Choice Hotels International Inc (CHH) 2006 Q4 法說會逐字稿

Good morning, and welcome to the Choice Hotels International fourth quarter and full year 2006 earnings conference call. 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 certainties 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 these important risk factors that you should review. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We caution you not to place undue reliance on forward-looking statements which reflect our analysis only and speak only as of today's date. We undertake no obligation to publicly update the forward-looking statements to reflect subsequent events or circumstances.

I would like to introduce Chuck Ledsinger, Vice Chairman and Chief Executive Officer of Choice Hotels.

Good morning and welcome to our fourth quarter and full year 2006 earnings conference call.

With me this morning is David White, our Chief Financial Officer. Following a few brief comments from highlights that are results from last year, we will open up the call to any questions that you have.

Yesterday after the market closed we reported 2006 fourth quarter and full year results. Diluted earnings per share for full year 2006 were $1.68, up 27% compared to $1.32 for full year 2005. Diluted earnings per share for the fourth quarter 2006 were $0.37, a 16% increase compared to $0.32 from the same period in 2005. Adjusted diluted earnings per share for full year 2006 were $1.49, an 18% increase compared to $1.26 for full year 2005. For the fourth quarter of '06, adjusted diluted earnings per share were $0.36, a 13% increase compared to 32%, excuse me, $0.32 reported in the same period of the prior year. Our calculation of adjusted diluted earnings per share excludes a loss in 2006 related to the extinguishment of debt and for 2006 and 2005 certain income tax matters described in the exhibits of yesterday's press release.

Operating income for full year 2006 increased 16% to $166.6 million compared to $143.8 million recorded in the same period of the prior year. Operating income for the fourth quarter '06 increased 10% to $39.9 million compared to $36.2 million reported for the same period of '05. EBITDA for the full year '06 increased 15% to $176 million $153 million in '05. For the fourth quarter of '06, it was $42.3 million an increase of 10% compared to the same period in 2005.

Franchising revenues which exclude marketing reservation activities and owned hotel operations and total revenues increased 14% for the full year '06. Franchising revenues increased 10% and total revenues increased 18% for the quarter '06 compared to the same period of the prior year.

New domestic hotel franchise contracts for full year '06 increased 13% so a record 720. Great year. Both new construction and conversion domestic hotel franchise contracts were strong, up 22% from 7% respectively for the full year. Fourth quarter new domestic hotel franchise contracts increased 21% to 267 compared to the fourth quarter of '05.

Domestic system-wide revenue available per room increased 6.1% for the full year of '06 and 3.7% for the fourth quarter. Domestic RevPAR for our mid-scale without food and beverage brands, Comfort Inn, Comfort Suites and SleepInn, which together represent about 50% of our domestic room supply, increased 9% for '06 and 6% for the fourth quarter of '06.

Domestic unit growth increased 4% for 2006. Our domestic hotel pipeline of hotels under construction awaiting conversion or approved for development increased 43% to 860 hotels representing 66,238 rooms. And during the fourth quarter, we executed ten contracts for our new upscale Cambria Suites brand. We have executed contracts for 43 Cambria Suites hotels. 30 of which were executed in 2006 alone, a great start for that brand.

We expect diluted EPS of $0.23 for the first quarter and $1.59 for full year 2007. The full year 2007 EBITDA is expected to be approximately $186 million. These estimates assume 4% unit growth to full year '07, RevPAR increases of 2% for the first quarter of '07, and 4% for the full year of '07 and effective tax rate of 36.25%. And they also include approximately $4.5 million dollars of severance costs during the first and second quarters related in previously announced separation of certain executives.

We are very pleased with our fourth quarter and full year results, and are very optimistic about the long-term prospects for our brands. With our recent shift to a brand-centric structure, we have enhanced our ability to leverage our core strengths and take advantage of opportunities for growth and innovation through a variety of economic and industry climates. Our talented leadership team, our proven business model, and financial strength and strong portfolio of brands gives us the confidence that will continue to achieve our growth targets going forward.

And I will now open up the call to answer any of your questions.

Great. Thank you very much.

[OPERATOR INSTRUCTIONS]

Our first question comes from the line of William Truelove with UBS. Please go ahead.

Two questions for you, Chuck.

