Choice Hotels International Inc (CHH) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International first-quarter 2009 earnings conference call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session and further instructions will be given at that time. As a reminder, today's call is being recorded.

During the course of this call, certain predictive or forward-looking statements will be used to assist you in understanding the Company and its results, which constitute forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995.

These forward-looking statements generally can be identified by phrases such as Choice or its management believes, expects, identifies, anticipates, foresees, forecast, estimates or other words or phrases of similar import.

Such statements are subject to risk and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Please consult the Company's Form 10-K for the year ended December 31, 2008 and other SEC filings for information about important risk factors affecting the Company that you should consider.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievement. We caution you do not 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 our forward-looking statements to reflect subsequent events or circumstances.

You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our first-quarter 2009 earnings press release, which is posted on our website at choicehotels.com under the investor information section. With that being said, I would now like to introduce Steve Joyce, President and Chief Executive Officer of Choice Hotels International, Inc. Please go ahead, sir.

Thank you. Good morning and welcome to our first-quarter earnings conference call. With me this morning as usual is David White, our Chief Financial Officer. This morning, David and I will discuss our first-quarter results and share our perspectives on recent trends that we are seeing in the business in this very interesting environment.

We will also update you on the progress we are making in managing the business differently in response to the challenging lodging environment that we have had over the past almost a year at this point. And as you are well aware, the economic environment remains extremely challenging. The broad economic measures that we have traditionally shared a strong correlation with -- lodging demand, GDP, consumer spending and employment data -- at this point, all remain weak.

Most economists are expecting continued weakness in the employment markets for some time and only modest improvements in GDP and consumer spending later this year and next. We do believe, however, that sooner-than-expected improvements in these measures would be an extraordinarily and good positive catalyst for us, both on the RevPAR and the franchise development fronts and we will discuss that in a little bit more detail.

Let's talk a little bit about RevPAR. Our RevPAR results for the first quarter and our revised RevPAR outlook for full-year 2009 reflect both the challenging aspect of the environment and also the difficulty in predicting future performance. As a reminder, Choice's RevPAR results lag for one month, so our first-quarter RevPAR results reflect the performance of our hotel franchises during December of 2008 and January and February of this year.

Our RevPAR for the first quarter of 2009 declined by approximately 10%. This result was slightly better than the 12% decline we had previously expected and the comparable chain scale results reported by Smith Travel Research, which, by our estimate, declined approximately 11%.

I would also highlight that a continuing trend that began in October of last year, our first-quarter RevPAR results declined meaningfully less than the RevPAR decline reported by Smith Travel for the US lodging industry as a whole. As you know, most of our brands compete in the economy and midscale segments, which have outperformed the hard-hit upper upscale and luxury segments on a relative basis.

More recently, in March and April, we have seen a continued deterioration in RevPAR results, but consistent with previously mentioned trends, we continued to outperform the chain scale results reported by Smith Travel for the economy and mid-scale segments.

Our second-quarter RevPAR expectation is for a 16% decline in RevPAR, which reflects these recent trends. This means that we accept the rate of RevPAR decline -- we expect the rate of RevPAR decline for the third and fourth quarters of 2009 to moderate gradually due to favorable comparisons.

Our monthly year-over-year RevPAR comparisons begin to get easier starting in June as last year we experienced low to mid-single digit RevPAR reductions beginning in June and continuing through September, followed by monthly declines ranging from 6% to 12% from October through the end of 2008.

Third-party industrywide RevPAR projections that we review range from declines of 10% to 14% for full-year 2009. However, I would caution you that RevPAR is inherently difficult for us to predict as a result of the broad range of economic forecasts for GDP, consumer spending and unemployment and the disparate measures that people are putting out, as well as our limited visibility into forward demand as our business mix is skewed towards more leisure-oriented and transient business customers and these customers tend to have shorter booking windows as opposed to those hotels that have group bookings to look forward to going more forward into the future.

Let me talk a little bit about development. Obviously, an important aspect for us. Like the RevPAR environment, the franchise sales environment so far this year has been much tougher than we anticipated. The significant declines in RevPAR and the lack of hotel financing have negatively impacted both our new construction and conversion franchise development efforts.

We have also seen, consistent with broader industry trends, a serious decline in the number of hotel sales transactions that drive our relicensing fees. The last time we saw franchise sales at these levels was during the first and second quarter of 2002, the year following the attacks of September 11, 2001. The second half of that year and each of the next six years that followed were very strong development years for us and the long-term development prospects for our brands as a result we believe are very promising.

