Choice Hotels International Inc (CHH) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Choice Hotels, Incorporated Conference Call. [Operator Instructions]

I would now like to turn the Conference over to your host, Mr. Chuck Ledsinger. Sir, you may begin.

Sir, please go ahead.

Okay, thank you.

Good morning, everyone. And welcome to our -- this is Chuck Ledsinger from Choice Hotels; sorry about the snafu. Good morning, and welcome to our First Quarter 2007 Earnings Conference Call. And with me this morning is Dave White, our Chief Financial Officer.

Yesterday after the market closed, we reported first quarter 2007 results. And after I discuss some of the highlights for the quarter, I will open up the call for your questions.

However, before jumping into the detailed quarterly results, I want to mention some exciting news related to our new Cambria Suites brand. I'm proud to announce, two weeks ago the first Cambria Suites Hotel opened in Boise, Idaho. And along with the Cambria Suites brand team, I stayed at the hotel for its grand opening last week. It's some beautiful property; it looks great. Service is wonderful. And the property's owned by an outstanding franchisee.

We at Choice are proud of this accomplishment and excited about the growth prospects for the brand. We expect three or four more Cambria Suites to open this year. And developer interest in the brand is very strong. Just this week, we executed our 50th and 51st franchise agreements for Cambria Suites Hotels in the Toronto, Canada area, our first two international locations for the brand.

Now moving back to the first quarter results -- our first quarter 2007 total royalty revenues were $43.3 million, which represented a 9% increase from last year's first quarter. Both domestic and international royalties included in this figure were in line with our expectations. Royalties from our domestic hotel franchise system increased approximately $2 million, or 6%. Domestic royalties reflect a 1.4% revpar growth, 4.5% unit growth, and a seven-basis point improvement in the systemwide effective royalty rate compared to the first quarter of '06.

Now when you compare our revpar results for the first quarter of '07 to last year, keep in mind that last year's growth rate was 9.4%, which included the favorable property-level performance impact of Hurricane Katrina in the Southern regions of the United States. Although revpar growth for the first quarter of '07 was slightly below our guidance of 2%, as we indicated in yesterday's press release, we remain confident in maintaining our full-year 2007 revpar growth outlook of 4%.

Our first quarter '07 unit growth and effective royalty rate were slightly ahead of our expectations, primarily reflecting timing of hotel openings and terminations. We're maintaining our outlook for full year '07 net domestic unit growth at 4%, and our outlook for full-year 2007 domestic systemwide effective royalty rate growth of three basis points. Royalties from our international hotel franchise system increased $1.3 million, an improvement of 43% compared to the first quarter of '06, and were in line with expectations.

Key item impacting comparability with the first quarter of '06 in this area is in the fourth quarter of '06, we acquired the Continental Europe Direct Franchising business. As a result of that acquisition, first quarter of '07 royalties include approximately $700,000 of incremental revenues attributable to the consolidation of that business compared to the first quarter of last year. The acquisition also impacted the cost side of the equation. And I'll discuss that in more detail in just a few minutes.

Initial and re-licensing fees were $4.9 million for the first quarter of '07, a decline of $700,000 compared to the first quarter of '06. One key driver of this reduction was that during the first quarter of '06, re-licensing fees included approximately $900,000 related to a group of 23 hotels that were sold by one of our largest franchisees to a new owner, who paid these fees and kept those hotels in our franchise system. No similar transaction occurred this year.

On the cost side for the first quarter of '07, there are two key items that impacted the comparability of SG&A expense and franchising margins to last year. First, the first quarter of '07 SG&A expense includes approximately $3.7 million of severance costs related to the previously announced terminations of certain executives. The severance costs net of the related tax benefit translates to approximately $0.03 diluted earnings per share. The severance costs also explained most of the year-over-year reduction in our franchising margins.

The second item impacting comparability is that first quarter of '07, SG&A expense includes approximately $900,000 of incremental costs compared to last year, attributable to the acquisition and the consolidation of the Continental European Direct Franchising business. While the acquisition is not expected to meaningfully impact our '07 performance, we believe it positions us well for long-term growth in Europe.

Overall, our SG&A costs were lower than our expectations for the quarter, principally as a result of lower-than-expected variable franchise sales compensation and bad-debt expense. Diluted earnings per share for the first quarter of '07 were $0.24, which is $0.01 ahead of our guidance. Our second quarter diluted EPS is expected to be $0.41, and we increased our full-year 2007 diluted EPS guidance from $1.59 to $1.61.

