Choice Hotels International Inc (CHH) 2007 Q3 法說會逐字稿

Good morning and welcome to the Choice Hotels International Third Quarter 2007 Earnings Conference Call. At this time, all lines are in a listen only mode. Later there will be a question and answer session, and instructions will be given at that time.

If you need assistance during the call today, please press the star followed by the zero and an operator will help your off line. As a reminder, today's call is being recorded.

Now, 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 result that differ materially from those expressed or implied by such statements.

The Company's Form 10K for the year ended December 31, 2006, details some of the important risk factors that you should reveal Although, we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievement. 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 sequent events or circumstances.

Now, with that being said I'd now like to introduce Chuck Ledsinger, Vice Chairman and Chief Executive Officer of Choice Hotel. Please go ahead, sir

Thank you. Well, good morning everyone and welcome to our third-quarter 2007 earnings conference call. And with me this morning is Dave White, our chief financial officer.

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

We continue to execute our strategy for profitable growth, and we're pleased with our strong third-quarter result. For the quarter domestic unit and rooms growth were 5.7 and 4.4% respectively. RevPAR increase 5.6% for the quarter compared to the same period of last year. Rev PAR for our mid scale without food and beverage brands Comfort Inn, Comfort Suites and Sleep Inn increased 6.1% driven by improvement in occupancy and a 5.4% increase in average daily rate.

These brands represent approximately half of our domestic room supply. Coming up back-to-back record years for franchise development in 2006 and 2005, we are pleased that our 2007 franchise development results continue to be strong. During the third quarter, we executed 182 new domestic hotel franchise contracts compared to 178 for the third quarter in 2006, which was a record year. And year-to-date, we've executed 469 new franchise contracts, an increase from 453 during the same period of 2006.

Our strong unit growth, RevPAR, and franchise sales results were key contributors to strong financial results for the quarter. Operating income for the third quarter increased 14%, 62.4 million compared to 54.6 million for the third quarter in 2006.

Adjusted diluted EPS which excludes certain income tax contingency reversals and in 2006, a loss on extinguishment s of debt increased 16% to $0.58 compared to adjusted diluted EPS to $0.50 for the third quarter in '06. Diluted earnings per share for the third quarter in 2007 were $0.59.

As we indicated in yesterday's press release, we're increasing our full year 2007 diluted EPS guidance from $1.62 to $1.67 and our EBITDA guidance for the full year 2007 from 187.5 million to approximately 189 million. Our fourth quarter diluted earnings per share is expected to be $0.41. This figure assume a 4% increase in Rev PAR for the fourth quarter 2007 and full year 2007. This figure is also assumed for full year '07, a net domestic unit growth of approximately 5%, a four basis point increase in the effective royalty rate and an effective tax rate of 36.1%.

And finally, these figures include $3.7 million severance charge which was recorded in the first quarter of this year. During the third quarter, we also continued to execute against our long term strategy of returning excess capital to shareholders. Since the beginning of the year through the end of third quarter, we've repurchased $4.1 million shares of our stock or approximately $155 million. During this same period, we paid cash dividends on our common stock $29.5 million.

In closing, we continue to demonstrate strong performance as we add more hotels to our distribution system, grow our operating income and return excess capital to our shareholders. We remain confident in our ability to continue to grow our market share in the segments on which we operate. And now, I'd like to open up the call to any questions that you might have.

(OPERATOR INSTRUCTIONS) And our first question this morning comes from the line of William Truelove with UBS. Please go ahead.

Hey, guys. Good quarter.

Hi, Will.

May be David could take charge on this question. On leverage ratios, where do you want to target eventually or where do you feel you're happy in terms of your leverage ratios? Where do you see the Company in the next few years?

What's the good range, so we try to model potentially what you might be buying in stock and additions going forward? Thanks.

Yeah. I would say we don't have a specific target of leverage level that we still like we have to maintain on the balance sheet if you will.

If you look back over the past five or six years, the share repurchase program has been in place. We have certainly been comfortable with leverage levels up to three, three and a quarter. So we're not uncomfortable with those levels.

I think the credit rating agencies are comfortable with us in that range as well keeping and maintaining our investment current credit rating. So, the share repurchase program, I think that nothing has changed there in terms of our philosophy that we still have excess capital, excess cash. We will return that over a long period of time to our shareholders through dividend or the share repurchase programs. Our first preference would be to find ways to continue, to use, and to grow the business. But we'll do the right thing from a shareholder perspective with that cash over time.

Thanks so much.

