Choice Hotels International Inc (CHH) 2008 Q1 法說會逐字稿

Good morning, and welcome to Choice Hotels International first quarter 2008 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. (OPERATOR INSTRUCTIONS). 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 results to differ materially from those expressed or implied by such statements. The company's Form 10-K for the year ended December 31st, 2007 detail 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.

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

Thank you. Good morning. Welcome to our first quarter 2008 earnings conference call. And, with me today is Dave White, our Chief Financial Officer. Yesterday, after the market closed, we reported first quarter 2008 results, and, after I share some brief highlights from yesterday's announcement, I'll open up the call for any questions that you might have.

Domestic unit growth was strong for the first quarter in 2008 with a number of units online increasing 6%, compared to last year. Domestic RevPAR increased 2.7%, and the domestic system-wide effective royalty rate increased by four basis points. The improvement in these key drivers was the primary catalyst for royalty fee growth -- royalty fee growth of 10% for first quarter of 2008. Our franchise sales result for the first quarter were also strong. We executed 133 new domestic hotel franchise contracts in the first quarter of 2008, an increase of 20% compared to last year. Our first quarter 2008 operating income was $34.1 million, compared to $27.4 million last year, and our diluted earnings per share were $0.30 for the first quarter, a 25% increase compared to $0.24 reported for the first quarter of '07. Our operating income and diluted earnings per share results for the first quarter of 2007, included approximately $3.7 million or $0.03 per share of severance costs related to the separation from service of certain executives during last year's first quarter.

Looking forward, we expect second quarter 2008 diluted earnings per share of $0.47 and full year 2008 diluted earnings per share of $1.87. Earnings before interest, taxes and depreciation expense for the full year 2008 are expected to be approximately $205.5 million. These estimates assume domestic unit growth of approximately 5% for full year 2008, a 1.5% increase in RevPAR for the second quarter, and 2% for the full year of 2008. They also assume a four basis point increase in the effective royalty rate for full year 2008 and an effective tax rate of 37% for the second quarter and 36.7% for the full year.

In closing, we're pleased with our first quarter results and believe they demonstrate the fundamental strength of our business model through another quarter of increased revenue and profitability. And, now, I'd be happy to answer any questions

(OPERATOR INSTRUCTIONS). We'll go to Steven Kent with Goldman Sachs. Please go ahead.

Yes, maybe you could just talk about the low RevPAR forecast for the balance of the year. What makes you do that today versus four months ago? I think the obvious answer is the economy, but is there anything specific that's happening out there? And then can you just as always talk about credit market issues, how that's affecting your pipeline of development?

Yes, sure, Steve. Let me have Dave take the RevPAR question because we've -- we're basing that on frankly some of the forecasts that were out there. We don't have, as you know, a whole lot of visibility very far out as far as the forward book of business, so we're being more reactive I think to what some of the prognosticators are saying in looking at the year. And, then I'll talk about the credit markets. Dave, you want to --

Yes, sure, Chuck, thanks. Back in February, when we provided our previous guidance, the industry RevPAR forecasts that we were looking at were for full year RevPAR growth of around 4.5%, which was industry wide.

I think the comparable -- the growth rate for the segments where we compete was pretty comparable to that. We haven't seen an updated forecast from that source, but we know that the original forecast assumed Q1 industry-wide RevPAR growth of around 3.5%. And, since the first quarter, industry-wide RevPAR growth was closer to 2%. We think there's a good chance that updated forecasts for full year '08 will be a little bit lower. And we adjusted our outlook accordingly. But, as Chuck said, we don't have tremendous visibility into forward bookings just because of the nature of our consumer skewing more towards transient leisure business from a mix perspective relative to some of the other chains that have a higher percentage of forward-group booking business and what not. So, for full year, for the balance of the year, we kind of took our RevPAR guidance to about 2% down from 3% in our previous guidance.

Are your franchisees starting to talk to you about any marketing programs that focus on maybe giving back gas rebates and checks or discounts, any of that? Is there sort of a push from either the franchisee-base or the end-customer about those kinds of issues?