Earnings before interest, taxes, depreciation and amortization -- EBITDA -- for full year 2007 is expected to be approximately $187.5 million. These estimates assume net domestic unit growth of 4% for '07, revpar increases of 3.5% for the second quarter of '07 and approximately 4% for the full year '07, an effective tax rate of 36.7% for second quarter '07 and 36% for the full year of '07.

These estimates also include, for the full year 2007, the previously mentioned $3.7 million severance charge, which was recorded in the first quarter of 2007. This represents a decrease from our original estimate of the severance charges published in February with our 2006 year-end results. In closing, we believe our strong brands and proven business model position us well for creating long-term shareholder value.

And I will be happy to open it up for questions now. So, any questions?

[Operator Instructions] Shaquia Hendrix with Lehman Brothers.

Hi, it's Felicia Hendrix. And good morning.

Hi, Felicia.

Hi. Have a quick question for you. I realize that relative to some of your peers that we cover, you're not as much of a revpar story as a more -- given your structure. But if you do compare your results by chain scale relative to what Smith Travel reported for the quarter, you did fall short. And I'm just wondering what the rationale for that was.

Yes. Felicia, this is Dave White.

Typically, when you compare our revpar results, and you've blended for the mix of our full-service, limited-service and economy supply, you'd come up a little bit short of the industry averages. And that's kind of something that's been consistent over the years.

I think the primary thing we think about is that the leisure mix for our businesses is, we think, generally higher -- a higher proportion of our business than the industry averages. And then locationally, our hotels tend to be located further away from the urban centers, if you will, which we think are kind of the two key things to think about when you're looking at that discount from the industry average.

Okay. What's that? Okay, thanks. There's a very weird echo, FYI.

Oh. Okay, thank you.

[David Katz with CIBC].

Hi, good morning.

Hi, David.

I wanted to ask about the share repurchase, and sort of your balance sheet. Obviously, you did pay down a healthy amount of debt last year. Would you be inclined to allow your leverage to drift up a little bit in the interest of repurchasing some shares? Let's say -- and I don't want to put a timeframe on it, but is that something that you would entertain?

Well, David, I think the best way to think about it is that we've been pretty good about returning value to shareholders over the years, and that will continue. And I think the manner in which we do it is more sort of opportunistic at what we see in sort of the cycles and the point in time. So we did repurchase shares in the first quarter. We plan to continue to do that, opportunistically.

We also recognize that there's an optimal amount of leverage in the business to deliver the right kinds of returns. And so that's not lost on us. So I think we'll look at a variety of ways of returning value. That potentially could be one way to do it.

Right.

One more quick one -- on the international front -- I know you've made some changes there, and we've seen some deal announcements, et cetera. When can we start to see some of that stuff -- or when should we expect to start to see some of that stuff moving the needle a bit more than it has?

Well, I don't think you're going to see much in Western Europe this year. It's going to take -- that was a -- we basically took back the direct franchising rights from the entity that has the master franchise for that part of the world. And so it's going to take a little bit of time to, I think, sort of assimilate what they have and then get it moving again.

But I would think, over the next two to three years, we'd start to see some benefits from that -- and not just Western Europe, but also other parts of the world. India -- we have a lot going on in India now. Japan continues to be very good. China has been slow, but at some point, we expect to have more presence there. So --

Okay, thanks.

Yes. Thank you, Dave.

[Will Truelove].

Hey, guys.

Hey, Will.

Couple questions.

About the initial franchise and re-licensing fees, down year-over-year on the first quarter basis --

Right.

-- given that you're more moving towards new builds versus conversions, and the new builds usually pay the initial fee, would we anticipate that this number could be something that's going to grow fairly rapidly over time? Or is it going to still be depressed for some reason?

Well, I think the reason the number was down predominantly -- the primary reason in the first quarter -- was a combination of initial and re-licensing. That $900,000 re-licensing that we had last year wasn't in the number this year. So that number's driven very much by executed contracts, because that's when the money -- that's when the dollars go hard. And so you're -- that's really what you're looking at.

