings per share would be in the range of 53 cents to 55 cents; full-year estimates are in the range of $2.09 to $2.11, excluding the effects of the third quarter 2004 loss on extinguishing debt. These estimates assume existing share count and RevPAR to increase 6 to 7 percent for the fourth quarter compared to last year.

Choice continues to enjoy the advantages of a strong balance sheet, high free cash flow, and a business model that generates outstanding returns on capital. We remain very confident of our ability to generate value for our shareholders.

Now I'll turn it back to Chuck.

Thanks, Joe. We'll now open up for questions.

[Instructions] Representing UBS, our first question comes from the line of Will Truelove.

Hi, this is Michelle Koch [ph]; there is no Will Truelove. I have a question on your use of the credit facility. At the end of the third quarter, it looks like you have an increase in net debt of about $7m from issuing long-term debt, then paying it off and increasing your revolver. I'm just wondering what we can expect in the future. Are you going to be using the revolver a lot more, and what is it being used for?

The way to look at it is, where we're using it is basically to supplement our share repurchase plan. But the way we look at our overall balance sheet and capacity is based on leverage. And if you look at the leverage, even though the absolute debt level number has gone up, our leverage has gone down on a debt EBITDA to basis of about 2.3 to about 2.35.

What we try do to is we try to maintain the optimum capital structure, and we use leverage where it makes sense. We continue to execute on our shareholder value plans of share repurchases and also on dividends. And we try to keep the appropriate capital structure, like the right cost of capital, for the business. So we'll use it from time to time. We're not going to de-lever for the sake of de-levering, but we do try and remain consistent around 2-1/2 times, or inside of that, on a debt to EBITDA basis. So it's been used to supplement our programs.

Okay, thank you.

[Instructions] Next we go to the line of Jason Ader [ph] with HCAM [ph].

[Greetings] Two quick questions. First, someone's out with a downgrade report -- one of the brokerage firms just basically saying that, given where we are in the cycle, maybe limited service isn't going to get the leverage that full service real estate owners might get. I just wondered if you'd comment on that. And also, with the stock down 11 percent, you've always been committed to buying back stock. Maybe just share your thoughts in term of where you stand on your stock buy-back program.

Sure. I think the comment was-- the analyst's downgrade was around valuation and through sector shifting within the industry and whether owner-operators or management-type companies might have a bigger bounce-back, perhaps, than we. I don't know the answer to that one, Jason. I mean, I think it depends on the company. Our numbers are-- what we look at is kind of the longer-term view, frankly, and all the signals for us are extremely positive. I mean, the development number in the pipeline is stronger than it's ever been, which bodes well for future growth. Margins are under control.

We had a little bit of a blip in the third quarter with a couple of-- one non-cash item that had to do with a retiring director, and then some Sarbanes-Oxley stuff, frankly. But that's kind of one-time things, we think. So I look at the development pipeline, new products that we have coming out.

Continue to return value to shareholders in a variety of ways, either through share repurchases and dividends-- And yes, we have been opportunistic over time about repurchasing stock. We still have, I think, 2.8m shares outstanding on the current authorization, and we'll pick the right time to either buy stock or perhaps, with dividends, return that free cash flow that we generate to our shareholders. We have a very successful run and trim of doing that, and that's not going to change. It doesn't take a lot of cash to operate our business, so my view is that you operate your business extremely well and very focused and you return value to shareholders in the best way you can. For us, that's been through share repurchases and dividends.

Just to paraphrase a little bit here then, Chuck, I understand. Basically-- I mean, maybe business travel is getting better and full-service hotels are well positioned. But certainly, those tail winds help you--

Absolutely.

There's no reason to think you shouldn't be able to see an acceleration in your free cash flow; and the stock buybacks that you've been committed to are very much a part of the future as well.

Yes. You said it more succinctly than I did, but absolutely. I mean, there's no reason to think-- We benefit from-- we've seen increases in our business. I mean, year over year, RevPAR's up. We had a very strong September; October's looking good. We think we're going to be in the 6 and 7 percent RevPAR range for the fourth quarter. And that plus-- new unit growth is what drives our revenue. So yes, absolutely. There's no reason to think we don't benefit-- We benefit from a rising tide, just like everybody does.

[Thanks]

With that, Mr. Ledsinger, Mr. Squeri, I'll turn the call back to you. There are no further questions.

Okay. Well, thank you very much for your attention, and we will talk to you in another three months or so.

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