Great. Thank you and our next question comes from the line of David Katz with CIBC World Markets. Please go ahead

Hi. Good morning, guys.

Hi, Dave.

Nice job on the quarter. You know, I know we keep asking this question and I think we know what the answer is, but I'm going to keep asking it anyway just in case the answer changes. Are you perceiving or seeing anything that's showing up in your business in terms of weakness on the consumer, weakness from gas prices?

The perception out there seems to be that a company like Choice and the category that you're in are susceptible to some of the consumer trends that are out there. So, like I said I'll just keep asking it just in case something does show up in your business

It's a good question, Dave, and to be honest with you, not really. I mean, we're affected -- I think the main thing is that we're not only just RevPar growth, we're unit growth. To the extent that -- It seems like if you look back historically kind of what happens is that we play the cycles and we're a very good defensive player but we have also do well on the up cycle too.

So, If things from a development standpoint what happens is that often the new hotels or new brands or small brands or new hotels have been created sometimes that may be independents too. When the cycles turn and things get a little tougher, they start to look for the larger brand organizations to affiliate with the larger platforms and so we benefit in that scenario. We also benefit frankly in under supply growth because we have both new building and conversions.

So I'd say from the a development side which is for us is that we're a unit growth market share company. The most important thing. Secondly, RevPAR is important but probably not quite as important on a margin. And we're not seeing it. We had a very strong summer. And I'm not saying we're showing the fourth quarter -- we don't have a lot of visibility. We don't put lots of rooms out very far.

So it's hard for us to -- I think with a lot of clear sight in this and say that we're going to have -- this is what we can see on the books that is going to happen. We tend to follow the industry. We're a little stronger in the summer months when there's a little more leisure travel. And also, I think I'd just say that there are popular priced brands and so, they are value-oriented brands.

So, sometimes you do see switching from some of the higher priced brand that there is a squeeze on the consumer. So, gas really hasn't had an impact on us. We haven't seen it really in the RevPAR. I'm not saying that a recession in the economy is going to have an impact on everybody. But probably frankly, a little less on us than some others.

Now, If we can just go back to something that I think was an answer to Will's original question. I want to make sure I heard you right.

You talked about being comfortable at the three to three and a quarter times leverage range.

Uh-huh.

And you're obviously quite a bit below that, at this point.

Uh-huh.

So, when I look at your guidance and I think one of the assumptions in your guidance is that the share account basically remains the same for the fourth quarter, right? And we don't only want to think about this in terms of the fourth quarter but take a little longer term view.

The assumption that your share count remains anything close to the same given that comment is probably not really all that relevant, is it?

Well, I think what you are looking at is just what the historical practice has been. And as we sit here today, we don't see the future much different than we see is past. Meaning that, we're going to return capital to shareholders.

Got it.

Look, we're also as Dave said, we'd like to find ways to grow our business profitably and so hopefully we're going to get some opportunities going forward to do that. So, it's a balancing act between opportunistic ability to purchase, evaluations and what alternatives might be.

Right. And if you could forgive me for not knowing this, were you not permitted to buy back any stock since September 30th or did you choose not to do so for one reason or another?

We weren't prohibited. That would answer your question.

So, for the last, I guess, three weeks or so you elected not to for one reason or another.

Well, we haven't really disclosed anything for fourth quarter end but between the announcement date of our increased authorization from the board in the end of the quarter we didn't buy anything else.

I think if you look back, we've announced there's board authorization increase over the past ten years that that program has been in place and we've got to check over time a pretty good track record of actually executing them over time.

Right. Okay. One last one and then I'll get out of the way here. On the international side, I just wanted to check back on that. How long -- I know we should be measuring this more in terms of years than months. How long before we start to see some real evidence of that business becoming meaningful for you all?

Well, I think it's obviously in terms of room share and unit share probably close to 20% of our unit supply. The model is a little bit different internationally than it is in the domestic market. We've got great scale in the U.S. 4300 properties and all that.

So, it actually makes the business probability a lot better than it is internationally. We feel pretty good about the partners we have internationally. Where we do master franchising and spots where we're doing it direct in Canada and Australia and Asia, why not. It will take time for it to have a more meaningful financial impact. We feel like we're doing well there.

Thanks. Thanks very much, guys.

Ok, David.

Thanks and our next question comes from the line of Lisa Henders with Lehman Brothers. Please go ahead.

Hi, guys. Just a few questions. One is you've asked this before and the answers have been, it's been too early. I'm just wondering where we are now.