Well, we've got a promotion we're going to do that focuses on gas, and that's sort of what we've done. I mean, I think the -- having the value brands helps, Steve. Frankly, we've seen in some of our RFPs for corporate business, we've seen some new customers that we haven't seen before. So, there may be some switching going on out there with business travel. So, but we haven't -- I can't tell you -- I can't quantify that. I know we have more accounts than we had or we have some companies that were including us in their -- sort of their recommended list of hotels for their employees to stay. I haven't gotten -- we don't have the numbers yet or haven't translated that into actual booked business. But we're out there in more places than we've been.

And then the credit market issue?

Yes, the credit market. We had a really strong development quarter. I mean, I think the mix of new properties to conversions was a little bit lower, but not a lot lower. I think it was like 33% versus -- or 33% versus 37% last year in that first quarter percent were new builds versus conversions. And most of our -- and our relicensing, the amount of relicensing, which implies that there was a change of ownership in the properties, is up pretty substantially in the first quarter. So we haven't seen it there.

We've seen a little bit longer amount of time to get the hotels that development cycle's lengthening a little bit, so it's taking a little bit longer to get done. Where we have seen it is, is -- that's in our core brands. So, core meaning the new build core brands, Comfort, Comfort Suites, Sleep, where we have seen a little bit more of it is in Cambria, where we've got owner operators in our core brands that are -- plus they're smaller properties. And, so, they're working on existing lending relationships with existing banks or credit loans usually. They have established long-time relations with a lot of their lenders. We haven't seen that trickle down yet into those smaller-type banks or smaller-type developers. Seen a little bit more of it in Cambria where that's more -- the type of developer is a little different. They tend to be more maybe institutional type developers or do multiple properties and are looking to different types of financing, maybe more money center banks or so forth. Plus, it's a new product, and. so, I think it's natural to assume that a new product is going to -- it's going to take a little bit longer sometimes in a softer credit market to get financed. But, the ones we have opened in Cambria are doing great. I think we have six opened. And, so, the story is still really good. It's just with the credit market we're going to probably see again a little bit of an extension of the time it takes to get some of these open.

Okay. Thanks.

And, we'll now go to David Katz with Oppenheimer. Please go ahead.

Hi, good morning. Good morning.

Hey, Dave.

Can you give us the updated thoughts on sort of the capital decisions. There's been, obviously, one of the issues we always focus on is share repurchase. Doesn't appear that there's been any so far this year, and just give us your updated strategy there. Thanks.

Yeah, I'll let Dave answer that one.

Yes, David, we didn't buy back any stock in the first quarter this year through the share repurchase program, and I guess the way we thought about it is in light of kind of the volatile economic backdrop, we've had some crazy acting markets, credit market jitters and recessionary fears, we decided to keep our powder dry. Going forward I think we expect to continue to use free cash flows that we generate from the business and balance sheet leverage potential in shareholder friendly ways over time., That would include sensible investments, acquisitions, dividends. With respect to the share repurchase program, I think over time we continue to use excess cash flow for that. But, the dollar amount and timing is going to depend on a number of somewhat unpredictable factors.

Okay. Thank you very much.

We'll go to William Truelove with UBS. Please go ahead.

Hi, good morning, this is actually Michelle Ko for Will Truelove.

Hi.

Hi. Two questions. Can you give us more details around the change in the receivables on the cash flow. Seems to be much lower compared to prior years for the first quarter. And then secondly, how much are the fees from international? Can you give us a proportion between the international and domestic?

Sure. On the cash flow, what you're seeing there on just the trade receivables is really a timing issue. We had a really solid fourth quarter in terms of collections on trade receivables. That's kind of the primary driver of that flip on the cash flow statement for receivables.

On the international side of things, we're going to publish our 10-Q here over the next week or so and I think the international royalty figure was $5.3 -- $5.3 million for first quarter of '08, and I think last year was around $4.2 million. And, if you look at that year-over-year increase, probably two-thirds of that is kind of driven by exchange rates and the other third is driven by the operational side of the business.

Okay. Great. Thank you.

We'll go to Felicia Hendrix with Lehman Brothers. Please go ahead.