Improvement in the credit markets and liquidity for hoteliers would have a significant positive impact on our development results with conversion franchise sales activity and relicensing activity improving first due to the strength of our conversion brands, which are the best in the business, followed by new construction results eventually. I will say, however, at this point, we have not seen any significant improvement in either. While we remain optimistic that the development and RevPAR environments will eventually improve, we are also operating with stringent cost controls to be appropriate in this uncertain environment.

Talking a little bit about our franchisees, changing gear from our recent results. I also want to emphasize that this environment is exceedingly challenging for our franchisees and more so than for us as they live with the bottom-line implications of the loss of revenues. We are working harder and smarter than ever, hand-in-hand with our owners to continue to improve our efficient and highly profitable guest services delivery model.

Over the last several years, we have resisted the amenity creep that so many others in lodging have embraced. As a result, many of our competitors have had to make deep cuts in their amenities that drive guests to their properties. Unlike many of our competitors who are reducing services to their franchisees to meet near-term financial objectives, we are in the enviable position of being able to offer more services to them to help them during these times.

We are investing aggressively and intelligently in marketing and reservations activities to drive guests to our franchisees hotels and in this current economic environment, our value-oriented brands are ideally positioned to capture share from guests that are trading down from higher segments. Our advertising efforts emphasize the great value our hotels provide everyday and this is being very well-received.

We have also developed free-of-charge training classes around the environment titled Streetwise Tactics for Tough Times that directly addresses how to survive, thrive and increase marketshare in these times. In just two months, we have given this class in 150 markets across the country, to more than 1800 owners, operators and hotel employees and the response has been terrific, both from the standpoint of their valuing their relationship for Choice as a result of this effort, but also the impact that this course is having for them in their hotels.

We have shared with our owners that we remain driven by our vision of helping them to generate the highest return on investment of any hotel franchise and we have reassured them that they have the full commitment of Choice Hotels' organization to their success and to help maximize their returns.

We are encouraging tradedown by emphasizing in our marketing efforts the value that our brands offer to both leisure and business consumers. And we are also continuing in this market to innovate and move the Company forward. For example, in early March, we became the first hotel company in the world to launch a global iPhone application. This application has already been downloaded more than 100,000 times in over 60 countries and by most people's comments is a killer app.

Other examples of recent innovations coming soon are dramatic and innovative changes to choicehotels.com, new services and qualified vendor relationships to help our franchisees better manage the cost side of their business in the areas of employee insurance, property taxes, as well as a variety of rate and selling strategy enhancements to improve rate plans, flexibility and control. These innovations will help our franchisees be more successful, which is the critical priority to us. Now I am going to turn it over to Dave to cover our first-quarter performance in more detail. Dave?

Thanks, Steve. I just wanted to highlight a few items from our release before we open up the call for questions. For first quarter 2009, domestic net unit and room growth increased 5.7% and 5.6% respectively compared to last year. Our domestic systemwide revenue per available room declined 10.3% for the first quarter of 2009 compared to the same period of last year. This RevPAR reflects a 440 basis point decline in occupancy and a 1.2% decline in average daily rates.

We achieved an 8 basis point improvement in the systemwide effective royalty rate compared to last year, which increased to 4.26% for the three months ended March 31, 2009. The RevPAR declines we experienced were partially offset by our unit growth and the improved pricing on our contracts. As a result, our domestic royalty fees for the first quarter of 2009 were $39.2 million compared to $42.4 million last year. This represents a decline of only 7.5% compared to a RevPAR decline of more than 10%.

The Company executed 60 new domestic hotel franchise contracts during the first quarter of 2009, a decrease of 55% compared to 130 contracts executed during the first quarter of 2008. The number of relicensing transactions for first quarter of 2009 was 35, a 63% decline from the 94 relicensing transactions reported last year, which is generally consistent with the industrywide trends we are seeing in the hotel transaction environment. The reduced contract volumes resulted in initial franchise and relicensing fees revenues declining to $2.6 million for first quarter of 2009, a 56% decline from last year's first-quarter results.

Diluted earnings per share for first quarter 2009 were $0.27 compared to $0.29 for the same period of last year. Our diluted earnings per share results exceeded our previous estimates for the quarter by $0.03 per share, primarily as a result of lower SG&A costs. On the cost side of the business, based on stringent cost control, our selling, general and administrative expenses for first quarter 2009 were $21.5 million, or approximately 9% below last year's first quarter.

