Choice Hotels International Inc (CHH) 2005 Q3 法說會逐字稿

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

[OPERATOR INSTRUCTIONS] As a reminder, today's call is being recorded for replay purposes. And that information will be announced at the conclusion of this quarter's earnings release.

Ladies and gentlemen, if I may have your full attention, please note that during the course of this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the Company's 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 31st, 2004, details some of the important risk factors that you should review. With that being said, let's get right to this third quarter agenda, here with our opening remarks,

is our host, Mr. Chuck Ledsinger, President and Chief Executive Officer of Choice Hotels. Please go ahead sir.

Thank you. Good morning everyone. Joining me today is Joe Squeri, our Executive Vice President of Franchise Operations development, and our CFO, and Dave White, who is our Controller. Good morning, and welcome to our third quarter 2005 earnings conference call.

Late yesterday afternoon, we reported that Choice's diluted earnings per share was $0.48 for the third quarter of 2005, compared to $0.36 in 2004. Adjusted diluted earnings per share was $0.43 for the third quarter, a 16% increase over the same period a year ago.

Adjusted diluted EPS in '05 excludes the effects of one-time decision to repatriate foreign earnings, pursuant to the American Jobs Creation Act, and the resolution of certain tax contingencies. Comparable figure for third quarter '04 data excludes the effect of debt extinguishment costs, and we included an exhibit in yesterday's press release, that provided additional details related to these items. We also reported that our operating income increased 12%, from 42.5 million to 47.8 million for the quarter. This improvement reflects continuation of the momentum we achieved in the first half of the year.

Another highlight during the quarter was the acquisition of Suburban Extended Stay Hotels. With the addition 60 plus franchises in the Suburban brand to our system, we immediately became leading franchiser in the economy extended stay segment. A segment we believe has attractive growth characteristics.

Aside from the Suburban acquisition, our franchise development efforts continue to post strong results. With 419 new domestic hotel franchise contracts executed during the first 9 months of '05, an 18% increase compared to last year. In the third quarter of '05 we executed 143 new domestic hotel franchise contracts, 17% increase over the same period of '04.

We continue to see a very strong response to our upscale all-suites Cambria Suites brand that we launched earlier this year. Just a couple days ago, a developer broke ground on the first Cambria Suites hotel which will be in Boise, Idaho, we expect this product to do very well in the target locations, that rely on commercial airport, and destination leisure business. And through the end of September, we've executed 8 deals, and we have an additional 14 applications under review.

In regards to unit growth in September, we achieved a significant milestone, by exceeding 4000 domestic hotels on-line, our third quarter domestic unit growth rate including the 67 franchises acquired from Suburban was 6.1%, and the number of domestic hotels on-line increased to 4028, with 328,000 rooms on-line. We ended quarter with nearly 500 hotels in our domestic pipeline, and 581 worldwide, which positions us well for future growth, that drives royalties and earnings.

Our third quarter 2005 RevPAR growth was 5.8%, which was in-line with our forecast, and we continue to believe that RevPAR growth for the full year will fall in the 5 to 6% range. Despite the recent hurricanes and volatile gas prices, we remain upbeat about our business prospects for the balance of year. The underlying fundamental strength of the economy, and heightened travel demand gives us optimism that our brands will continue to perform well. We remain focused on and committed to building long term value for our shareholders. Last Friday, we affected a 2-for-1 stock split.

We also recently announced a 15.5% increase in our quarterly dividend to $0.13 per share, and we continue to opportunistically return capital to our shareholders through share repurchases. We believe these actions are in-line with our commitment and strategy to maximize returns to our shareholders.

Now I would like to turn things over to Joe who will review our result in more details, after Joe is finished we'll take your questions.

Thanks, Chuck. We continue to enjoy a record pace in franchise development, in particular, sales of new construction hotel contracts continue to improve, with 46 contracts executed in the third quarter, representing a 15% increase compared to last year. The rooms represented by these projects increased 26%, from 2700 to 3400. Reflecting a trend toward developers building larger properties. For the 9 months entered September 30, our new construction hotel franchise contracts increased from 100 to 139, again 39%, with the room count for these projects increasing 53%, from 6900 to 10,500.

