Choice Hotels International Inc (CHH) 2005 Q1 法說會逐字稿

Good morning and welcome to the Choice Hotel's International First Quarter 2005 earnings conference call. During the course of this conference call, certain predictive (sic) 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, 2004, details some of the important risk factors that you should review. As a reminder, this conference is being recorded.

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

Thank you. Well, good morning and welcome to our first quarter 2005 earnings conference call. Yesterday afternoon, we reported that Choice's diluted earnings per share was 36 cents for the first quarter of '05. That's a 20 percent increase over the same period a year ago. We reported that our operating income increased 18 percent, $22.3m for the first quarter of '05. Our operating income results were driven by an 11 percent increase in franchising revenues, and a 300 basis point improvement in franchising margins, which increased to 53.6 percent. Now, the franchising revenues and margins exclude marketing and reservation activities in our 3 company-owned hotels.

We're very pleased that '05 has gotten off to such a good start, and we're optimistic that the momentum reflected in our first quarter financial results will continue throughout the spring and summer. We're also proud to announce that during the first quarter of '05, we crossed the 5,000 hotels open worldwide threshold, representing more than 400,000 rooms. The large size of our systems demonstrates a strong demand for our brands and the range of lodging choices that we offer for both consumers and developers.

During the first quarter of '05, our franchise development strategy continued to produce solid results, with new domestic hotel franchise contracts reaching 103. That's a 27 percent increase compared to last year's first quarter. The growth in executed contracts highlights the continuing interest in our brands from hotel owners and developers who appreciate the vast array of services and resources we offer them, and our dedication to their success.

As you may know, we launched our Cambria Suites brand at the ALIS conference in January. Cambria Suites is an all suites lower upscale offering to leverage our developer base and provide even more options for hotel guests in locations that thrive on commercial airport and destination leisure business. The Cambria brand launch is off to a very good start. We're seeing good interest from developers; we've signed 2 deals and received 6 additional applications that are -- that we're working, which is a very good start.

Our franchise development success continued to translate into impressive unit growth. During the last 12 months, we added 180 net units in more than 13,000 rooms to the domestic franchise system. This represents domestic unit growth and is almost 5 percent, 4.9. At the same time, our development pipeline remains strong, with more than 500 hotels under development worldwide.

Our marketing programs continue to deliver incremental business for our franchise hotels through creative advertising, electronic commerce, and consumer loyalty programs. The first quarter of '05 produced RevPar growth of 5.5 percent, which reflects continued improvement in domestic system-wide rate and occupancy, and while our Comfort Suites and MainStay brands achieved RevPar improvements between 7 and 8 percent for the quarter, we're pleased that each one of the 8 brands achieved a year-over-year improvement in RevPar.

Business delivered to our franchisees through our central res system, or CRS, accounted for more than 34 percent of total domestic system-wide revenue in the first quarter of '05. That's 130 basis point increase compared to last year.

System-wide revenues delivered through Choicehotels.com, our proprietary website, increased to approximately 53 percent, while general revenues from all internet sources, including our site, third party sites, and GDSs grew by more than 30 percent.

During the first quarter, we continued to execute our strategy and our pattern of delivering strong business and financial results. We remain intensely focused on continuing this track record in returning value to shareholders. The significant free cash flow generated by our operations was a vital strength of our Company, and by most standards, especially relative to our peers in the lodging industry, our franchising business requires relatively low capital expenditures. We expect to continue to return capital to our shareholders from both ongoing dividend increases, which underscore the confidence we have in our prospects for future growth, and opportunistic share repurchases. How much we allocate to each alternative will be a function of both our operations and the market conditions.

I'd now like to turn things over to Joe Squeri, who's our Executive Vice President of Development and Brands, and who will review our results in more detail. And after Joe's finished, we'll take your questions.