To build on Steve's earlier comments, in light of the current operating environment, we continue to manage our cost structure cautiously by implementing cost controls, particularly around discretionary payroll, professional fees and new business projects. Our objective is to manage the SG&A expenses of the business for full-year 2009 to a mid-single-digit percentage decline compared to last year's full-year SG&A expense, excluding the effect on 2008's SG&A of the special items we noted in exhibit 8 of our year-end press release in February.

For the three months ended March 31, 2009, the Company repurchased approximately 700,000 shares of our common stock at an average price of $26.82 per share for a total cost of $18 million. The Company has remaining authorization to repurchase up to an additional 5.3 million shares of the share repurchase program.

Our balance sheet and the liquidity position remains strong. We finished the first quarter with approximately $57 million of cash on hand and total long-term debt of $310 million, which represents a multiple of 1.6 times our trailing 12-month adjusted EBITDA results.

As of the close of business yesterday, the Company had approximately $40 million of available unused borrowing capacity pursuant to revolving bank facilities that are committed until June of 2011.

Turning to our outlook for the remainder of 2009, I would remind you that the continuing uncertainty around the economic environment and credit market conditions and the impact of these conditions on travel patterns and hotel development activities make it difficult to predict future results. This particularly applies to underlying assumptions for RevPAR, new hotel franchises and relicensing sales and interest in investment income and expense.

With that in mind, in yesterday's release, we shared our outlook for the second quarter and full-year 2009. We currently expect second-quarter 2009 diluted earnings per share of $0.41 and full-year 2009 diluted earnings per share of $1.68. EBITDA for full-year 2009 are expected to be approximately $175.5 million. These figures assume domestic unit growth of approximately 3% for full-year 2009 and approximately a 16% decline in RevPAR for second quarter 2009 and 11% for full-year 2009. These figures also assume a 3 basis point increase in the effective royalty rate for full-year 2009 and an effective tax rate of 36.3% for second quarter and full-year 2009. Now let me turn the call back over to Steve.

Thanks, Dave. As we have said to you many times before, our low levels of debt, our limited exposure to real estate, the lack of a timeshare business makes us unique in the lodging space. Despite the challenging and current economic environment, our fee-for-service business model positions us extraordinarily well for long-term, profitable growth in a variety of segments and geographies on account of our well-known brands, our exceptional franchise services, our strong central reservation systems and extraordinary e-business efforts, our collaborative and strong relationships with our owners and our overall business model.

We believe our current formula will last us in this downturn and will do us extraordinarily well in the upturn. And as a result, are very confident that we will continue to provide to our shareholders the extraordinary returns that they have gotten over the years. We are a company that we believe is well-positioned to weather what is going on. We also believe that we are well-positioned and first in line to benefit from the upturn, particularly on the conversion markets. And our brands as positioned and discussed in the moderate tier and below give us the opportunity to provide real value in this environment where people are so sensitive to cost controls in their businesses and also in their personal lives. And with that, I think we will open it up to questions.

(Operator Instructions). Steve Kent, Goldman Sachs.

Hi, good morning. Just two questions for you. Could you just talk -- I know it is hard for you to exactly get the answer to this, but the update or any update or color on the health of your franchisees. Obviously, they are not so keen on maybe building new hotels, but how about just sort of making their way through the next two years. Are there any that you are concerned about or do you hear more of them -- that you are concerned about them from a leverage perspective?

And then the international business, that pipeline has been shrinking a little bit and the numbers have been shrinking a little bit. What initiatives do you have in place to start to rejuvenate that group of hotels?

Okay, let me start and then Dave, why don't you chip in. On the health of the franchisees, that is actually, again, one of the real bright points for us versus some others. In general, we believe our franchisees have relatively low levels of leverage compared to the hotels. And that is in part due to the kind of the history of lending in the moderate and lower tier environment, as well as the character of our franchisees who are typically putting in heavy amounts of equity into their deals.

And so while we have had some incremental conversations with some folks needing assistance, the relative levels of our leverage allow our franchisees to operate profitably and being able to cover their debt service at significantly lower occupancies than you kind of see for the rest of the industry.

We are obviously monitoring this very closely, but I can tell you our days credit sales outstanding, our receivables and everything have not changed significantly at all. There are some folks that we assist on a one-off basis. That has not been a dramatic increase either. And we obviously will continue to monitor that, but for the most part, that is a big plus for us in this downturn, that our franchisees are not -- this is their livelihood. They own one or two hotels. They are typically operating the hotels themselves. They did not get into the leverage games that were played by a number of investors and developers coming in late into the cycle. And as a result, we will probably deal with a few more cases this year than we did last year, but don't expect anything significant along those lines at this point.