Good morning, guys.

Hi, Felicia.

Hi. Two quick questions for you. Just getting back to the quarter results you guys did a lot better than we thought you would, given what we were looking at, looking at from Smith's Travel data. So, I'm wondering first of all what was driving that. Second, if you could give us some color on what you're seeing in your leisure customer? Did you see anything that was surprising in the quarter? I'm asking because of your muted forecast going out for the rest of the year.

Yes. Well one thing to remember of course is that our -- our quarter is a month lagged, so we're talking about December, January, February. And so, for the industry, March was soft because of calendar for one thing, Easter and an extra Sunday I think in the month. So you really have to kind of look at March and April together I think going forward, which is going to be softer. And so, the industry's seeing the same thing domestically. So, that's part of it.

And we're not really seeing anything different than I think the overall sort of industry trends in our leisure mix. We're not seeing -- so right now, I mean, I think we're sort of being cautious about what the outlook is based on, as Dave said earlier, just kind of what the prognosticators and economic forecasts are for the rest of the year. Don't know what the impact of all this stuff that we're hearing. All the consumers are kind of bombarded with with gas prices and everything else, so we do know that there was -- I think Roger Dow from TIA was talking about -- the math on increases in gas prices where an average trip of 600 miles each way and if gas goes up $1.00 that's adding $80 to the trip if your car gets 15 miles a gallon. So, does that change behavior? Probably not for your one trip. But, we just don't know. And we're kind of -- also if gas starts to get up over that $4, which not too far away in some cases, just what impact is that going to have? Is that a psychological barrier or not? We just don't know. We haven't seen -- really haven't seen a lot of big shifts yet. So it may be that things turn around, and people's outlook starts to change a little bit. And, yes, we're in a recession, but everybody has kind of factored that in or if we are in a recession, I think we probably are then second half of the year could be stronger. But, if what we see right now and what we think's out there, we think this is just a more prudent approach.

Okay. Good. And then in line of that outlook, it does look like you're assuming that margins are going to improve more for the remainder of the year than we would have expected. I was wondering if you could just walk us through your thoughts with that.

Yes, I think what I would say is we did a little bit better on the cost side of the business in the first quarter than we had guided to through the balance of the year. The last three quarters of the year we expect some of that to reverse, some of that is kind of timing, but not all of it. So, I think for full year from a margin perspective, franchising margin perspective, our expectation is probably not that different than it was when we previously guided somewhere in the kind of low to mid-60% range.

Okay, great.

For full year.

And, just finally, Dave, you touched on this a little bit before, because you said that you saw in the quarter a decrease slightly in conversions. I'm wondering if you're expecting a change in your typical conversion patterns in this cycle?

We actually saw more conversions, Felicia, less new builds. So, what we would expect to see is -- which is what happened in the first quarter, I think in the first quarter we had ratio of new build to conversions was lower, meaning there was more conversions than new builds.

Okay. I misheard.

Yes. So -- and that's kind of what you would expect.

Right.

I think we're seeing the -- but, what we're seeing also, though, is a nice increase in the number of executed contracts. But, last year's first quarter was a little bit softer with Comfort Inn, and we've made that up nicely this year. And, so I think, that we are not seeing anything on that -- on the development front on the conversion or new build, frankly, even though albeit a little bit lower ratio, that would have us change that full year forecast. Still the hotel still seems to be -- trades are being made, and that seems to still be going on.

Okay. Great. Thanks, guys.

Sure.

We'll go to Joe Greff with Bear Stearns. Please go ahead.

Good morning, guys.

Hey, Joe.

David, just want to clarify your comment on full year '08 EBITDA margins. What you're saying is you would expect them to be flat to down for the year relative to last year, which obviously implies the rest of the year to be down. Can you help explain that, and what's driving that if my premise is correct?

Well, actually I was expecting full year EBITDA to franchising margins to be consistent with our previous guidance, basically, which was 64%, 63% I think was kind of number, 64%.

Okay.

So compared to last year, I think that's probably about essentially flat, flattish.

So relative to a quarter ago, when you provided guidance, the margins for the back part of the year are the same?

