Choice Hotels International Inc (CHH) 2004 Q4 法說會逐字稿

Good morning, and welcome to the Choice Hotels International fourth-quarter and full-year 2004 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-K for the year end December 31st, 2003, details some of the important risk factors that you should review.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce Charles Ledsinger, President and Chief Executive Officer of Choice Hotels. Please go ahead, sir.

Thank you. Good morning, everybody. Joining me today is Joe Squeri, our Executive Vice President and Chief Financial Officer.

Good morning and welcome to our fourth-quarter earnings conference call. Yesterday afternoon, we reported that Choice's diluted earnings per share for full year 2004 were $2.15, an increase of 10 percent over diluted earnings per share of $1.96 reported for the same period in '03. Adjusted diluted earnings per share increased 16 percent to $2.16 for the full year '04 from $1.87 in 2003. And the adjusted EPS excludes a 1-cent per share loss on extinguishment of debt in '04 and a 9-cent per share gain on the prepayment of a note receivable from Sunburst Hospitality that happened in December of '03. We also reported that our operating income increased 10 percent from 114 million last year to 125 million for '04. Operating income for 2004 reflects an 11 percent growth in revenues. And while there was an increase in SG&A costs SG&A costs of franchising margins, which exclude marketing and reservation activities at our three Company-owned hotels increased 5 basis points to 60.9 percent for the full year of '04.

For the fourth quarter, we reported diluted EPS of 60 cents compared to 57 cents in the fourth quarter of '03. The 57 cents reported in the fourth quarter of '03 also includes the gain related to the Sunburst note receivable prepayment. Diluted EPS increased 25 percent in the fourth quarter of '04 compared to adjusted diluted EPS excluding the note prepayment gain of 48 cents in the same period of '03. Operating income increased 11 percent for the fourth quarter of '04 to 31 million from 28 million in '03. Franchising margins for the quarter increased from 57.5 percent in the fourth quarter of '03 to 58.2 in '04.

We're very pleased with our full-year and fourth-quarter financial results. These financial results are indicative of the strength of our brands as reflected by our system growth and RevPAR results for 2004. For the second consecutive year, franchise development established a new record in 2004 with 552 executed new Domestic Hotel Franchise contracts. This represents better than 17 percent growth over the 470 contracts executed in '03. In the fourth quarter, we executed 198 new Domestic Hotel Franchise contracts, which was a 12 percent increase over the previous year. Growth in new Domestic Franchise contacts illustrates the interest in our brands from hotel owners and developers who continue to be impressed by our franchise services infrastructure, our aggressive marketing and reservation programs, and our abiding commitment to deliver the best possible return on investment to them. Our strong franchise development results in recent years have positively impacted and improved our franchise system growth rate. Our unit growth rate for '04 was the best we've achieved in the last five years. At the end of 2004, we have 4,977 hotels open worldwide, representing more than 400,000 rooms. At the same time, the number of hotels we have under development has increased to 569 hotels, representing an additional 45,000 rooms. The size of the development pipeline positions us well for future unit growth that drives royalties and earnings.

RevPAR results for the fourth quarter of '04 were also encouraging. Fourth-quarter RevPAR increased just under 8 percent, which exceeded our expectations. We're optimistic that this industry-wide trend will continue in '05 as lodging industry fundamentals appear to be strengthening. Our marketing programs continue to deliver more business to our franchise hotels through building brand awareness and consumer loyalty.

For 2004, our central reservation system delivered a 16 percent increase in revenues for franchisees. Overall reservations contribution increased just under 150 basis points to 30 percent system-wide domestic gross room revenue. Business delivered electronically to our franchisees through the central res system represented more than 60 percent of revenue through our managed central reservation channel. Our proprietary website, ChoiceHotels.com, delivered a 37 percent increase in revenues while revenues from all Internet sources, including our site, third-party sites and global distribution systems, grew by 22 percent.

Our strong business and financial performance has enabled us to continue one of our key strategic imperatives, returning value to our shareholders through dividends and share repurchases. In 2004, we returned more than 175 million of cash to shareholders through these vehicles. Ongoing cash dividends and opportunistic share repurchases will continue to be our primary vehicle that keep (ph) 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 Jose Squeri, who will review our results in more detail. After Joe's finished, we'll be glad to take your questions. Joe?

Thanks, Charlie. Charlie already talked about our outstanding unit growth and how pleased we are with our 2004 results. On the development front, of particular significance is the fact that our increased deal flow has resulted in 19 percent and 20 percent increases in initial franchise and relicensing fees, respectively, for the three and 12 months ended December 31st. Our domestic development pipeline continues to grow, increasing to 460 hotels as of year-end 2004, an increase of more than 15 percent, which is in line with the 16 percent growth in the overall worldwide pipeline.

The number of new construction properties in the domestic development pipeline was 284 at the end of 2004, a 41.3 percent increase from 201 units at the end of 2003. Our application flow was strong in 2004, up about 22 percent from 2003 levels. And we continue to have success in converting a good percentage of them at the executed agreements. We are extremely pleased with the overall volume increase in new construction deals. We executed 182 new construction projects in 2004, up 42 percent compared to 2003. For the year, we executed 370 conversion contracts and 182 new construction contracts, which is a ratio at about 67 to 33 and an improvement over 2003. This improvement in mix 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. This trend is also encouraging because it implies improvement in lodging industry supply growth fundamentals.