And Steve, I'm sorry, just to interrupt. I don't think I have ever even asked you this, because it has never been an issue, but have any declared bankruptcy or anything close to that this quarter?

Hey, Steve. This is Dave White. Yes, in any time period, you can have credit terminations for a number of reasons, including bankruptcy, those types of things. But just to give you some quantitative information that we look at and monitor pretty closely, as Steve said, DSO at the end of March of this year held up really well. It was actually down, DSO was down a little bit compared to last year at the same time. It was about 20 days relative to franchise builds.

The number of pure credit terminations increased a little bit in the first quarter compared to last year, but in absolute terms, remains very low. And our net receivables write-offs were up slightly, but continue to be less than 1% of our billings.

So in terms of the credit metrics that we can monitor and that we know are reliable, absent having balance sheets on the 5000 plus franchises in our system, which isn't cost-effective to do, we feel pretty good about the health of the franchisees based upon those metrics. But we have to continue to monitor the environment going forward because certainly the RevPAR environment is still going to be challenging here for a period.

Thanks for that. Pardon then any comment on international?

Yes, on international, I think the way to think about that is, over the past couple of years, if you recall, we reacquired the franchising rights from a master franchising partner in Europe over the last couple of years. And as a result of that reacquisition, we have seen the terminations increase a little bit in the international system and a big piece of that is our decision to kind of clean up the brands in those areas.

And the other thing that has happened, and actually happened in the first quarter of this year, was that former master franchising partner essentially declared bankruptcy or went into receivership and they owned 20 or so of our hotel, branded hotels in Europe. Those hotels came out of the system. So that is what you are seeing in the first quarter on a sequential basis against last year.

Going forward, I mean what we are doing and continue to do and think we can be successful at over the long haul is improving the value proposition for franchisees outside of the US by frankly figuring out ways to improve the amount of business we deliver to them.

One of the things we are rolling out now and real excited about is globalization of Choice Privileges, which a strong loyalty program is something that we haven't had applied to our international system, but we think that that is something that will help us. And there is a number of other things that are underway in other markets that we are looking at on the development side of things that we think can help us in that regard and going forward.

Yes, and I think we have said this to you folks before is one of the commitments that I made to the Board coming in was we do an evaluation of our international operations and growth pipeline. We would come to them with a set of suggestions as to where we think we should focus and where we want to put resources. We are in the process of delivering that to -- the first stage of that to the Board in the next week or two. And then we will be putting more meat to that overall strategy. And hopefully, sort of, as planned by the end of the year, be able to sort of talk about exactly where we are looking at attacking. But it is not going to surprise you. India is obviously a big target for us. China is a significant target, although the franchising model in China is a little more challenging and so other areas that we believe have good focus for us.

We have got a good basis to start from and I have been spending a fair amount of time traveling to see the product, as well as the franchisees and sort of listening to them. But even the existing markets, for example in Europe, we think there is opportunity there as it relates to incremental both conversion opportunities, which is sort of the core stuff that is available in Europe itself, but then also some newbuild opportunities, albeit based on some recovering economies.

And so I am actually very encouraged by what I think the opportunities that we have got and now we have got to sort of go from concept to where we are actually going to put resources. But in any case, when we do that, as I have also said before, it takes a while to get that done. You really -- when you put your resources in place, particularly where you haven't been significant, start looking at creating those relationships, start hoping those relationships turn into deals and then hoping those deals then result in a pipeline in those areas, that can, depending on the market, can take quite a bit of time to do.

We are not really expecting immediate results that will be back, but I think what we will be able to do is talk about our overall strategy and then report back to you as to how that strategy is progressing and how we are evaluating and changing that over the next several years to try to build to a much more significant pipeline internationally as a number of our brands really should be significantly represented across the globe. We have got great representation in a number of specific markets and we think and believe that there is clear opportunity to expand that, as well as Dave mentioned, expanding the value proposition for the brands, which when we do that, will allow us to increase the value that we receive from the franchisees.

Okay, thank you.

Jeff Donnelly, Wachovia.

Hey, good morning guys. Steve, do you see opportunities presenting themselves over the next 12 to 24 months where Choice could maybe pick up additional brands to the extent it so chooses or even move further upscale?

Yes, I sure hope so. We are obviously in a position that is good from the standpoint of we have got capacity and we have got money and we are hoping to see, as a result of sort of the conditions, some buying opportunities either for collections of hotels that can go into our existing brands or other brands to help add to the portfolio. We are very interested in having an upscale conversion brand and continue to look for opportunities there and we are evaluating almost everything else that comes up.