For the back part of the year they're --, yes, really the margins are about the same in the back part of the year because we're losing some revenues because of the RevPAR takedown, but some of the timing stuff in Q1 on the cost side reverses in the balance of the year.

Got you. Then a question regarding development pipeline. If at the end of the first quarter, kind of going forward, nothing gets added to the development pipeline, nothing slips out or falls out, and you kind of look at 2009 domestic unit growth, do you feel comfortable that looking at your pipeline now and not asking you specific guidance question for '09, but looking at your pipeline now, do you think 4% to 5% domestic unit growth is sustainable through next year?

Yes, I don't know, specific percentage. I think we feel good about our portfolio of brands and our ability to continue to grow them over time. If you look at the mix, we've got great collection of conversion brands, there's still a lot of independent hotels out there in the segments, where those brands compete, as well as other brands that we think are not performing as well as those hotels within our system, new construction side of things. But, I think it will just kind of depend upon the credit market and the new hotel development cycle. I think we still have room to continue to grow our portfolio, grow our brands. As Chuck mentioned, the current trends we're seeing on the conversion side of things are positive around applications that we're receiving, applications in-house, and we haven't seen a whole lot of impact on the new construction side of things for our core brands there either. So, without pinning it down to a specific percentage, we think we still do have good opportunities to continue to grow the scale of our system.

Great, and one final question, David. When you look at full year '08, what's sort of your run-rate CapEx or maintenance CapEx, or what you would make analogous to your investment in property and equipment in your cash flow statement of $2.6 million, what's a good run rate to use for the -- ?

I'd say somewhere between $8 and $11 million is probably a reasonable estimate.

Great. Thank you so much.

Sure.

We'll go to Jeff Donnelly with Wachovia. Please go ahead.

Hey, guys Chuck, actually just two questions. I was trying to get my arms around the relicensing fees. And, as you pointed out, the growth was fairly strong in Q1. Do you think that's a statement around the health of, I'll call it, investor appetite and credit market liquidity at that deal size, or is it just perhaps the deals planned for late 2007 got delayed into Q1 of '08, and that we shouldn't expect such strong growth in subsequent quarters through your relicensing fees?

Yes, I'm going to let Dave talk to our relicensing guys. So, I'm going to let him answer that one.

Yes. Relicensing guys, we don't have a lot of -- a ton of visibility into the balance of the year because there's normally a pretty short window from the time we find out about the sale of a property and to the time it actually relicenses, and we recognize the relicensing and the fee. But relicensing was certainly strong in the first quarter in terms of the number of relicensing transactions. It was up pretty substantially from last year. Although from a fee perspective, it was a little bit lower growth rate, just because of mix issues and some other kind of unique issues for the quarter.

So, looking forward, it's really -- it's really hard to kind of say whether it's being driven by stuff shifting from Q4 of last year to Q1 of this year. I would say last year's relicensing number was pretty strong. So, I'm not sure we're really seeing that. So, it's kind of hard to say. But going forward, we're not seeing anything I guess in the trends currently although our visibility is pretty limited in terms of how far we can look forward on relicensings. We're not currently seeing anything alarming there.

Do you have any sense -- I don't know if you off the top of your head have information going back a few years, but was there sort of a lagged slowdown if you will in relicensing data after, I'll call it, another credit crunch maybe like we saw in 2000, 2001 timeframe.

Yes. Well, I guess I'm not sure anybody's ever seen a credit crunch like this one. But, looking back over the past kind of I guess seven or eight years, the relicensings, the number of relicensings have varied from, call it, 5% of the previous year's systems size to 8%. It's been at the high end of that range the past two or three years, '07, '06 and '05. So back in '04, '03, and prior it was kind of in that 5% to 6% of previous year's system size. So, it's ranged across that timeframe kind of in that manner.

Can you -- just last question, was how much of the $1.5 million reduction in the outlook for '08 EBITDA was a result of the recent hires, COO, General Counsel, et cetera. I apologize if you touched on that in your comments.

