Choice Hotels International Inc (CHH) 2006 Q2 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the Choice Hotels International first-quarter 2006 earnings conference call. At this time all participants are in a listen-only mode. Later there will be an opportunity for your questions and comments, instructions will be given at that time. (OPERATOR INSTRUCTIONS). I would now like to begin today's presentation with the forward-looking statement.

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 risk and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The Company's form 10-K for the year ended December 31, 2005 details some of the important risk factors that you should review. Although we believe that the expectations reflected in this forward-looking statement are reasonable, we cannot guarantee future results, level of activity, performance or achievements. We caution you not to place undue reliance on forward-looking statements which reflect our analysis and only speak of today's date. We undertake no obligation to publicly update the forward-looking statements to reflect subsequent events or circumstances.

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

Thank you. Good morning, everyone, and welcome to our second quarter 2006 earnings conference call. And with me this morning is Joe Squeri, our Senior Vice President, Operations and Chief Financial Officer and Dave White, our Controller. And following a few brief comments and highlights about the quarter Joe and I will open up the call to any questions you have.

As you know, yesterday after the market closed we reported second-quarter results; for the quarter we reported diluted EPS of $0.36, an increase of 12.5% over the $0.32 recorded in the second quarter of '05. Net income drew 12% from $21.5 million in the second quarter '05 to $24.1 million in the same period of this year. EBITDA increased 13% to $44.7 million from $39.7 million in the second quarter of '05. Total revenues increased 15% to $140.5 million compared to the second quarter of '05.

We experienced a 7.7% growth in domestic systemwide RevPAR. All of our 8 established brands experienced RevPAR growth with four of them seeing double-digit increases. Domestic unit growth increased 4.8% compared to the second quarter of '05. And 3.6% excluding the acquisition of Suburban. During the second quarter we signed five contracts for our new upscale Cambria Suites Brand, and we've signed 15 year-to-date as compared to 13 for the full year in '05. We've executed contracts for properties in a number of desirable markets including Baltimore, Denver, Phoenix and Orlando. We remain very optimistic about the brand and continue to receive an enthusiastic reception from the development community.

Our other high-end new construction brand Comfort Suites is also performing well with 31 contracts executed in the second quarter, a 63% increase over the prior year. Our estimate for EBITDA for the full year of '06 is $175 million, a 14% increase over '05. We anticipate a modest deceleration of RevPAR for Q3 and Q4 and market trends consistent with the forecast of leading lodging industry research firms. We still believe that our net unit growth will be approximately 4% for the year.

Our new EBITDA guidance reflects slightly lower franchising margin growth than our previous guidance had anticipated. Our estimates for third quarter and full-year diluted earnings per share of $0.46 for the third quarter and $1.45 for the year, also reflects slightly higher interest costs in our last forecast and results of our nonqualified employee benefit plan investments to the end of the second quarter. Key assumptions on our estimates are described in yesterday's release.

We remain very optimistic about our long-term prospects. In the second quarter we continued to achieve growth through prudent management of our brands, outstanding services to our franchisees and industry-leading returns on invested capital. Our business model remains strong, as does our balance sheet. We run our operations in a way that maximizes returns to our investors by generating cash flow that can be used to grow the business and create value for our shareholders. We leverage our size and scale and distribution to maximize returns to our franchisees. We offer travelers a mix of brands across geographies, brands that have performed well in a wide range of economic conditions.

I will now open up the call to any questions that you have.

(OPERATOR INSTRUCTIONS) Will Truelove, UBS.

Can you talk a little bit about your external growth expectations for domestic growth this year?

Yes, the estimates are for 4% unit growth, and I think that outlook would carry on through 2007, as well.

Is that unit growth or room growth?

It is unit growth; I think room growth would be slightly less than that.

Okay. Thanks. That's all I have.

Michael Millman, Soleil Securities.

Could you tell us if you are seeing any impact from a slowing in emplanements or decline in emplanements? If you are seeing any impact from gasoline prices that is either people traveling less or staying closer? I guess talk to me about just sort of some of the economic fundamentals.