I was hoping you could address the shift to the brand-centric structure and the amount of management changes that have happened relating to all that, not only senior executive level but mid managerial level. And the second thing I was hoping you could address the disparity between your consistent earnings and your very volatile stock, if you have thoughts or comments you would like to say about that. Thanks.

Yes.

Well, the first part, Will, has to do with the structure, and the brand-centric structure really started with Cambria where we were, we wanted to add executives specifically devoted for the growth of the Cambria brand. And what we have done is we put strong leaders in each one of the segments, if you will, of the business. And so there is a combination of brands in those segments. But it allows us to really focus on the long-term growth and pan-quality and consistency of all of the brands, and we felt like it was needed as we move forward, both to, both for growth which is incredibly important, obviously, but also to ensure the quality standards are being met going forward and to have people that are literally wake up every day and living and eating and breathing their brands. So we've had that in the past but it hasn't been delineated as it is now. When we shifted to that way, it resulted in some changes in the organization and some changes in roles the shift to the brand-centric organization was responsible in some part for the departure for our Chief Marketing Officer because effectively the nature of the job was changing. The other two senior positions were unrelated to that. And then if the middle management ranks or we have senior people running those divisions, those are people who have been with us all of whom have been with us a long time. They're some of our strongest executives, and we were confident about that.

And I can't comment on the volatility of the stock. All we can do is keep hitting good earnings numbers and the market will figure it out. We are really looking, we need to look at this business as a cash flow generation business. It's a very strong cash flow generator and we have proven over time we will return that value to our shareholder in a variety of ways, and that's our goal going forward.

We have a great strong business. Huge pipeline of hotels and a great new brand that's really taking off. We were down here in Florida with a group of exceptional developers for Cambria specifically and have met with them over the last day or two, and there is a lot of excitement about that brand.

If I can ask a follow-up, then. Can you talk a little bit about the pipeline especially as it relates to international and how you are sort of structure and organization and take advantage of international growth. I know in the past you had master franchise agreements. Can you tell us how that is transitioning going forward?

Yes. I mean, the thing that's changed is we have taken over direct franchising for part of continental Europe. It still is that way in the U.K., it still has a Master Franchise Agreement. Outside of the U.K., we are directly franchising or will be. So there is a little bit of infrastructure cost that we've added to do that, but we think that will ensure longer term growth in that area. The International Division reports to Bruce Haas which has for the last I don't know, seven or eight years. Six or seven anyway.

That will continue, and as we really look at development internationally as to whether we do master franchises or direct franchising, it really depends on the country or the region of the world. Some areas are easier and more sort of used to or have that model in place already which means that it makes more sense for us to do it directly. Some don't. And we will continue to do that. We will continue to grow our international business probably at the pace we have been doing. Maybe a little bit faster than we have historically. But we think it's a good contributor of long term to our business.

I can't remember the other part of the question.

That's fine. Thank you so much.

Thanks, Will.

And we have a question from the line of David Katz from CIBC. Please go ahead.

Hi, Good morning.

Hi, Dave.

The one issue I guess I would love to hear you comment on is share repurchases. And you do have an authorization for 5.1 million shares it looks like. What is your I guess approach at this point? There had been obviously quite a bit more activity to this end than we have seen the last several quarters. And I guess I wanted to get your thoughts on that.

As we said all along, David, we were opportunistic about when we repurchase shares. We have been paying down debt. And we will repurchase shares or return capital in other ways as the market or as the conditions sort of dictate. And we are not -- we don't have a stated number of shares that we repurchase per year and we don't do it that way. We were opportunistic about when we repurchase and we will continue to be. I really can't -- don't want to say any more than that. Other than our long-term strategy is to return value to shareholders. And I think that's the headline there.

Okay. If I can just follow that up real quick. The leverage is fairly low. It was low before we bought back stock and some debt. And then we pay down some more. And we have the authorization sitting there. Is there anything other than, let's say your opportunistic view, that would prohibit you from getting into the market and buying back stock or anything I'm not thinking of?

Only timing. I mean when we can and when we can't and availability of shares to purchase. You aren't missing anything. And we have been out of the market for awhile so we paid down some debt. And we will continue to repurchase shares. Don't read into anything of those comments that says that we won't. We took a hiatus for a little bit of time there. Going into the future I think you will see share repurchases and you will see probably an increase in dividends, and probably moderate levels of debt.

Okay. Perfect. Thanks very much.