Yes, that's a piece of it. But, probably, the key driver is we took down RevPAR by 100 basis points. You can translate to around $2, $2.5 million of royalty reduction, and then some of the first quarter spend that I mentioned. We outperformed our spend estimates in Q1, some of that's going to reverse for the balance of the year. So that's a piece of it, but it's not the majority of it by any stretch.

Should we anticipate, I guess, any impact from those hires in subsequent quarters, that your deferred compensation or other sort of benefits that might be deferred?

No, not that -- no, I don't think so.

Okay. Thanks, guys.

Okay.

(OPERATOR INSTRUCTIONS). We'll go to Michael Millman with Soleil Securities. Please go ahead.

Thank you. Could you talk about the International Rooms? It looks like International Rooms were down in the quarter.

Sure. Yes. Year-over-year, if you looked at international, the number of units online declined by I think it was 41 units. The room decline was much more modest than that. And, if you look at what's driving that decline, obviously, you've got gross openings in international system net of terminations. On the termination side of things, we terminated some properties in Europe, which represents about half of that reduction. And those terminations stem kind of from our acquisitions that we've made over the last year or so and from franchising rates from our prior master partners there. So you kind of focused on cleaning up that system a little bit and position it for growth down the road.

And the second reason is kind of in Australia, we terminated some -- we decided not to renew close to 30 properties there. They were kind of smallish properties. They weren't particularly well suited for our brand. So, saw higher terminations than we saw last year. How [we're] offsetting terminations and explaining why the change in the international rooms online was a little more modest relative to the reduction of units online, we added a couple of large properties over the last 12 months, including two Clarion hotels -- one was the largest hotel in Stockholm, as I understand it, 558 rooms, and a 560-room Clarion Hotel in Prague. So, that's what you're seeing going on in the International unit and room supply.

I guess following, it looks like the opposite, generally hotels were up 6%, I think, in the units in the first quarter, but rooms were up only 4.5%.

Right.

That would seem to suggest you're going smaller, or is that a trend, or is it kind of a one-time thing?

Well, I think it's been a bit of a trend over the last I guess, I don't know, four to five years, maybe and just to -- the average property size for the industry has been smaller. And, so, I think we're sort of seeing the same thing. Sometimes mix has something to do with that, but International is just because of those few larger hotels, so they're really two different -- totally different reasons for that. I would expect -- we cleaned out some of those international properties in Europe, as Dave said, to position us better for longer term growth there. Some of those hotels needed to go. I think that's a real positive. We'll get reset some of the -- I think as we move forward to have a -- as we take on the franchising -- direct franchising in Europe and so anyway, domestically, yes, we've seen that for the last few years.

And so just to -- on the international, is that done now the -- the cleaning up?

Well, I wouldn't say that. I mean, I -- I mean, I -- I don't know how to -- totally handicap that. I'm not sure. There may be a few more to come. But, I don't think it will be substantial, so --

On the cash, it looked like the biggest use of cash was a reduction in payables. Are we talking about timing differences, or maybe you can put that into some context?

Yes, there was some timing issues there, Mike. Essentially last year in the fourth quarter, we ran some pretty heavy media campaigns, fourth quarter of '06, I guess, and those -- I'm sorry, '07. And that played out in terms of when we paid off those vendors, it just played out in the cash flow statement the way you are seeing here, so really kind of timing related to advertising and media type campaigns and a couple other timing type issues.

And SG&A, which I think you said was some timing benefits, it looked -- when you correct for last year's costs, that they're up about 16%. Maybe you can put that into context also with what we should expect from SG&A going forward?

Yes, for the full year, from an SG&A perspective, I think we're thinking, our current guidance implies probably 5% to 6% SG&A growth on a full GAAP basis. If you adjust that, the impact of last year's severance costs year-over-year increase would be a bit higher than that. And really what the SG&A growth rate reflects is kind of our plans to make investments in activities that we believe will generate nice royalty and cash flow streams for us in the future, things like Camry Suites, Extended Stay, some of our other brand initiatives.

Okay. Thank you.

We have no further questions in the queue.

Okay. Well, thank you very much for your attention, and good questions. And we will talk to you soon. Have a good day.

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