Thanks, Chuck. We are off to a great start in 2005. The key highlight for the first quarter is the 10 percent increase in royalty revenues compared to last year, and this was driven by unit RevPar and royalty rate growth.

Revenues from initial franchise fees and relicensing fees increased 27 percent during the quarter on the strength of both deal flow for new hotel franchise contracts and relicensings of existing franchises. Relicensing contracts increased 44 percent in the first quarter of 2005, to 62 contracts, compared to 43 in the same period of last year.

Our domestic development pipeline continues to grow, increasing 7 percent, to 399 hotels as of the end of the first quarter. Similarly, our overall, worldwide pipeline is up 11 percent to 503 hotels for the same time frame. The number of new construction franchises in the domestic development pipeline was 272 at the end of the first quarter of 2005, a 32 percent increase from 206 units at the end of the first quarter of 2004.

Our application flow continues to improve with the number of applications received, increasing by about 9 percent in the first quarter of this year, compared to 2004, and we continued to successfully convert many of them into executed agreements.

The overall volume increase in both conversion and new construction deals continues to please us. Conversion deals in new construction projects were up 28 and 26 percent, respectively, during the first quarter of 2005 compared to last year. During the quarter, we executed 34 new construction contracts and 69 conversion contracts. The ratio of new construction to conversion contracts is about 1/3 to 2/3, was in line with last year. We believe this ratio is a good indicator that our brands continue to be attractive to developers of new hotels, and that these properties will help to further strengthen the quality of our system.

Overall, the major development objectives for 2005 is the reimaging of Comfort Inn®, our flagship brand of almost 1500 domestic hotels. This effort will implement improved brand standards that will ensure we meet customer needs and enhance the consistency of the hotels in the brand. We expect most of the Comfort Inn® system will have completed the brand improvements and reimaged with new signs by the end of the year.

Next month, we will be meeting with our franchisees at our annual convention in Las Vegas. At that time, we will be emphasizing the need for continued improvement in guest satisfaction as a means to adding more repeat business to our hotels. We are putting in place new guest surveys and hotel inspection processes that will help our owners target improvements in quality and consistency.

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 now estimate second quarter of 2005 estimates for diluted earnings per share will be in the range of 58 to 60 cents. Full year 2005, estimates are in the range of $2.39 to $2.44, and these estimates assume existing share count and RevPar to increase 5 to 7 percent compared to last year.

Choice continues to enjoy the advantages of a healthy balance sheet, significant free cash flow, and a business model that generates outstanding returns on capital. We remain committed and confident of our ability to continue to generate value for our shareholders. Chuck?

Thanks, Joe, and now we'll open it up for any questions that you might have.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star, then 1 on your touch-tone phone. You will hear a tone indicating you have been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. If you are using a speaker phone, please pick up the hand set before pressing the numbers. Once again, if you'd like to ask a question, please press star, 1 at this time.

And our first question comes from the line of Joe Graff(ph) of Bear Stearns. Please go ahead.

Good morning, guys. You guys had earlier touched on that momentum from 1Q has continued into the Q2. Can you just elaborate on that? Obviously, we had a softer-than-expected GDP number this morning. Are you seeing anything where you might see a slowdown, or reservation activity or leisure activity as you go into the summer?

We haven't seen it yet. I think the numbers have been at least -- we don't get -- we don't have a whole lot of visibility on the forwards -- in forward reservations, although the activity in the close end has been good, and the RevPar numbers continue to look pretty good, too, so, no, we haven't seen that yet, and I guess time will tell. I think that -- anyway, so far, so good.

And, Joe, relative to our estimates in the first quarter, you guys had better operating margins (inaudible) and I think it was the best operating margin, Delta, in about 4 quarters. Can you just touch on that? What was the driver there?