Great, thank you. And we have a question from Joe Greff with Bear Stearns. Please go ahead.

Good morning, guys. You answered my question on the buy-back. I guess maybe talk a little bit in-depth about the recent management departure and if that does anything in terms of the internal structure with the brands and how things are run and how comfortable you feel with internal candidates picking up the slack or how you might sort of reconstitute the internal structure going forward?

We are very comfortable with the management depth of the business. We had a very stable management team for a long time. The people that are running the brands are very seasoned people. They had been with the company for long periods of time, and among our strongest executives. And there is depth through the organization, marketing organization, and all the way through. So in one case this was a departure with Joe and the presence for early departure that was a personal decision to leave the business, leave the company. That's personal decision. We are fine with moving forward. And we have very strong people. I'm still around. I have been here for eight years, and we are up until four months ago we didn't have a President in the company. I was the President. I think we will be fine. And we have strong people that are reporting to me, and that's fine. I'm totally engaged in the business and haven't not been -- so I don't think we will miss a beat.

Excellent. Thank you.

[OPERATOR INSTRUCTIONS]

And we are showing a follow-up question from the line of David Katz with CIBC. Please go ahead.

Hi, again. Chuck, can you give us thoughts about your international efforts? I know there were changes in Europe and would love to get some updated color on how we can -- what our expectations should be for that, and perhaps some thoughts on India and other far-off lands and what the opportunity is for you guys there.

You mentioned you may have been on the line that day, but I mentioned earlier and here I'll repeat it, what we did in continental Europe is we took back the direct franchising for continental Europe. It will take a little bit of time to get ramped up there. I think we will see nice growth there. Part of that at least over the last few years has been to try to upgrade the quality of the properties there. And so that has been underway, and I think it has gotten a lot better. The overall quality of the hotels in Europe is much better now than it was. And I think it makes, it provides a strong base for growth ahead, and direct franchising for us is going to be more profitable after you kind of covered your initial costs than through the Master Agreement. So I am confident that over time we will show some nice growth in Europe.

Other parts of the world, yeah, India is a big opportunity. There is a Master Agreement in India, and we are going to have a nice growth there. China has been slower. We have been cautious about China. For us it's a matter of finding the right partners over there, again probably through a Master arrangement. And we have a couple of hotels, and we would like to have more. But it's a tough place, and you have to be careful who your are aligning your interest with.

And just one more if I may. In the U.S., obviously, the franchising world has gotten increasingly crowded and presumably a little bit more competitive. Are you -- how aggressive are you on pricing? Are you pricing down any of your contracts these days?

No. We have a very, very strong franchising operation as I'm sure you know. And we also have a -- what I have been encouraged is a cycle continues is our new build, our new build contracts are up nicely. We are doing a lot of conversions. But we are also doing a lot of new builds. No, I haven't seen that.

I think we compete very well. We have a proven model that really works. We have a culture in the company that I think is attractive to franchisees, and that has a lot to do with it, and the brands perform. We are focussed on that owner and that owner's profitability, and they believe it. And we mean it. So it works very well.

It's always been competitive; it's not like it was never not competitive. But I think we are out there. We have increased our market share over the last five years and I think we will continue to do very, very well. I don't have any concerns about that.

Last one I promise. Any thoughts about M&A or perhaps buying another brand or anywhere, any holes in your portfolio that you would like to fill?

We always look for opportunities. You know, I think we are pretty comfortable right now with what we have. We have a lot of attention focussed on Cambria. And we are -- our Extended Stay business is good, is strong, too. And, yeah, there is always places you could fill in.

What we saw historically when the cycles do turn or when the things soften a little bit or whenever that is, that may be a while, there is in the growth stages there is always new brands that are created. There is groups of hotels that are created. There is regional groups that are created. That always creates opportunities.

Sometimes our acquisitions were more of the small type, maybe 5, 10, 20-type hotel conversion opportunities as opposed to large scale acquisitions. But I wouldn't rule out any of those things as a way to grow the business going forward. We have a very big strong platform that very easy to absorb large numbers of franchise properties. So if the opportunity arose, we would be aggressive about chasing it.

Thanks so much.

Thank you.

[OPERATOR INSTRUCTIONS]

At this time I'm showing no further questions in queue.

Thank you very much. Thanks for your attention.

Thank you.

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