Choice Hotels International Inc (CHH) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Choice Hotels International first quarter earnings results conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded.

Before we begin, I would like to read the following disclaimer. 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, 2005 details some of the important risk factors that you should review. I would now like to introduce Chuck Ledsinger, President and Chief Executive Officer of Choice Hotels.

Good morning and welcome to our first quarter 2006 earnings conference call. And with me this morning is Joe Squeri, our Executive Vice President of Operations and Chief Financial Officer, and David White, our Controller. And following a few brief comments, and they will be brief, and highlights about the quarter ended, Joe and I will open up the call to any questions that you have.

As you know, yesterday after the market closed we reported first quarter results. And the first quarter was a very strong quarter. For the quarter we reported diluted EPS of $0.26 for the quarter, an increase of 44% over the $0.18 reported in the first quarter '05. Net income grew 47% from 12 million in the first quarter of '05 to 17.7 million in the same period of this year. And EBITDA increased 32% to 32.4 million from 24.6 million in the first quarter of 2005.

Operating income increased 35% to 30.1 million compared to 22.3 million for the same period in '05. And total revenues increased 20% to 109.4 million compared to the first quarter of '05. We experienced a 9.4% growth in domestic systemwide RevPAR. And of our eight established brands, all RevPAR growth, with five of them seeing double-digit increases.

Domestic unit growth increased 5.2% compared to the first quarter of '05. And excluding acquisition of Suburban, domestic unit growth increased 3.6%. Year-to-date new domestic hotel franchise contracts were up 17% to 120, with new construction contracts increasing 41% to 48, compared to 34 in that first quarter of '05.

We signed 10 contracts for our new upscale Cambria Suites brand as compared to 13 for the full year of '05. We're very pleased with our accomplishments in building this brand from the ground up. And given the strong interest in development activity thus far, we're very optimistic about its potential.

We are off to a great start in '06. We're well-positioned for continued growth on the combination of our solid operating model and the strength of the industry. We remain positive on our outcome for the fiscal year, and are raising our fiscal year earnings guidance. For the second quarter our diluted EPS is expected to be in the range of $0.36 to $0.39. Full year 2006 diluted EPS is expected to be $1.46 to $1.49. Earnings before interest, taxes, depreciation and amortization, EBITDA, is expected to be 175 to 179 million for full year '06.

These estimates include the following assumptions. The Company's expects net domestic unit growth of approximately 4% in '06. RevPAR is expected to increase 6 to 7.5% for the second quarter and 5.5% to 7% for the full year of '06. The effective royalty rate is expected to increase 3 basis points for the full year. And all figures assume the existing share count includes stock-based compensation expense, and assume an effective tax rate of 36.5% for the full year of '06.

I will be glad now to open up the floor for any questions that you might have.

(OPERATOR INSTRUCTIONS). David Katz from CIBC.

Congratulations. Nice quarter. Two questions. Firstly, just looking at the other companies in our universal broadly, as well as yours, obviously people are reporting pretty strong growth in their pipeline of new hotels. How do we balance our thinking in limited service and economy between sort of the impact of construction costs with these growing pipelines, and potentially a supply growth issue down the road? Can you just share your thoughts on those topics?

I think the initial impact has been that deals are still getting done, they're taking a little bit longer. Usually what happens is I think the increase in cost has slowed things a bit. Whether that remains kind of permanent increases I think is yet to be seen. But the other side of it is the rates have been strong -- ADRs. And so as long as you're seeing the type of RevPAR numbers and rates, particularly in some of these markets, I think it is going to attract some new supply.

I think most people think it is going to be -- I don't know how long you can predict out before the supply starts to catch back up to demand -- it is still not quite in sync with demand outstripping supply. But the day will come. It usually does. That is why I like our business model because we also convert hotels. The last time around when we had a slowdown we had a great performance. We think it helps big, solid strong scale businesses and particularly ones that have franchising, or predominately franchising, or in our case 100% franchising. That is how I will respond to it. I can't predict when things will turn, but let's enjoy it while we can. I think it is going to be -- it will be a while.

The market or the industry appears to be internalizing or starting to appreciate more and more than merits of franchising. And clearly you all do understand those. Are you at all concerned or seeing any signs of entrance into that segment of the business more aggressively? Are people attempting -- are you seeing any signs of people buying some business that are concerning to you at all?

I don't know that -- I think what Choice is -- it is just Choice is being unique because we only do franchising. I think that -- you know, all the other big companies do franchising. They just that they don't do it 100%. I think that is not to say that they don't have very effective business models, because they do. They work very well.

I think actually what you're seeing is you're seeing in some cases kind of the opposite. La Quinta was bought by Blackstone and effectively taken out of -- they are buying back franchises, they are not --. Some of that will go on. It is a scale business though and so you have to have a lot of hotels before it really starts to make sense. It takes a long time to build a chain of 4 or 500 hotels.