In terms of having any kind of insight into your franchisees and their ability to access the market just to get that -- It's like more costly for them and is that going to become an issue in terms of growing unit and then I have some follow-up questions.

Lisa, we really haven't seen that. Most of our franchisees are using local and smaller lenders. And so they really just haven't been affected the same way that some of the larger institutions have. And also obtain their credit loans and so it's really a little bit different animal. And it may be costing a little bit more. But probably more likely what it is is they're required to put a little bit more equity in. But that really hasn't been a constraint. We'll still selling a lot of new franchises and we're opening a lot of hotels. I haven't heard that getting the financing has been the issue.

The construction time because of some of the permitting and all the things that have to come together has stretched out a little bit longer. But we had a good quarter, a good year this year on the terms of the thing. A new hotels opening has been also very good on new sales on contracts. So you know, we just haven't seen it. I've talk to a lot of people and they haven't said that that's really done constraints.

That's good.

I hope it continues.

Since your business is based on unit growth as you do. So, just getting to your guidance, I think there's a little bit of a difference when we look at RevPAR percentage changes between what we're looking at and the guidance that you're giving just because we don't have the same start numbers including the suburban acquisition last year. I was wondering if you could give us those numbers for the fourth quarter and full year of last year.

Yeah, sure. Full year RevPAR including suburban in '06 was $40.13. And the fourth quarter including suburban was $39.70.

$39. Okay, great. And then finally, what was the share count at the end of your quarter?

In the September, I don't have that right here in front of me. Let me track that down before we end the call and I'll give you that.

Okay, great. Thanks, guys.

Okay, Lisa.

Thank you. And our next question comes from the line of Joe Graf with Bear Stearns. Please go ahead.

Good morning, guys.

Hi, Joe.

How sustainable is 5% net domestic unit growth. I mean, given the pipeline and the progress you're making with some of the brands? Is that something that you think is sustainable for the next couple of years? Or what it is a sort of two year sustainable unit growth rate and how different is it on a property basis versus a rooms basis?

Yeah, we usually targeted sort of four to five unit growth. And I think that that probably translates into somewhere between -- I don't know -- 3.5 to 4.5 on rooms growth. For us, unit growth is important. I mean units are important because you get paid fees when you sell our new franchise. You get paid fees if one of franchise sells that's where your licensing fees. That's not by rooms. That's by units. So, there is a fair amount of income that gets generated by unit growth. We get fees whether the hotel opens or not. So, we don't like to do that because obviously it takes up space and it takes up time.

But if you look at our revenue generation, there's a fair amount of fees that are generated through those sales of new units. Rooms of course are what paid the royalties so over time that's important part too. But they're both important. I'd say that what I just said probably four to five and then on rooms probably be little bit less just because the mix of properties going forward is little different than the historical mix has been. But if Cambria coming on, which is our bigger units and so that'll have a kind of litigating impacts. So still, that is still small in the whole scheme of things.

Got you. And one final question. David, I guess with respect to China you're provide a guidance, I mean do you think the level of -- what we were characterize as capital investments or CapEx for next year is consistent with what you're doing this year or should I go up or should I go down and what are the drivers there?

Yeah, we haven't really gone through all of our planning at this point, included that with our board. So, I'm a little hesitant to provide any kind of guidance like that at this point. But we are kind of middle of December this year hosting an investor day where we're presently planning to talk about '08 expectations.

Got you. Thanks, guys.

And just to answer that question on the quarter end share count, we were at 62.8 million shares outstanding. And that's before any type of dilution backed for options.

Well, thank you very much. And again if anyone does have a question, please press star and then one on your phone. We're going to a question from the line of Jeff Donnelly with Wachovia Securities. Please go ahead.

Good morning, guys. Merit coming on its earning call that re-licensing fees could be significantly lower than previously expected is pure transactions in the marketplace for dropping the ability to capture those fees. What's your take on that? Is that something you guys expect to see in your portfolio?

Well, we had a strong third quarter from a re-licensing perspective. And we'll put those details as we always do in our 10Q here in a week or so. So, Q3 was strong from low- end perspective and I think that also ties into Chuck's earlier comments about credit availability. I mean, these transactions, there's liquidity there to get these transactions closed and I'm not seeing anything else that causes me at this point to have any concern in that area.

Just a follow-up to some of the earlier questions on your pipeline, I think Chuck, you touched on this in one of your comments. The chance that may be your completions or deliveries perhaps slow a little bit in your pipeline simply because construction periods are taking a little longer. Do you have an estimate of how much longer that is taking? So we can have a sense of maybe how your room completions change over the next 24 months.

