Choice Hotels International Inc (CHH) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. We do appreciate your patience today and good morning! Welcome to the Choice Hotels, Inc. second-quarter 2005 earnings conference call. At this point, we do have all of your phone lines muted or in a listen-only mode. However, after the executive team's presentation today, there will be opportunities for your questions, and those instructions will be given at that time.

(OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, today's conference is being recorded for replay purposes, and we ask that you stay online at the conclusion of our call to receive that replay information.

Ladies and gentlemen, if I may have your full attention please. 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, 2004 details some of the important risk factors that you should review.

With that being said, let's get right to the second-quarter agenda. And here with our opening remarks is Mr. Chuck Ledsinger, President and Chief Executive Officer of Choice Hotels. Please go ahead, sir.

Thanks very much. Well, good morning, and welcome to our second-quarter 2005 earnings conference call. Yesterday afternoon, we reported that Choice's second-quarter diluted earnings per share were $0.65, a 23% increase over the same period in 2004. For the first 6 months of 2005, diluted EPS increased 22% to $1.01 compared to $0.83 last year. We also reported that our operating income for both quarter and the 6 months ended June 30th increased by more than 16% -- 37.4 million for the quarter and 59.7 million for the 6-month period.

Franchising revenues, which exclude marketing and res fees in three Company-owned hotels increased 13%, 58.5 million for the second quarter of '05 compared to 51.8 million last year. For the first 6 months of 2005, franchising revenues were up 12% to 99.7 million.

Contributing to these improvements was a 5.5% increase in the number of domestic hotels online to 3,926 at the end of June, representing more than 317,000 rooms online. This compares to 3,723 hotels, representing just over 300,000 rooms last year.

Second-quarter '05 RevPAR growth of 5.1% was in line with our expectations. We believe the RevPAR growth of the third quarter will range between 6 and 7% -- for the full year, fall in the 5 to 6% range.

Choice's franchise development continued to grow at a record pace during the quarter, with new domestic hotel franchise contracts reaching 173 for the quarter, a 15% increase from '04. Year-to-date for the end of June, we executed 276 contracts, a 19% increase over the 232 executed in the same period last year.

Our strong development result underscore the growing hotel owner and developer demand for our brands. With the current appeal and breadth of our brands, strength of the economy and industry fundamentals, we are optimistic about our prospects for continued franchise development. The range of lodging choices we provide developers positions us well to compete for future franchise contracts in the economy, mid scale -- and with the recent introduction of Cambria Suites -- upscale segments of the industry.

The decision to add the Cambria Suites product as an upscale all-suites brand has produced solid results, as we have 6 deals executed and nearly 10 other deals in the application process. We expect this product to do very well in its target locations that rely on commercial, airport and destination leisure/business. Our development pipeline of just 100 -- over 470 domestic hotels at the end of June positions us extremely well for future unit growth that drives royalties.

Our marketing and distribution channels continue to deliver value to our franchisees. We have enjoyed a particularly strong summer season in our central res system. This month, we experienced 3 days with reservation sales in excess of $8 million, have also had 15 other days exceeding the 7 million mark this summer. Business delivered to our franchisees through the CRS, central reservation system, accounted for nearly 34% of total generated revenue, a 140 basis point increase over last year.

The share of central reservation revenues delivered through ChoiceHotels.com, our proprietary website, increased more than 700 basis points -- 30% -- from 23% last year. These results illustrate the ability of our central res systems to deliver powerful reservations contribution and real value to our franchisees, which in turn, helps us in our franchise development efforts.

As we pass the midpoint of the year, free cash flow generation continues to be a critical strength of our Company. We were able to return more than 30 million to our shareholders through share repurchases and dividends in the first 6 months of this year.

Ongoing dividend increases and opportunistic share repurchases will continue to be a primary focus. How much we allocate to each will be a function of both our operations and market conditions.

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

Thanks, Chuck. Like Chuck, I am very pleased with the Company's performance for the quarter and for the first 6 months of 2005. In particular, development of new construction hotels continues to improve, with 59 contracts executed in the second quarter compared to 33 for the same period a year ago. Number of rooms represented by these new construction projects more than doubled to just over 4,600 rooms compared to 2,200 last year, indicating that owners are building bigger properties.

For the 6 months ended June 30th, our new construction hotel franchise contracts increased from 60 to 93, a gain of 55%, with the room count for these projects jumping 71% from 4,100 to 7,000. These results demonstrate that our new build construction brands is competing effectively for development dollars.

We continue to enjoy strong growth in initial franchise and relicensing fees, which increased more than 25% for both the quarter and the 6 months ended June 30th. At the end of the second quarter, hotels under development in our domestic system numbered 471, representing 36,058 rooms, increases of 19% and 17% respectively compared to last year. Our application flow remains quite strong, up about 21% year-to-date, and we continue to be able to convert many of them into executed agreements.

