Choice Hotels International Inc (CHH) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International fourth-quarter and full-year 2010 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 conference 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, risk management believes, expects, anticipates, foresees, forecasts, estimates or other words or phrases of similar import. Such statements are subject to risk and uncertainties that could cause the 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, 2009 and other SEC filings for information about important risk factors affecting the Company's that you should consider. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We caution you, 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 fourth-quarter and full-year 2010 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 very much. Good morning, and welcome to Choice Hotels' fourth-quarter and full-year 2010 earnings conference call. With me this morning, as always, is Dave White, our Chief Financial Officer. We are very pleased with our strong fourth-quarter results which we published last evening.

Among other highlights, we achieved another quarter of strong RevPAR growth, delivered strong franchise sales growth and continued to build on our track record of managing the business to generate significant free cash flows. David and I will discuss our results in more detail later in this call, but I wanted to take a minute to briefly touch on some of the macro level indicators that drive our business and some of the trends that we are expecting this year.

The macro level indicators that are strongly correlated with our business performance, which are consumer confidence, consumer spending, GDP growth, are showing signs of strengthening. In addition, one of the major factors that are very important to our performance is the unemployment rate and most economists are expecting the unemployment rate in 2011 to at least remain steady or improve slightly.

We seek improvement in these gauges, along with the limited supply growth that the industry is experiencing, as very positive catalysts that should support continued improvement for room demand, RevPAR results and ultimately our franchise system growth. We have established our business plans, our operating and financial targets with that as a backdrop, leaving us lots of flexibility to adjust as necessary. So let's turn first to the results of the fourth quarter.

On the RevPAR front our fourth-quarter results were very strong with a 9.7% increase led by occupancy gains and a modest average daily rate improvement over the prior year's fourth quarter. Our performance was better than we had anticipated and was comparable to broader industry performance which makes us optimistic that our RevPAR performance should track more closely to industry performance than some of the previous cycles on account of the value orientation of our brands and the strong desire for value on the part of consumers.

We finished 2010 with nine consecutive months of RevPAR increases from April through December, which followed a relatively negative first quarter in 2010. Our full-year RevPAR growth of 2.8% compares favorably to the US lodging industry performance in the mid-tier and economy segments. Recent RevPAR trends have remained positive with an increase through last week of approximately 5% for the past two and a half months.

For 2011 recent forecasts from PWC and Smith Travel Research are for industry wide RevPAR increases to range between 4% and 6% for our chain scale segments. Our current operating assumption is that our full-year 2011 RevPAR will increase approximately 4% to last year. And while hopefully our RevPAR assumptions will prove to be conservative, considering our recent RevPAR performance and the tougher comps that come our way in the back half of the year, we felt the estimate we published last night for RevPAR to be prudent.

Turning now to franchise sales, we were encouraged by our fourth-quarter 2010 franchise sales results. For fourth quarter 2010 we executed 161 new domestic franchise sales contracts, representing a 44% improvement compared to last year. Our results were aided by the development incentive for our Quality, Clarion and Econo Lodge brands that we put in place during the middle of last year and discussed with you.

Franchise sales of conversion hotels in the fourth quarter increased from 91 in 2009 to 135 in 2010, representing an increase of 48%. Franchise sales of new construction hotels increased 24% from 21 in the fourth quarter of 2009 to 26 in the fourth quarter of 2010, but obviously still well below previous heights.

Looking ahead we believe that hotel profitability resulting from the RevPAR improvement and property level productivity gains is steadily strengthening. We expect this trend combined with an increased velocity of hotel purchase and sale transactions, an improving hotel lending environment and less aggressive competitor retention policies to be a gradual catalyst for improvement in our franchise sales.

For full year 2010 net domestic unit growth was 87 hotels or 1.8%. Our rate of net unit growth compares favorably to the US industry wide net unit growth rate which was approximately 1% last year. We anticipate unit growth for 2011 to be approximately 1% this year which is in line with overall industry supply growth projections.