These results demonstrate that our new build construction brands are completing very effectively for development dollars. We also continue to enjoy strong growth in additional franchise and relicensing fees, which increased 17% for the quarter. I share Chuck's excitement our new Suburban Extended Stay Hotels brand, and as part of acquisition, we welcome former Suburban CEO, Kevin Lewis to our team, as Vice President of Extended Stay brands. In this role, he will be responsible for will responsible for the MainStay Suites and Suburban Extended Stay Hotel brands. Kevin's expertise in leadership in the segment will help us to maximize potential for both of these brands, each of which has enjoyed a good reputation with consumers for quality and consistency.

At the end of the third quarter, hotels under development on the domestic system, numbered 497, representing just under 38,000 rooms. 38,000 rooms. Both of these metrics represent increases of more than 20% from last year. Applications flow remains quite strong, up more than 17% year-to-date compared to last year, and we continue to be able to convert many of them into executed agreements.

With the momentum we've built in our development pipeline, the addition this year of two very attractive hotel product to our portfolio in new segments for us, and the benefit of a highly experiences salesforce, we are confident in our ability to continue strong unit growth, for 2005 we expect unit growth to be between 5 and 6%, including the franchises acquired from Suburban. We announced yesterday that fourth quarter 2005 estimates for diluted earnings per share would be in the range of $0.29 to $0.31.

Full year 2005 estimates for adjusted diluted EPS which excludes the tax effects that Chuck described earlier, are expected to range between $1.22 and $1.24. Full year diluted EPS without these adjustments is expected to range between $1.27 and $1.29. These estimates assume our existing share count and RevPAR an increased 5 to 6% in the fourth quarter, compared to last year.

Choice continues to enjoy the advantages of a strong balance sheet, a 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. Now, we would like to open it up for any questions anyone may have.

Thank you very much, Mr. Ledsinger. [OPERATOR INSTRUCTIONS]

And representing UBS, first question will go to the line of Will Truelove.

This is actually Michelle Coe for Will. Great quarter. Just a couple of questions. It seems like the net new room openings was a bit lighter than what we expected. Were there a number of removals in the quarter? And what can we expect for the fourth quarter?

I'll let Joe take that one.

Joe, yes, we mentioned in the press release, that the decline was the result of franchise terminations and we saw to this, we've been on this process for a number of years, but we've stepped up in earnings last year, partly with the re-imaging of Comfort Inn, and some of the sign changes we've done over that period of time, if we look at total contribution per unit, and we look at guest satisfaction scores, and if those are below our expectations, we take our opportunities to either through QA, windows, or whatnot, to replace existing products with higher performing products, so what you saw here was exactly that effort, and the results of that effort.

Importantly though, if you looked at the contribution per unit or contribution per room, that increased close to 7%, which was higher than the 5.8% RevPAR, so we're putting better units in the market. They are being priced at higher rates, meaning our effective royalty rate, and then performing better from a guest satisfaction point. While there was a drop down in the openings, we were not at all concerned with that number.

Right. Okay, I noticed also that your guidance for 2005 EPS, you know, is up by a couple of cents. Are you expecting the higher initial fees to continue into the four quarter?

Well, we typically, while we've enjoyed the last couple of years, higher initial franchise fees and re-licensing fees, the guidance that we gave is our best guess of what of our performance will be.

We typically perform better in the last quarter with respect to development, we've been able to outperform some of our numbers this year, as a result of initial fees and re-licensing fees, so to extent that trend continues, we hope we can meet the numbers that we laid out.

Okay. And also, just a couple of questions on Suburban. I know that you have 67 units. I was wondering if you had a room count? I'm guessing somewhere between 9000 and 10,000 rooms?

I'd say around 9000 rooms.

9000?

Yes.

Okay. And do you think the royalty rate at suburban is going to be above or below the currents average?

It's right around 4% now, and we would expect that it would, depending on our sales efforts, we expect to keep it there or move it up slightly, but we're going through that analysis right now.

Okay. Great. Thanks very much.

Thank you, Michelle.

Thank you ma'am. And next we go to the line of David Katz representing CIBC World Markets. Please go ahead.

Good morning. Two questions. One, whatever color you can give us, you know, regarding, you know, sort of the Gulf area and Gulf Coast, in terms of how long, you know, it appears that this is sort of a net benefit for companies like yours. How long would you think that goes on? A little spill-over into 1Q, how far into next year do you think?

I don't know that we have any, you know, specific knowledge of that. You know, I just don't know how to answer that question. I think that the reconstruction efforts are going to take some time, and those some of the benefit is due to displaced people that are, you know, that are there from, evacuees, that's probably becoming less of a portion as to people that are there on the business to rebuild, I don't know that, we haven't tried to sit down and figure that out, so I don't think I can offer any great insight into that, other than just speculate about it.