Our Comfort Inn owners are realizing the benefits of the brand's reimaging program. About half of the Comfort Inn system, our largest brand, has new signage in place and has begun implementing other key standards and amenities to support the new look and ensure a greater brand consistency. We continue to put a heavy emphasis on the need for continued improvement in guest satisfaction as a means of driving more repeat business to our hotels. Our new guest surveys and hotel inspection processes will make sure that our owners focus on the issues of most importance to consumers, and that they receive prompt attention.

With the momentum we built up of franchise development and the benefit of a highly experienced sales force, we are confident of our ability to continue unit growth in the 4 to 5% range. We announced yesterday that third-quarter 2005 estimates for fully diluted earnings per share would be in the range of $0.82 to $0.85. Full year 2005 estimates are in the range of $2.43 to $2.48. These estimates assume existing share count and RevPAR increases between 6 and 7% for the third quarter and 5 to 6% for the full year 2005 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?

Thanks, Joe. We would be glad to open it up for questions.

(OPERATOR INSTRUCTIONS). Samir Jain, Jefferies & Company.

Just a question on the debt -- I noticed that it declined sequentially. Why was that? And what will the impact be on interest expense going forward?

Well, if you look at our cash flow statement, we obviously were less active in buying back stock. And depending on how we manage that, in terms of buying back stock, which we still believe is accretive, that will impact obviously the interest rate cost. But rates have been going up. Most of our debt is variable priced at this point -- two-thirds of it anyway. So that just reflects the cash flows of the business.

And absent of us finding opportunities, you would expect some natural delevering from time to time. And then if there was opportunities for us to deploy that cash flow more accretively, we would do that as well.

So if rates continue to move up, then does that sort of single preference to retire debt over share repurchase?

Not necessarily. I think you have got a pretty flat yield curve, so we would consider things all the time like terming it out. And that will all fit into our overall capital allocation process. So if rates were still where they were -- and it may be advantageous for us to term it out to get a little more predictability in our interest cost -- we would consider that, especially in light of what our capital return process is and what we are looking at.

So I don't think there is anything really to read into that. There is natural things -- variances in our quarterly statements over the years. And from time to time, when there is opportunities, we execute against them.

Okay, good. And then, Cambria, should we still be thinking about that has its -- I guess the first hotels opening in early '07? Does that sound right?

Yes. The first one, Boise, I think, just broke ground -- or is coming near. But yes, I think that that is fair.

Joe Greff, Bear Stearns.

A question for you on the Cambria Suites product. How many applications do you have currently pending right now?

Around 10.

And as you kind of go into next year, do you think that contributes to revenues next year? Or is it still kind of early? Is it really more of an '07 driver?

It is really '07. We are going to just be opening probably the first ones in early '07. So it will be -- there may be a little bit of initial fee income but not insignificant.

But we do believe in a long term. We think it is going to be a great product, and there is a lot of interest in it. So the momentum continues to build there. So it is a good spot for us.

(OPERATOR INSTRUCTIONS). Will Truelove, UBS.

This is Michelle Coe (ph) for Will Truelove. Good quarter, gentlemen. We actually have two questions. The first is -- given your expected $0.58 to $0.60 at the second quarter -- and you recorded $0.65 sense, which is basically a $0.05 outperformance, and then you raised your full year expectations by $0.04 to $2.43 to $2.48. Does this mean you are keeping the second half expectations flattish?

One could infer that.

Yes, I think that is probably right.

Okay. And then our second question is -- since June's RevPAR results are stronger than March, can we infer that your third-quarter RevPAR is stronger than your second quarter?

Yes. We are looking for a stronger third-quarter RevPAR than the second -- marginally stronger. We said between 6 and 7 for the third quarter, we think.

I think one thing to focus on is, when you look at our outperformance and we give you a little more color on that, we are pretty good. And what one of the merits of our business is predicting the royalty fee stream. Because if you understand units and RevPAR and pricing, we are pretty good on that. And where the outperformance was, was in our transaction-based businesses. We drove initial fees hard -- that outperformed in that area. Partner services outperformed, and we were able to keep costs under control.

So when we looked -- we gave a 6-month outlook -- we have a pretty good sense on royalty fees because it is a business that has been in place, and we know there is some vagaries obviously in RevPAR. But we are very optimistic about our transaction businesses, but those really are transaction businesses. And so when we go out and give forward-looking guidance, we give numbers that we realistically feel good about, and outperformance is based on transaction and execution -- which is what happened in our first 6 months.

(OPERATOR INSTRUCTIONS). And allowing a few more moments for participants to queue up, Mr. Ledsinger, Mr. Squeri, we have no further questions. I will turn the call back to you for your closing remarks.

Okay. Well, thank you very much. Thanks for your attention. And we will talk to you soon. Good day.

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And that does conclude our earnings call for this quarter. Thank you very much for your participation, as well as for using AT&T's Executive Teleconference Service. You may now disconnect.