Since most of our business is really skewed leisure, about 70% leisure, and leisure for us is mostly drive, drive-in and also by virtue of the locations which ten to be highway secondary type locations not as many city center type locations. So we are not as impacted as much by airline travel, although we would be obviously in a very soft economic environment, but we really haven't seen that. And it is hard to tell if there has been substitution or sort of impact of gas prices on travel. It is still strong. The comparisons year-over-year are getting a little tougher just because we had strong performance last year. We are saying that the third and fourth quarters are going to be little bit softer in RevPAR than the first two but the first two were super strong. But we are not really seeing trends I think on the leisure side that are atypical from the industry in general. We are pretty much kind of where we thought we were going to be.

The third and fourth quarters are tougher comparisons, too, because last year there was displacement from the hurricanes. And frankly in the southeast or some of those markets had a positive impact because you had FEMA workers and others that were staying and filling the hotels.

Maybe just a follow-up, the urban centers seem to be getting higher RevPAR. Is that just strictly related to that there is less availability there?

Yes, higher demand, less availability and more business travel and business travel is less price sensitive than a strong economic market than leisure, and gas prices aren't going to have as big of an impact on people traveling on expense accounts as those that are driving on their family vacations or going to see Aunt Mary.

Thank you.

(OPERATOR INSTRUCTIONS) David Katz, CIBC World Markets.

Just noticing on some of the share repurchases, which has been sort of a historical habit of yours, there hasn't been much. Can you sort of update us on your thinking with respect to that?

It is an opportunistic program, and I guess opportunities are created and maybe we have an opportunity now. But I don't think we are in a steady-state kind of thing, we were out there supporting the stock per se. What we do is we buy when we think it is an attractive valuation, and as you've seen people that follow the stock for a long period of time, there have been periods of significant price dislocation where we have been active buyers of our stock.

It's very rare that we are periodic buyers on a repetitive basis and subject to a plan. We usually buy when we think that there are opportunities for us to purchase our stock at a significant or a reasonable discount to what we believe is intrinsic value. And that is pretty much the way we've been executing our plan since the time we were spun out of Manor Care.

Thanks. Hang in there, guys.

Joseph Greff, Bear Stearns.

Joe, back on the topic of share repurchase, would you engage in dilutive, EPS diluted buybacks. We actually had a gaming company talk about that yesterday.

What did they say?

They are actually buying back stock and diluting EPS. I just wanted to know if that is something you guys would engage in.

That is not what we think is really the right financial strategy. What we have tried to do is return value to shareholders, in an economic way that makes sense. And that is the combination of dividends and share repurchases. And there will be room over time to increase the dividend. We paid down some debt in the second quarter, and we're still generating substantial amounts of cash flow relative to the size of our business. And we will find the most prudent way to return that value to shareholders and hopefully we will find some other growth opportunities, acquisition type things as we go along like Suburban. And Cambria is going to be a real hit for us, and we are focused on that. So we are really building the company for the long term. It is a great financial model. It is a great story. Nothing has changed. It is a super quarter. We had a great -- if you looked at the first half of the year, it was very strong. So first quarter just happened to be exceptionally strong, and this quarter I think it was pretty much in our expectations. So we don't really see anything, any chinks in the armor really for the long run here.

But Joe, what I was alluding to is we have been buyers of our stock since '97, '98. We've never done it where it was dilutive to earnings. We would never -- that is not a philosophy, and it wouldn't be something that we would ever undertake.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS) Michael Millman, Soleil Securities.

This is a question that people never like to ask but I will ask it. Why do you think there is this disconnect between what do you reported and what the market was thinking?

Well, I don't know. I mean, you know, we've seen this before when, you know, this isn't the first time there has been a sort of price adjustment in the stock. The first quarter was very strong, and I think some people maybe thought that would continue. We didn't say it would; we said pretty much that we are within the range is where we had talked about for the entire year. So I think sometimes the market gets ahead of itself, and that's okay. It corrects, and we are in a -- we keep plugging along. So I don't know what we can say other than that.

I appreciate your responding to that question. Thank you.

Gentlemen, there are no further questions at this time. Please continue.

Well, we had nothing more to add. Thank you for your attention and your questions, and we will see you in the third quarter.

Ladies and gentlemen, this conference will be available for replay after 1:30 this afternoon until August 26th at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 832732. (OPERATOR INSTRUCTIONS) That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.