An aggressive CFO beating up the operating units. Some of the stuff that goes on is on the SG&A line and I'd like to say it's permanent, but from time to time, we adopt initiatives; we do commission plans, and I think what happened in the first quarter is sort of reflective of what can happen in the business, but we're not silly, and in quarters we like to invest in certain initiatives. We do -- we have some minor variable comp plans that come in and out. I don't think it's the kind of thing that you look for quarter-over-quarter. I would expect probably some of our spending would increase towards the back end of the year, but nothing to the degree where it would upset any of the targets that we've laid out.

So if I were to look at operating income margin at the end of this year, relative to the end of last year, what sort of a reasonable margin basis that you can -- or margin improvement that you could generate or that you're targeting that's embedded within your '05 guidance?

Internally, we obviously focus on margins. We don't talk too much about them because I don't want to put a target out there and if I don't get 50 basis points, somebody gets upset because I decided to launch a commission plan that can drive an incremental 50 more units next year. So I don't have operating target margins -- I mean, we do, as we lay them out. It's a scale business. We expect that absent of any kind of discretionary spending that the margins will continue to improve, but we don't let out any target operating margins. I wouldn't feel comfortable laying those out. We do lay out internally our EBITDA guidelines that we try to hit and those EBITDA guidelines fall down into EPS. So if we can get a little more volume, more units, and more -- and a stronger EBITDA that sets us up for the future, we may invest in a quarter to get that.

Okay. Great. Thanks, guys.

Thank you. Again, as a reminder, if you would like to ask a question, please press star, 1 on your touch-tone phone.

And our next question comes from line of Michelle [Coe](ph) of UBS. Please go ahead.

Hi. This is Michelle Coe(ph). I work with Walt Schuler(ph) over at UBS. Good quarter.

Thank you.

I just had a couple of questions. It appears that there is a gain on sales for $133,000. I was just wondering if you could talk about that a little more and is that related to the MainStays that you own?

Those are the legacy transaction, 3 MainStays and a piece of land that we got from the spin-off from SunBurst. That was a parcel of land that was divested. It didn't have any strategic importance to us and that's pretty much what happened.

Okay. And also, in the interest income and other investment line, there seemed to be a loss this quarter of $131,000. I was just wondering if you could tell me what was offsetting the interest income? What was in that other investment?

What goes -- it's not -- as you know, on our balance sheet there's $28m, but that's -- most of that stuff kind of goes in and out, but that reflects our investments in our pension plans and non-qualified trusts and they vary with the market, so not a significant item. It will fluctuate from time to time, but it doesn't represent any discretionary earnings -- investments that we're doing. What you do in non-qualified plans, is you invest and match the obligation to your employees and if the market's up, you get a gain; if the market's down -- so, there's nothing really in there from an operating standpoint.

Okay. That could potentially continue to be a loss for the rest of the year, depending on the pension plan?

Yes, depending on how non-qualified -- or it depends how the market conditions are. It's invested the way that our -- for the most part, the way our employees invest, so if they invest one way, and the market goes one way, then we match it, so it could go either way. I don't think it's going to be material in one way, shape or form.

Okay, great. One other quick question, it seems the cash and cash equivalents number for 2004 increased slightly from what was in your 10-K by about $964,000. I was just wondering if you could quickly say why that might be?

The number in the 2004 cash/cash equivalents is different than the number in the audited 2004?

Yeah, in the 10-K.

I'm sure it's the reclass in time to time; it's not significant. It's probably moved from one line item to another, probably from an overdraft to a cash equivalent. From time to time, you have that and reclass it just to make it consistent with the current presentation.

Okay, great. Thanks very much.

Thank you. Again, if anyone would like to ask a question or share a comment, please press star, 1at this time. We have no one in queue. Please continue.

Okay. Thank you very much and we will talk to all of you soon. Good day.

Thank you. Ladies and gentlemen, this conference will be available for replay after 1:30 p.m. Eastern Time today through midnight, May 28, 2005. You may access the AT&T Teleconference Replay System at anytime by dialing 1-800-475-6701, and entering the access code of 776115. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 776115. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.