We haven't seen anything at this point that was particularly interesting and a good fit with our portfolio, but we are -- that is clearly a target for us. And we are hopeful that this environment, particularly as it stretches out, might create some buying opportunities for those folks that have some capacity like we do and our long-term believers in sort of where the business is going and the fact that we'll recover and the fact that there are going to be significant amount of conversion opportunities out there.

I don't really see us going much past the sort of upper upscale full-service business. I don't think you'll see us in luxury, but the full-service conversion business to us I think would be a great complement to our leisure-oriented set of brands because the business transient component of that. That is why we are putting so much energy behind Cambria as well because we love the business mix that comes with that hotel.

I have also said before that I like the upscale extended stay business a lot. And so all of those are potential opportunities for us to look to see if, as sort of things elongate and people are struggling with liquidity, the fact that we are in a good position from that standpoint should and hopefully will create some opportunity for us to do some things that will help accelerate our growth.

Does that mean that you are thinking of brands that are along the lines of -- I know not these specifically, but more of the ilk of like Courtyard, Hilton Garden Inn or Four Points than necessarily of the ilk of say Marriott or Sheraton?

No, I would say Cambria's price point and productline and customer base is very much along the lines of Hilton Garden and Courtyard. So our interest is actually more in sort of the Sheraton Doubletree mode, not those brands in particular, but sort of that -- that sort of relative price point at where you are kind of running 3.5 to 4 star full-service hotels. And for us, that would offer a conversion opportunity because I think the full-service newbuild business is probably going to be pretty tough for a long time. So that conversion aspect is important.

And we also think, with our distribution channel and the number of customers that we have got that are looking for more major markets and more urban products, that we can add real value in those conversion scenarios. But the issue will be finding the right brand at the right price.

Are these ones where you would hope to find them in a distressed situation or just more likely that it is more that you have a more optimistic view of the future and good capital structure and it just comes down to pricing as opposed to being able to pick it off because of a, again, a distressed situation?

Well, I mean obviously a distressed situation depending on the brand could be very attractive. But we are actually thinking more along the lines of -- this Company has looked at a number of opportunities over the last several years and in my position here and in my previous position, I have looked at a number of brands over the years. And in the last five or six years, the pricing of brands really wasn't all that attractive in terms of value created for the shareholders versus what you were paying in the growth opportunity.

I think that pricing in this environment, like the pricing of real estate and hotels, is most likely to moderate and therefore, creating more real opportunities where you can convince yourselves that the output of that capital is a good thing for your shareholders. We are a company that I think believes strongly in the model and we can do our business hotel by hotel, brick by brick. It would be great to pick up an additional brand, but we don't need that to be successful. So what we want to do is find the right brand at the right pricing. That doesn't necessarily mean distressed, but one where the price point versus the growth opportunity gives the right return to the shareholders. And as you know, the value proposition for our shareholders and the return requirement that they are accustomed to are high, so we have got to make sure that we match those.

Would you ever consider, if it necessitated it, entering the management side of the business?

I get asked that a lot obviously because of my background. I love the pure play franchise model. Our intent is to stay with that. If there were a situation that were incredibly valuable to the Company that required us to go into management, I am not afraid of doing that, but I really like the pure play. It eliminates so much confusion and conflict. All we do is work to benefit the franchisees. I have done the other business combined with franchising, but I would say that, barring an extraordinary opportunity, we are going to stick to the pure play model because we think that makes us special.

And just to switch gears really quickly, on the deals that you guys have done I guess in the most recent quarter, any trends that were I guess visible to you either like deals that fell out of the pipeline, are they more called the one-off developer? And I guess conversely any business that you are picking up? Does it tend to be more along the lines with your multi-unit better relationships or any themes that you can see?

Well, I mean the first theme is obviously, in the newbuild business, which isn't started and doesn't have financing, is at risk. So I mean everybody is sort of talking about their pipelines. The reality is the financing markets are really not functioning for newbuilds. And so we are evaluating our pipeline like I know other people are looking at it. And so -- and it is not just the smaller guys; it is small, medium and large guys that really -- I have heard from everybody. I haven't heard anybody saying anything positive about the financing environment.

So now the one thing that happens is we still get deals done and the reason that we will still move along, particularly on the conversion side, and we will get some newbuilds, not a lot, is because our average transaction is significantly smaller than everybody else's and so we are doing a lot of deals in the $3 million to $5 million category. There is still some funding that is available to that and so we have seen that.