And did you, forgive me if I missed it, but did you sort of break out any specific, you know, impact/benefit from the hurricanes, you know, in your numbers?

No, we really didn't. It's, we had, we had 3 or 4, 4 or 5 maybe properties that were totally destroyed, and then we had, I think in all, about 50 from Katrina that were, you know, that were impacted in some form or another, some of those are already back on-line, and some will be, will come back on-line over the next month, few months. Overall, I think that the negative impact probably was not that dramatic when you look at the overall , we have 4000 hotels in the U.S.

Right. And also, forgive me if I missed it, but I didn't see any updates on how Cambria is coming along? If you could update us on that.

Yes. Well, as I mentioned in the remarks, we have, we opened, just broke ground on the first hotel in Boise, Idaho, so we are excited about that. We have very good response to it, to the brand. We have 8 executed contracts and an additional 14 applications under review, which is strong, you know, for the first year, so I'm very, very pleased with our progress, and we have some good solid developers who are interested in it, and as I said, we've just broken ground on the first one so, you know, so far so good.

Okay. Thanks so much. Sorry I missed that, but thanks very much and great quarter.

No problem. Thank you.

Thank you for your questions, Mr. Katz. Next in queue, we go to the line of Bill Lerner representing Prudential. Please go ahead.

Thanks, guys. When Cendant spins-off the lodging business, you guys will finally have a decent comp. Any thoughts on that, you know, beyond it being a comp? I mean, will they focus differently on the business? Will that help raise the profile of it in some way, just trying to get your take?

Yes, I don't know. I mean. I think we've always viewed Cendant as a competitor, and even though the market hasn't thought about it quite the way we have, it has been hard to sort of get to the break through, get through the numbers, historically just because it's not as transparent as it will be, but we keep up with what they are doing, and we look at them as, along with others, as major competitors. I mean, I don't think we are worried about it.

I think they have always been there, and I don't think they are going to, so it's not, we are not viewing this as frankly a threat or necessarily an opportunity either. I think it will kind of continue to go along. They will still have a time share business, which is a pretty good --

That's true.

a good piece of it too. So I think it remains to be seen. I mean, you know, they are a good competitor, and they continue to be, and we will do what we do, and they will do what they do, and if you guys can have some more data to support the research, that's probably good, but it won't change anything we are doing.

That's helpful. Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] Next we go to the line of Samir Jain representing Jefferies. Please go ahead.

Hi. Just a point of clarification. When you said that the guidance assumes that static share count, is that before or after the shares that you mentioned you purchased in October?

It would assume that it's after that, that anything that we purchase is beyond the numbers that were disclosed. You'd have to, so the numbers that are in your income statement would have to be adjusted for the stuff we did after October, after the end of September, sorry.

Okay. And any thoughts about W, not W, I'm sorry, Starwood giving a little bit more information on their Aloft brand? Do you think that changes any of the sort of prospects for Cambria, or do you consider them to be a different competitive set?

It will not change anything we are doing with Cambria, and you know, I think it remains to be seen, you know, kind of how their brand evolves. I mean, it will not have an impact, I don't think, at least we haven't seen it, let's put it that way, so, you know, there's talk about doing, Hyatt has talked about doing something, and Starwood's talked about doing something, but we think that's fine.

We think Cambria will stand on its own and do exceptionally well given the type of market that we can, where we can build those hotels, at the price that we say they can be built. Our developer base is, you know, is interested in that product, so that's what we basically focus on. You know, I think it, as I said, we'll learn more about where they see that brand being positioned, and what they do. We've got a year, year and a half headstart on them, so that's helpful, and we'll see what happens. But you know, I think that's a potentially a pretty good segment, and there's room in it for, obviously, there's a couple of brands that do well in there now, so we are not concerned about, as a matter of fact we kind of expected that to happen.

Okay. Great. Thanks.

Thank you very much, Mr. Jain, and with that, Mr. Ledsinger, Mr. Squeri, I'll turn the call back to you. There are no further questions.

Thank you very much for your good questions and your attention, and we will talk to all of you soon. Good afternoon, or good morning. Good-bye.

Your host is making today's conference available for digitized replay for one month. It starts at 1:30 p.m. Eastern daylight time, October 28th all the way through 11:59 p.m. Eastern standard time November 28th.

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