If increased hotel transactions occur in a meaningful way or financing improves we would expect that to have a positive catalyst for our unit growth. A primary reason that hotelier's franchise of choice is our proven delivery -- our proven ability to deliver reservations to their hotels through our central reservations channel. We continue to make great progress in this area which further strengthens our value proposition.

In 2010 domestic central reservation systems, or CRS, revenue increased more than 6% for the year driven largely by growth in reservations delivered through ChoiceHotels.com. ChoiceHotels.com reservations revenue increased by 12% in 2010 driven by our increased investment in paid and organic search and shifts in consumer purchasing behavior. Mobile devices revenue to ChoiceHotels.com more than doubled in 2010 and reached 1% of ChoiceHotels.com revenue share for the first time.

Based on these results ChoiceHotels.com now represents nearly one-half of our CRS share. We continue to refine and invest our technology platform and leverage our scale and believe that our expertise in this area is a sustainable competitive advantage.

Another key prong of our marketing strategy is growing our global Choice Privileges rewards program. Choice Privileges concluded another successful year in 2010, adding a record 2.5 million new members. Membership now stands at 12 million worldwide. This was achieved in part due to an aggressive hotel desk sign-up effort, as well as new promotions and programs that were added throughout the year.

Along with the new and existing membership these promotions and programs helped drive $1.4 billion in domestic revenues through Choice Privileges. This represents a nearly 18% increase compared to 2009 and Choice Privileges revenue represents approximately 29% of our domestic systems gross room revenue in 2010. This percentage represents a nearly 400 basis point increase over 2009.

Finally, we recently announced that we've introduced our Choice Advantage property management system outside of the US. The reception by our international franchisees has been strong and we will keep you updated as those efforts continue. Ultimately we believe rollout of Choice Advantage on a global basis will improve our value proposition and our ability to grow our international business in a significant way.

In summary, on many fronts 2010 turned out to be a very good year. We believe our continued focus on strengthening and leveraging our core competencies has positioned us well for any environment that comes our way this year and in the future. Now let me turn it over to Dave to cover our fourth-quarter performance in a little more detail.

Thanks, Steve. As you saw in last night's press release, we reported adjusted diluted earnings per share of $0.42 which exceeded our previously published outlook of $0.38 per share by $0.04. Compared to our outlook several key items impacted our results during the quarter.

First, approximately $0.02 of our outperformance related to better than expected operating performance. Our royalty revenues were better than we had expected on account of a combination of factors including domestic RevPAR growth of 9.7% exceeding our outlook which had contemplated 7% to 8% growth; unit growth of 1.8% exceeding our expectation which had been for a 1% increase; and stronger than anticipated international revenues.

In addition, our fourth-quarter results for adjusted selling, general and administrative expenses were slightly better than we had expected. The remainder of the guidance outperformance was attributable to investment gains on employee retirement plan assets driven by the positive performance of the broader equity markets late last year, as well as a slightly lower effective income tax rate compared to our expectations.

So turning briefly to a few additional key operating and financial metrics for the quarter -- as Steve mentioned, we were very pleased with the RevPAR performance of our franchisees during the quarter which had a meaningful impact on our royalty revenues. As a reminder, our RevPAR results for the fourth quarter reflect our franchisees' gross room revenue performance for the month of September through and including November.

Our RevPAR results in December, January and so far through February of this year have continued to be positive in the mid-single-digit percentage area and this is reflected in our outlook for the first quarter.

Finally, we achieved a 3 basis point improvement in our effective domestic royalty rate for the quarter. As a result of our net unit growth, RevPAR and effective royalty rate results, we achieved an 11% increase in our domestic royalty fees for fourth quarter which increased to $52.2 million compared to $47.1 million last year. The Company's international fees included in royalty fees revenue were $6.9 million for fourth quarter 2010 compared to $6.1 million in the preceding year.

On the cost side of the business our adjusted selling, general and administrative expenses for fourth quarter 2010 increased by $2.9 million which is slightly better than we had anticipated, but reflects a higher level of incentive compensation in 2010 compared to 2009, a year when most of our incentive plans paid out at levels significantly below target. The adjusted figures for SG&A and earnings per share exclude certain specific items which we described in the exhibits to yesterday's press release.