We do believe that -- we do believe that, on the conversion side, we will probably be first to see that because I think as that market recovers, that will be the first thing that will have activity, sort of that lower-end conversion stuff. But I am not seeing big, small, large -- I am just not seeing anything that people view as positive in the financing markets today. There is a sense that it is coming, but no one has a firm conclusion as to when. So I think we probably need to move to the next call, but thank you for the questions.

William Truelove, UBS.

I only have one question. I saw that the Comfort Suites brand RevPAR change was about 500 basis points worse than your just general Comfort Suites. Is that evidence of potential tradedown as people are not willing to pay for suites as much, but basically to go to what I call almost a very similar brand? Is that something or is there something more sinister going on?

I think what you are seeing there is more a function of the growth in the supply in the Comfort Suites brand, which is up by close to 15% over the last 12 months. So you are just seeing the ramp-up of those hotels. Our RevPAR results we report are not comparable same-store sales, so you're just seeing some of that in the RevPAR result there. I wouldn't read into that it's a tradedown impact.

Okay, great. Thanks. That's it.

David Katz Oppenheimer.

David, are you there?

Felicia Hendrix, Barclays Capital.

Hi, good morning, Steve. Good morning, Dave. So Steve, you sounded a little bit more bearish than a lot of the other lodging companies that we cover. No one is really talking about anything extremely positive, but some people have been using the term stabilization or kind of saying that they have seen declines, the steep declines decrease. You certainly -- you came in better than expectations. Just wondering if you are seeing anything different than the others or if you just feel like you are giving more of a realistic perspective on what is going on.

Well, that must be my maturation because everybody else has been calling me Pollyanna. So thank you for that question. No, actually I still -- my view is -- my view is relatively unchanged. I think the issue was if you look at Smith Travel and sort of the performance of the industry and our performance that we have had in sort of the last two months, I had hoped to see a little more uptick in that that we didn't get. But we are still relatively along the same lines that we thought we were going to be.

We talked long and hard about whether or not we should go with 10 or 11 and I think in the end, we decided that 11 was the appropriate number given what we were seeing today. But I am still a firm believer that come the summer, when the comparisons get easier -- if you recall, we dropped negative after Memorial Day in large part due to the gas prices. So we are benefiting a little bit today by our highway locations, but last summer, it hurt us and so we're going to get some favorable comparisons there.

And so I am still fairly optimistic that we get into the third quarter and the fourth quarter, both from the standpoint of the comparisons and also the pressure begins to ease on -- hopefully you see a lessening of the drop of jobs and a lessening -- you are still going to have a drop, but a lessening in the drop of GDP and an increase in some of the consumer confidence that we are going to start seeing that improvement.

So I didn't mean to be more bearish. I have been very accused about being too optimistic, but I am still probably in the same place I was and that is -- it is coming, it is just a question of we haven't seen it yet. It does feel like we get into the summer that we are going to get those better comparisons and get better results. But it is still, I would call, a very fluid environment. And you can look for some positives and see them, but you can also see some risks out there.

Got it. Thank you.

Joe Greff, JPMorgan.

Good morning, guys. Three questions. My first question, and I am sorry if you mentioned this and I didn't catch it, but if you were to calendarize the 1Q '09, takeout December and put in March for RevPAR, what was the 1Q '09 calendar RevPAR result?

And then my second question, Steve, touches on your earlier prepared comments about tradedown. How are you measuring that and I guess what brands are you seeing that in?

And then my third and final question relates to just market franchising terms. Are you seeing any of your competitors compete or start to meaningfully relax that and I guess what are you doing, if anything, on that front? Thank you.

Jeff, on the RevPAR side of things, I don't have a calendarization of RevPAR, but I think what you can read into what we said in the prepared announcement is our RevPAR results are on a one-month lag, so basically we're sitting here on May 1, we have a pretty good handle on the April and the March actual RevPAR performance for our system. Right? So that is baked into our 16% estimate for the second quarter. I would say that, off the top of my head for Q1, it is probably 12% on a calendarized basis would be a good way to think about it.

And then on the second question around tradedown, what we are seeing there is, on the business side of things, if you look at the data that comes through our central reservation channels, it has declined at a faster pace than our nonbusiness travel demand. That is the business that comes through the central channels. Obviously there is a piece of our business travel that goes directly to the hotels that we have less visibility into.

And I guess what we have seen is that corporate business demand, which is a relatively small piece of our business, it is about a third of our travel base compared to two-thirds leisure, which we think is a pretty good comp compared to the other lodging chains out there, that business travel demand has been down in the 20% to 25% range with the larger accounts. And kind of anecdotally, from what we hear from other industry participants and the GDS providers, other lodging companies, owner/operators themselves of these corporate hotels, corporate travel is off anywhere from 25% to 50%. So we feel like we are down probably less on the business side than some of the other higher-end lodging companies. So that is what we are seeing on kind of the tradedown side of things from what we can measure out of our CRS.