And so I don't see big changes there. I think what is happening is, like with Intercontinental what they have done, they looked at obviously Holiday Inn's franchise way back -- were one of the first. But what they have done is they're starting to lighten up on the real estate side. And I think same with Starwood. But, yes, is a high margin business, so that is good thing. But I think the larger companies that are invested in management aren't going to change that. They may just from time to time sell assets to lighten up their investment in the real estate.

One more quick one and then I will give somebody else a chance. In terms of the calendar shifting with Easter and Passover moving, has that had any impact on your portfolio at all? Because it doesn't appear to be evident from your guidance, I don't think. But has that had any impact on your business?

Joe?

No, I mean, calendar shifts for us -- as you are looking at the health of our business and the quality of our business, you look at the -- I believe closed transactions and those types of RevPAR gains or losses eventually smooth themselves out. We have studied the pipeline. We have studied the backlog, and it has never been as -- it is quite strong. Application flows continues to be strong. It is up over close to 8% over last year, so calendar shifts are really of no consequence to us.

(OPERATOR INSTRUCTIONS). [Carlos Santorelli] from Bear Stearns.

Great quarter. I was just wondering if you guys could break out maybe what is in that other revenue number, the 2.2 million for the quarter? Are those mainly termination fees, and kind of how should we think about them going forward, that line?

The largest share -- you have got a bunch of ancillary revenue, you have got training fees and termination fees. And probably 1 million plus or so is termination fees. We are much more aggressive in pursuing termination awards. I think are process has improved. It is kind of hard to budget that. We don't really budget that or forecast termination awards to increase materially one way or the other. But I don't think that that should factor necessarily into your earnings guidance one way or another.

You get some upsides when you collect on some terminations, but you can't really control the transactions one way or another, whether the assets are sold or terminated or disposed of in some way.

Bill Lerner from Prudential.

Two questions. One, can you just give us some color around the Suburban properties, how that is going and how the pipeline looks and the opportunities net there? And then secondly, just a little more maybe on international. Obviously you guys have exposure overseas, but has your desire to get more aggressive building out that business changed in the last six months, what have you?

I will start with international, and Joe can talk about Suburban. But international we still think is a continuing big opportunity for us. What we have done though is we haven't invested anything in bricks and mortar internationally. We have bought in a couple of cases some systems, meaning that we -- Flag, the company we bought in Australia and converted that really from more like a co-op type business to a franchise fee royalty paying entity. We like that. That has worked very well, and we have a large presence down there.

We will continue I think to find those opportunities where we can. We've got businesses growing nicely. We have a large presence in Japan. We've got a couple in China that are starting, although that has been -- that will be slow I suspect. But Europe, Western Europe particularly, there is big opportunities we think there as we have sort of rationalize what we have over there. Scandinavia has always been great and continues to be. Mexico is a big opportunity. We only have probably four or five, maybe five I think franchises in Mexico. But we just started revitalizing that probably a year and a half or so ago. I think, yes, it is going to continue to be a nice growth vehicle for us. It is small. It is still a small piece of the overall, but it will be growing at I think probably a more rapid rate perhaps then the Company overall.

And on Suburban, I think the timing of that transaction couldn't have been better. There's always some concern and some confusion as to the benefits of franchising relative to an Extended Stay product. We got immediate accretion on the property's performance once they were integrated into our reservation volume. We are tracking RevPAR close to 10%. Their reservation contribution I think more than tripled as soon as it was integrated into our system. We signed six deals in the first quarter. It has given us new life for Mainstay.

One of our key initiatives, obviously besides Cambria, is to really start to position Extended Stay as a franchisable product. And I think the performance of Suburban to date has given us new information, new value propositions to go out there and market our properties to extended stay customers who for the most part are not your traditional hotel owner. The existing owners have also renewed about 40% of their contracts. So we are very pleased with Suburban. And it was obviously positive to earnings by about $700,000 in the first quarter. It has been so far so good, and we're optimistic about our continued success in extended stay.

(OPERATOR INSTRUCTIONS). David Katz from CIBC.

Can you update us on -- it didn't look like there were any shares repurchased in the quarter. Did I miss that? Was there a reason for that, and just update us on your thinking there?

You didn't miss it. We've did not repurchase shares in the quarter. We will continue to repurchase shares when we have the opportunity, when there are shares available. We will continue to pay the dividends out. It is not our intention to hold cash in the business. But I'm not going to comment any further than that. It is more opportunistic for us when the opportunity presents itself, and when we think -- when we have the ability to do it.

At this time we have no further questions. Please continue.

Thank you very much for your attention and good questions. And we will talk to you soon. Good day.

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