Our balance sheet and liquidity position remains very strong. We finished the year with approximately $91 million of cash on hand and total long-term debt of approximately $250 million which represents a multiple of 1.4 times our expected 2011 EBITDA.

Turning to our outlook for the first quarter and full year 2011, we currently expect first-quarter diluted earnings per share of $0.25 and we expect our full-year 2011 diluted earnings per share to range between $1.71 and $1.75 per share. We expect full year EBITDA to range between $180 million and $183 million. These figures assume net domestic unit growth of approximately 1% for full-year 2011. The figures also assume domestic system wide RevPAR to increase 5% in the first quarter and approximately 4% for full year 2011.

Finally, these figures assume a 3 basis point increase in the effective royalty rate for full-year 2011; an effective tax rate of approximately 35% for first quarter and full year 2011; and all figures assume the existing share count. Now let me turn the call back over to Steve.

Thanks, David. Well, 2010 obviously was a strong year for us, particularly in comparison to the previous two years. We emerged from one of the most challenging economic periods in the lodging industry's history. And while 2010 was not without its challenges, Choice was able to show growth in the key areas that drive our continued success -- revenues, earnings per share, domestic net units in rooms and domestic RevPAR.

I am confident that 2011 will be a much better year for our Company and the lodging industry thanks to an improved operating environment and we will gain more visibility into how strong the year will be over the next couple quarters. We are focused on our long-term strategy to be a hotel distribution company that optimizes its brands to drive unit growth and provide the best return on investments for its franchisees and provide excellent returns for our shareholders. I'm now going to open up the call to answer any of your questions.

(Operator Instructions). Patrick Scholes, FBR Capital Markets.

Good morning; actually I have two questions. First one relates to your new room and hotel additions last year. If you can give a little color, approximately what percent or what portion of your new rooms last year were from Holiday Inns that had perhaps lost their franchise contract due to the rebranding by Intercontinental? That's my first question.

And then my second question -- if you could give us a bit more color on -- or more detail on the $20 million to $40 million of annual lending that you're doing. How is that progressing? Specifically where -- what brands that's going towards? Thank you.

Yes, sure. Thanks, Patrick. Okay, let's talk about Holiday Inn, but also we'll talk about it in the context of sort of the other brands and their activities. So obviously one of the major opportunities for us for our conversion brands, particularly in Clarion and in Quality, is when other brands determine that their hotels -- that some of their hotels no longer function well within the brand that they're in. So that can include Holiday Inn, Holiday Inn Express, Hampton Inn, amongst others.

That creates an opportunity for us because we can provide franchisees with brands that generate real value by driving real revenues into their hotels and a place to land their product that is consistent with the life cycle stage of their product. So Holiday Inn is a good example of that.

I would say that -- I don't have the number exactly in front of me, but I would say somewhere between 15% to maybe 20% of our activity particularly in the fourth quarter was related to Holiday Inn conversions as they moved through their exercise of refresh.

One of the things that I think we noted last year during a couple of the calls was that while the brands were talking about pushing hotels out, that was not actually occurring and there was a fair amount of short-term extensions being granted and we had the unusual phenomenon of seeing the applications come in and then being withdrawn as those extensions were being granted.

It appears to us that based on fourth-quarter activity that that extension activity is beginning to slow and therefore there will be more terminations of hotels. And therefore if that trend continues we would expect that to result in more opportunities for us and stronger franchise sales as a direct consequence.

And then on the investment side, that still is I would say moving slower than we had anticipated. We have had a couple of significant transactions that will -- that as they progress and we see them as real we'll discuss with you in detail. But the reality is we had set out a goal that we would utilize a small portion of our capital available to help incent growth, primarily around Cambria, but also potentially for some of the extended-stay brand and maybe Ascend.

It's mostly focused on Cambria at this point and, I'll tell you, I'm a little disappointed that we are not able to put that capital out because the financing markets really still are not cooperating, with the exception of sort of very major city center type activities or opportunities that come from franchisees because of a relationship with a lender.