And then obviously the bigger picture numbers are, if you look at our RevPAR declines versus others, we are getting significantly less. And we think that is the combination of tradedown being offset somewhat by people trading out. So particularly in the economy tier, we have got some pretty good performance relative for those brands, but we think that is the combination of both people moving downscale, but also people stopping, which is the offset of that.

But in general, based on sort of the overall performance versus both Smith Travel, the segment conditions and what we are hearing from others, we believe that the value proposition that we are marketing and sort of the image of our brands is helping us to pick up additional business that may have been in other brands previously.

What was the third part of your question, Jeff? I didn't catch it.

Joe. Relaxing franchising terms, either your competitors or you?

Yes, so I think, in general, deal flow is down. Everybody might be a little bit more aggressive. We haven't seen anything significant in terms of people out buying deals. And so we are not -- our view is -- we have approached how we have done it. We give ranges to the sales guys. For the most part, the deals that are getting done are well within those ranges. And there's some typical stuff that everybody does, which is ramping fees and some other stuff like that and we haven't seen significant changes in that.

And our view, even if we did, we would tend to resist that because our view is we are going to get the deals whether it's now or six months from now. Nobody has the conversion brands that we have got and the value that we drive through conversion brands. So in a way, now is our time. When the transactions pick up, we are going to see a lot of deals because we have got the best brands available for folks to convert to that provide real value and real business. And as a result, we are going to get that big swing-up. So we are not going to discount early in the process to try to improve the number of transactions because the transactions are going to come from liquidity in the market, not from discounting.

Great. Thank you.

(Operator Instructions). [Mariah Slaven], Oppenheimer.

Good morning. We just wanted to know if you have had any changes in your strategy regarding share repurchases?

No. We are continuing to have that as a strong priority in our capital allocation strategy. We have an approach that we do not buy programmatically. We buy based on what we perceive to be a discount to the value of the shares. We will aggressively buy shares as we see that as an opportunity. That is obviously impacted by capital availability and pricing and where we think things are going and the general movement of the lodging industry. But no, it is our first priority. It is most valued by our shareholders. And you can continue to see us -- you can expect to see us continue with the pattern that we have had over the last several years that we will be an aggressive buyer of the stock when we think that the market is undervaluing what we are doing.

Okay, great. Thank you.

Michael Millman, Millman Research Associates.

Thank you. I want to ask a question related to the competitive sets of something that Marriott is always talking about, how they are receiving premiums on the competitive sets and maybe you can talk about how your pricing is relative to the competitive set. And related to that, what kind of differentiated selling points can you make to potential independents or potential brand switching related to the competitive sets?

I will take the first part of that question. Each brand is different in terms of the competitive set that we compare it against to on a RevPAR basis obviously and its relative performance against that competitive set for each of our brands is a little bit different. But on a holistic basis, one of the things we look at closely is how our annual RevPAR growth rate indexes against the chain scale results, the broader industry chain scale results you see from Smith Travel Research.

And if you looked at the last five years, the gap between our RevPAR performance and STR's averaged about 150 basis points, but it is a pretty broad range in each of the years as to the gaps. It has been as high as 50 basis points positive and negative 300 basis points. So it is had some volatility to it.

Most recently, as Steve talked about in the prepared remarks, our RevPAR for the first quarter and continuing through March and April actually was doing better on a holistic basis relative to those STR chain scales. So on a holistic basis, that is the trend that we are seeing recently and we are hopeful that we can continue that trend. But obviously in the past, we have seen volatility in that regard.

Joe Gagan, Atlantic Equity Research.

Yes, I have two questions. The first question is about receivables and cash flow and the second question is about RevPAR and pricing. On the cash flow, last year, it was $104 million and the previous year was $145 million. So it was 28% less. And the net income was 10% less. And this quarter, the cash flow was $10 million and the revenues were $114 million and the revenues in '07, when your revenues were around the same as this quarter, were $116 million and the cash flow was double at $20 million. So the first part of this is do you know why the cash flow seems to be so much weaker than the revenues and the net income?

Well, obviously you've got to factor in the working capital items. So you can look back at the cash flow trends over a pretty long period of time and there is some variability from period to period in the working capital type items. Also in the level of marketing and reservation advances that we make over time. So I think if you looked at it over an extended period of time and compared our free cash flows to net income, you would see that it is a pretty strong yield over an extended period of time.