I think that what we've seen -- I mean the industry -- and it's not unique to choice -- it's applicable really to the entire industry. My sense is that for the industry wide it's going to tack on six months on a new construction project over the past year or two just with all the things you have to go through to get a hotel open.

So, for us, hotel can open as quickly as 12, 13 months and it can take longer much longer than that. So it's hard to generalize. But as Chuck talked about our expectations, we integrate perspective still remains strong for these brands every time..

Just one last question. Do you have international royalty fees for the quarter?

I don't have those right here in front of me. But we've put those in our Q which we're going to file in the next week or so.

Okay. Thanks guys.

Okay.

Thanks, and we have a question from the line of Michael Millman with Soleil Securities. Please go ahead.

Thank you. That's Soleil. Several questions. Can you talk about why the fourth quarter RevPAR seems to be well below the third quarter gain and whether that has to do with last year's acquisitions. Or is there something else involved?

I think seasonality has something to do with it. But we had a strong, a very strong third quarter. And we've said all along I think for the year we're sort of in line with where we said we were going to be for the year. Our expectation is that's about where we're going to end up. So, again, it's a little bit more based on sort of what the industry prognosticators are saying. And as opposed to clear visibility that we have in our business per se.

So, we try to look at what our historical performance is vis-a-vis the industry and look and see if there's anything unusual in the business which there's not or any trends that we're seeing. So, we're saying we're going to get that year number and I don't know David if we have any further insight.

Yeah, just looking at the PWC and SGR publications recently as well as lot of the others in the industry, I mean, it doesn't seem inconsistent with what some of the other hotel companies have put out there and something that inconsistent with what PWC and SGR are expecting in terms of Q4 slight deceleration industry wide and RevPAR.

I asked because it just seems that you're third quarter RevPAR was much higher than you had guided and your fourth quarter now looks like it's much lower than you guided back a couple months ago. Going on sort of in the same vein and talking about the mid-scale.

Michael, on Q4, I mean, I think in the last call in our second quarter call, we had guided Q3 RevPAR a 4.5 and on the call we talked about Q4 being in the mid-fours to get us to four for the full year.

We've been pretty consistent saying 4% RevPAR I think since the beginning of the year, we have to go back to the first quarter release. But I think, we going to 4% for 2007 year and in the most recent call, we guided to mid fours in the fourth quarter. So, we're not really that I would say different than where we thought we were last time we had this last call.

Okay, on the mid-scale, but work for the total the occupancy was up 50 basis points How long do you think you can continue to get ADRs of five plus with under 1% occupancy increases? Now, what's the sustainability there?

Well, I think that trend is pretty much what everybody is seeing is that occupancy has been modestly increased to flat. I think the forecast for next year actually occupancy is to be down a little bit and it all coming through rate. So, I think to the extent we exhibit the same trends of the industry does and I would expect that that would be sustainable the same way. I mean, I don't think we're going to see a big differentiation from what the rest of the industry in our segment is seeing and otherwise we're not going to see something occupancy spike in array where everybody else is seeing it all in rate that price is not going to happen.

No, I recognize. It's the industry. I was just wondering if you were concerned about sustainability of industry, getting rate without getting --

Yeah, I see what you're saying. Well yes, you liked it, I mean, ideally you love to have occupancies increasing as well rates. But I think the rate differential tends to be more supply driven. So, supply on RevPAR supply stays in levels where we’ve seen it. You’ll probably still be able to drive it through rate. Those won't last forever probably.

So hopefully, the economy cooperates and we're able to continue to push that rate. I think it's a cyclical business that I think right now is still seeing lots of pricing power and hopefully, that will continue. But it’s really, I think in fact, again it’s often that. What you’re seeing now, is probably, the supply of this. We still got a little bit more demand and then we have supply coming into the market. So, we're seeing that positive Rev PAR and positive pricing power.

And the west coast fire -- is this looking like a mini-Katrina in terms of the hotel business?

Yeah. I don't know the answer to that. That's a good question. I'm sure there's many people displaced and there's going to have to be homes rebuilt. So, whether it's to the extend that there was in New Orleans, I don't know the answer to that. I certainly think that it will have an impact on the business.

Okay. Thank you.

Yes, sir.

Great. Thank you and again, if anyone has a question, press star and then one. We are showing another question from the line of Joe Graf with Bear stearns.

I'm all set guys. Thank you.

Thanks, Joe.

Thanks and at this time then I'm showing no further questions in queue.

Okay. Well, thank you very much.

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