We haven't seen much improvement in that new build lending environment and, if you listen to most of the experts -- when we were out at [Alice] in a big way -- they're not anticipating that anytime soon. So obviously our ability to put that capital out and get more Cambria's done is somewhat contingent on that financing market being more robust than it is today.

Great, thank you for the color and detail.

You bet. Thank you.

Harry Curtis, Nomura.

Good morning, guys. A quick follow-up to Pat's question. As far as the advances that you do have out, you said in your press release that I think $5 million of the $20 million has come back. What are the economic terms to you when you lend this money out?

Well, it varies somewhat. But we're clearly looking for a return on that. It's sort of -- you can think of it in terms of somewhere between -- it's always above our cost of borrowing, but somewhere between our weighted average cost of capital, up or down, that's our targeted piece. It depends on the deal and how attractive the deal is and how lucrative we think that contract will be.

We've got targeted ranges of which -- of what we're willing to contribute towards a deal and we're typically underwriting within those. But there is -- as we put that capital out there is a return, but it is more of a financial lending approach than it is more of an equity return, if that helps.

Yes. But I guess where I'm going with this is we should -- to the extent that you lend $20 million, we should see some kind of a return on your interest income/other line item.

That's exactly right.

Okay. And then can you talk about your development opportunity domestic versus international and to what degree are you pushing the international envelope? It seems like all of these lodging calls -- or on all of these lodging calls there's an emphasis on international development and is that not an open field for you guys, particularly given that you don't have an awful lot of exposure internationally at the moment?

Yes, that's a great question. So I'm on a lot of these panels and calls where they say -- so, how are things going domestically? And the common comment is let me tell you about China. So, we actually see our international opportunity as significant. We have been investing in our value proposition for the last two years and I think we talked about that in the earlier calls. That is now being delivered.

So what we've got is what we think is a competitive advantage and that is we are the only cloud-based technology platform that's massively distributed in the world, as far as we know. We're in 4,000 hotels roughly, we'll be in 6,000 hotels within a year or two, and we are delivering that to our international folks on a sort of language-by-language movement and the reception has been exceptional.

What that allows us to do, and particularly -- so let's take Europe as our initial and probably primary target. Because we can be flexible on what buildings look like and what we take in terms of room type and we can go smaller than most folks can, we can move into a conversion environment in Europe, which, as you know, is a prolific environment now because the European hotel market is rapidly moving from unbranded to branded.

We can go in and move -- and a cost of conversion to us provided that the hotel is well furnished and in good shape physically, the can cost of conversion to us versus other hotel companies can be significantly less because our basic proposition is -- if you've got access to the Internet you have access to all of our systems versus having to spend potentially a couple hundred thousand dollars to buy servers to cable, to buy air-conditioning for the servers, to have technology experts that oversee the server.

So there's a significant cost advantage from that, that combined with our flexibility on product type, not on quality and on how well it's conditioned but on product type, we think makes us a very attractive franchisor for conversions in Europe and we think that is a significant opportunity.

So as a result, if you hadn't noticed, we recently hired a new Head of European Development, a gentleman that has I believe 20 or 30 years of experience named Oliver Dupont, and his background is in our type of products in franchise sales. He is a very connected individual and we're expecting, because of the value proposition that we are arming him with, to be able to significantly upgrade our development on the international side. So we think that's a real positive.

Our targets, as I think we've discussed before, start with Europe. The second primary target is India. And then after that we are looking for opportunities in China as everyone is focused. The difference though in our position is franchising in China to this point has not proved to be hugely profitable. We want to do it only in a way that we're going to get significant scale and a significant amount of fees out of it otherwise it's not worth the effort. And so we're trying a number of different ways to enter the China market in a way that might make sense for us.

Our primary focus through is we are going to go to the markets where we can get large scale, large distribution and large fees as a result to drive brand awareness and value for the franchisees and we will move sort of country to country or market to market with that attitude in mind. We think we have a significant moving advantage with our technology platform, which is literally the only cloud-based platform out there.