Our major development objectives for 2005 include the ambitious program to reimage Comfort Inn, our flagship brand of almost 1500 domestic hotels and the introduction Cambria Suites, an upscale, select service all suites hotel. We expect to have most of the Comfort Inn system reimaged with new signs in 2005 along with the adoption of improved brand standards that ensure we meet customer needs and enhance the consistency of the hotels in the brand.

We launched our Cambria Suites brand at the ALIS conference in Los Angeles in January and have already received a tremendous reception from the development community. We are backing this introduction with a dedicated sales force of professionals who are well versed in the segment, the industry, and the territories they serve. Targeted at a higher-end consumer, Cambria Suites will leverage our developer base and provide even more options for our hotel guests in locations that thrive on commercial airport and destination leisure business. We expect these hotels, when opened to generate substantially higher average royalties per unit than our existing hotel contracts.

Based on our strong development track record of the past few years, we are confident of our ability to continue unit growth in the 4 to 5 percent range. We announced yesterday that first-quarter 2005 estimates for diluted earnings per share would be in the range of 32 to 34 cents. Full-year 2005 estimates are in the range of 238 to 242. These estimates assume existing share count and RevPAR increases 5 to 7 percent 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 continue to generate value for our shareholders. Chuck?

We'll be glad to take any questions now.

(Operator Instructions). Joe Greff from Bear Stearns.

Good morning, guys. Two quick questions with respect to your '05 outlook. What do you have modeled in for your use of excess free cash flow? And then two, how much contribution do you have from Cambria Suites in '05?

Yes, we give it out given our -- the ability -- we expect to complete our program but those numbers don't assume that we're buying any stock. So that's a --

Sort of assuming (ph) cash hoarding or is it --?

I wish it was hoarding. It's more retirement of debt.

Okay. And then with respect to Cambria Suites?

No, probably no financial impact. We'll just monitor the development activity. We've actually received four applications to-date. Construction won't happen for some time down the road. But 2005 does not assume -- those numbers assume no contribution from Cambria.

Great. Thank you, guys.

Will Truelove from UBS.

Good quarter, guys. I had a question about the cash rate in the fourth quarter. It seemed a lot lower than the previous three quarters -- around 30 percent or so. Could you talk a little bit about what the reasons were for the lower tax rate and what kind of tax rate you're assuming for '05?

Yes, I'll let Joe take that one. Joe?

From time to time, there are contingency items from the tax position that resolve. Actually we had some last year. If you look at our tax rate in the fourth quarter last year was lower than what we were booking in the first three quarters, and that was a similar result this year. I would say our outlook going for next year is probably a tax rate on the order of 37 percent. But from time to time, these things will happen and you wouldn't be surprised if certain other contingencies get resolved in the back half of the year. But that's kind of normal course. You take tax positions. You wait (technical difficulty) is complete, and you resolve them as they resolve from a tax standpoint. So it's happened in the past couple of years and we just kind of keep working through our tax position.

Right. A follow-up question to that would be -- or when you talked about the number of new build construction applications that you're seeing, which brand seems to be receiving the vast majority of that?

Comfort Suites continues to have the most appeal for our developers at this point in time. We had some improvement in Sleep Inn and hopefully that will continue. We actually had a very good year on MainStay. We completed -- executed 17 contracts. And if you look at our numbers, we had sequential growth in every one of our brands, which we were very excited about.

We still have an interest in Comfort. Comfort is probably not as much of a new construction growth opportunity as Comfort Suites and MainStay and Sleep. But continue to see interest in all of our brands. And next year, as we laid out, the emphasis is going to be on those brands with a strong sales force going after Cambria opportunities.

Great. Thanks a lot.

Fred Taylor from Lord Abbott.

Yes, just a question on your comment on debt repayment versus share repurchase. Given the significant levels of cash, why wouldn't you just refinance the debt and continue with share repurchase? And I guess secondly and related, how you view your long-term bond ratings and where you want to be?

Well, our practice has been to maintain an investment-grade rating on the debt and to maintain leverage ratios that support that. So to the extent that we have excess cash, we will opportunistically repurchase shares or return cash in the form of dividends. So it's a combination of those two things. We're not going to sit on large debt loads and we're not going to pay down all the debt. The leverage makes sense in the business. But as you know, if you understand the business, it generates a fair amount of free cash flow. And our practice has been and will continue to be to return that to the shareholders if we can't find great ways to invest it. So --

Okay. Thank you.

(Operator Instructions). There are no questions. Please continue.

Well, if there are no more questions, I think we are finished. Thank you very much for your attention and I look forward to talking to you next quarter. Good day.

Ladies and gentlemen, this conference will be available for reply after 12.30 PM today until March the 16th at midnight. You may access the Executive Playback Service at anytime by dialing 1-800-475-6701 and entering the access code of 762835. That does conclude our conference for today and we thank you for using AT&T Executive Teleconference. You may now disconnect.