Well, actually, I did do that and in '03, '04, '05, '06 and '07, the operating cash flows were like 30% to 40% more than net income. So it changed in '08 obviously, right? And then as far as the receivables go, on this quarter, if you add together the regular receivables and the receivables for marketing and reservations, they were up 7.4% and yet the sales were down 10%. So I mean my question in all this is that --.

The big reason for that, Joe, is basically the way the marketing and reservation fees work, which is essentially a cost-reimbursement approach. So in years where we collect more marketing and reservation fees than we extend on those activities, then there is no impact on net income because it is a pass-through. So we treat it as essentially no impact on EBITDA, EPS or net income. But on our balance sheet, any increase or decrease goes against the receivable or the payable.

So I think what you're seeing from '07 to '08 -- I mean I can see that -- in '07, marketing and reservations were a source of cash of around $12 million and in '08, they were a use of $8 million. And that is something we will just -- there will be volatility in that number depending upon what is going on with our level of investment and marketing and reservation activity.

But the weak cash flow has nothing to do with the franchisees not being able to pay you?

No, the franchisees helped -- I mean as we talked about earlier on the call. Our DSO numbers were actually better at the end of March of this year than they were a year ago, down to about 20 days. Write-offs remain still very low, below 1% of our franchisee billings. So no, we haven't at this point seen any major concerns there.

Okay. And then on the pricing on the RevPAR, now I just want to understand what was said earlier. So as far as your analysis of the RevPAR, that is only through February, is that correct?

Well, it is actually through -- really through March and April as well. We are seeing that same trend in March and April. We have been slightly ahead of the STR chain scale results when you work it out using our blend of room supply.

Okay. So in other words, the figures you are giving here for RevPAR and pricing, that is for February, March and April, is that right?

For the Q1 results, that was December of '08, plus January and February of this year. We talked about in the prepared remarks how we had seen some RevPAR results in March and April that had that same trend. And then when I answered Mike's question, the point was we have seen broad ranges over time in the differential between our RevPAR performance and Smith Travel Research's results. But in the more recent data, the gap has actually been -- we have been ahead of the STR chain scale results and we are hopeful that we can continue to do the things we are doing to make that -- make that continue.

All right. Here's my question on it. It says here that -- and I want to make sure I understand this correctly -- that your pricing only went down 1.1% year over year. Is that right?

Average daily rate?

Yes.

Yes, the ADR, right, went down 1.2% for the quarter.

I mean I am just trying to understand how that works based on -- you cite Smith Travel and what the other public hotel companies are saying about the pricing environment. I mean so how are you only down 1.1% given what everybody else in the world is saying about pricing?

Well, I think that's a function of -- if you look at our business mix, we tend to skew more towards leisure travel and kind of price smaller in midtier business markets and less larger corporate travel. So our franchisees -- I mean their franchisees actually set the price for their hotel rooms, so they control the average daily rate that they sell the room at. But my sense is that, just for the composition of our business, that the rate has held up better. Also locationally, our hotels tend to skew a little more towards small metro highway locations than some of the other major lodging chains. And if you look at the STR data for interstate, location, small metro areas, it has actually held up a little bit better than the city center locations where I think that big corporate traveler is spending time.

Yes, and you are getting tradedown. So when you think about that pricing, what we have been out preaching to the franchisees and the franchise leadership has been preaching to them as well is, look, you're not going to induce any demand by lowering your prices. You are going to have lower occupancy. Hold your price, live with what is there. You have got to be competitive on your street corner, but what we are seeing in our segments, which is not necessarily true in the upper segments, is that there has been more discipline around price discounting this time around than last. If you look in the upper segments where particularly in the group area things have fallen off pretty significantly, you are seeing a lot more dropping in pricing than you are seeing in the segments we operate.

Right, okay. So basically you're just saying that your pricing is pretty much the same, even though there is like 5% or 6% GDP declines this quarter?

Yes, but where you see that is in the occupancy.

Right, okay. All right, thank you very much.

At this time, I would like to turn the call back over to management for closing remarks.

So once again, we appreciate your time and attention during the call. We remain optimistic about the eventual uptick and what that will bring for our Company. We are, we think, well-positioned to weather the current economic conditions, even as they extend themselves. But we are hopefully optimistic about a beginning improvement coming this summer towards the end of the year as we have discussed and what that will then mean for our Company. We continue to believe in our model as being one of the strongest in the industry. We are not departing from any mission-critical initiatives as a result and look forward to an upturn and the good things that that will come. Thank you for your time.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.