So I will tell you the pipeline's pretty good. Application flow is up pretty nicely over the prior year. So I think that we'll see probably the same trends we've seen historically. I don't see that mix changing necessarily.

Okay. And then my second question is about your senior management team now. You've had, obviously, a couple of defections; people leaving. Do you feel comfortable with the current staffing level at your senior team? Or are you going to be looking to add some more people?

I think we're very comfortable. We have a very strong management team here. And we've had a very strong management team together for a long time. So lots of people have been in place for a long time. So I'm not at all concerned about that.

Great. Thanks so much.

Okay.

[Patrick Scholes of JP Morgan].

Great. Good morning.

Morning.

Wonder if you can provide a little bit more breakout color on your revpar, specifically how revpar grew in the first quarter in, say, the Southeast areas that were more impacted by the hurricane, as opposed to Mountain and West Coast regions.

Yes, hey, this is David White.

We really don't get into kind of disclosure of the revpar, kind of on a region-by-region basis, per se. And we deal with it kind of on a brand-by-brand basis, in kind the press release, if you will. But I think our sense is that we have a pretty good -- we have a lot of exposure in the Southern part of the U.S. and the East Coast. So that was kind of one of the key things when you think about the comparison against last year's debt -- that Hurricane Katrina impact. But we don't specifically give any type of revpar percentage growth rates by region per se.

Okay.

[Anna Macean with JP Morgan].

Hi. Can you please make any comments -- if there's -- I noticed that the Quality Inn, the Clarion brand; which are part of your mid-scale, [which wouldn't diverge], were weaker in terms of revpar than some of your other brands. Is there anything specific regarding -- whether it's in economy or extended-stay or mid-scale brand -- are you seeing any differences across the different sub-sectors, in regards to revpar? Or is it more given where these particular hotels are located?

Yes, I think it's a combination of both of those things you mentioned. I mean, some of it's geography, and some of it's just product mix within the brand. So we look more from the standpoint of sort of are we maintaining our revpar relative to what we consider our competitive set overall. And then we look at unit growth. And we certainly have programs that help licensees improve those revpar results. But keep in mind they're franchise. So you can only do so much to affect that. So part of what you do as a franchiser, obviously, is hopefully give them better tools to manage their business.

Also it has to do sometimes with -- there's been a fair number of new properties and change in some of the mix within the group. So we've added Quality Inns -- a fair number of Quality Inns. So it takes a little bit of time sometimes to ramp up to get to kind of stabilize occupancy. Sometimes that can affect it.

But like I said, I think we're more concerned about sort of the -- where we are relative to the competitive set, particularly in those brands.

I guess another question is, are you seeing particular weakness in the mid-scale, [the] food-and-beverage segment? Or is it just that the Clarion brand isn't doing as well, or [inaudible] --

I think that's more of -- yes, I think that's more of a mix question within our Clarion portfolio, as opposed to the brand. So I think that there's some very good performers in the brand, and then there's some that need to improve. And so I think that's more of that than, I think I'd say, the segment itself.

Thank you.

That answer your question?

Yes. Thank you.

Okay.

[Peter Lewis with Angelo, Gordon].

Hi, guys.

Hi.

I have a question about your stock buybacks, to the extent you're able to speak to it in a little more detail.

The price you paid -- it looks like you could have paid less for most of March. I guess -- and then you'd also made a comment on a previous call that accretion or dilution to earnings is one of the factors you looked at. So I wonder, just to the extent you can speak to it, what was the catalyst for you to start buying stock? And then what was the catalyst to stop?

Well, it would be nice to think that as a public company you could buy the stock every time it was in low. But unfortunately, that's not the case. So you're locked out, you're blocked out, you have limits on how much you can buy. You have limits on when you can buy.

So I would say the catalyst has been -- we've been -- we're opportunistic when we can buy. We like the price where it's been. And so we view it that way. And then we also view it from the standpoint of alternatives that we have potentially for uses of capital. So I wouldn't read a whole lot into that, other than we bought it when we could. And that's pretty much what we are able to do.

Okay, thanks.

Yes.

[Operator Instructions]

Thank you. I am showing no further questions in the queue.

Okay. Well, thank you very much for your questions and your attention. Good day.

Ladies and gentlemen, this Conference will be available for replay after 1:30 p.m. today, through March 26th, 2007. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code 869362. International participants, dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844; access code 869362.

That does conclude our Conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.