And so we're assuming that's going to help us push the international growth. At the same time on the domestic side, we think as we've got the improving economy we've got a lot of room left in the brands that we've got and then obviously we're moving into the upper upscale -- well, upscale and upper upscale with Cambria and Ascend which we think are wide open opportunities for us.

So as I look at the range of development opportunities for this Company, and you combine the fact that we really don't play in the upscale domestically at all, and the fact that we have an enormous opportunity internationally, it's not hard to get pretty excited about what the opportunities might be.

That's it for me, thanks.

Robin Farley, UBS.

Great, thanks. I wanted to clarify, when you talk about the 1% unit growth for 2011, what does that assume in terms of removals? In other words, what kind of gross increase in units and removals get to that what I assume is a net 1% unit growth?

Yes, that's right. That's the correct assumption, a net 1% unit growth. So if you look at 2010, our gross openings were 327 hotels of which 250 of those were -- I'm sorry, 249 of those were conversion and 78 new construction. So to get to the net 87 units in 2010 you back out about 240 terminations. For 2011 the openings number will be somewhere around 300 and we'll probably do a little bit more on the termination side with some of the brand initiatives that we have underway.

And when you look at the gross openings in 2011, one of the key things to focus on -- and this is completely consistent with the last lodging cycle -- is our new construction openings tail off a little bit from 2010 levels to about 30 next year in -- or this year, 2011. So you're seeing the impact of that on our net unit growth rate. And obviously the size of it -- the absolute size of the system is bigger too. So the base has grown which is having an impact on that 1%.

Okay, great. Thank you.

David Loeb, Baird.

Good morning, Steve. I had the privilege of staying in a couple of Cambria's in the last couple of months and it really is a great room, great box. I guess the thing that concerned me was the lack of push from the brand in terms of bringing occupancy in. What are you doing for your owners to try to help them fill those rooms at good rates?

That's a great question. So when you launch a brand there are two things that are important, and having done this a couple of times I've learned how not to do it. And so one of the things that occurs is distribution is key, right? So we currently had Cambria at 23 units in opening -- that are open and operating. With 23 units it is hard to get any real awareness or recognition of the brand, so what you have to do is to drive trial.

So we have taken the usual step, based on my previous experiences, of hiring a sales force that is a significant number of folks that all they do is sell Cambria hotels directly for the franchisees. So we have a team of roughly 16 individuals that are selling 23 hotels, that their goal and their objective is to sell those hotels into a competitive performance with the other brands that are out there.

We are having significant impact through that; they are working not only local but also national accounts as part of our overall revamping of our sales process. And we are having real success in terms of driving performance of those hotels as a result of their efforts. That will be in place until we see a distribution level that allows it to be self-sustaining.

And so that has been in conjunction with our franchise advisory committees. It has been very well-received and we think in the long run will prove to be a meaningful differentiator in the start-up and eventual success of that brand.

In the meantime though some of your owners must be looking at other options including converting away from that brand. What's your stand on that and what will you do to try to incent them to stay in the system?

Well, you've got to look at it hotel by hotel. But let's be clear, they don't have a contractual right to do that so we're not very supportive of them looking at other options. But more importantly, we are very supportive of helping them be successful and we need to retain what we've got obviously, but we also want to go that significantly. A number of those will come from the existing franchise base.

And so we're doing whatever we need to make sure that people feel they're being supported, that we're doing everything to have those hotels perform. The ownership is a pretty savvy group, they understand what's happened over the last two or three years, they're not expecting us to overcome that. But they are expecting us to lend support given the fact that we haven't gotten to the distribution level that we were hoping at this point.

And so we're doing a lot on the side of helping to sell their hotels and then we're doing a lot -- or hoping to do a lot utilizing the balance sheet to help get more distribution to the system. Those two things, if you talk to the bulk of the owners, will tell you they view as the meaningful and right thing to be doing and that's what we're focused on.

Okay, thanks. Very helpful.

Ryan Meliker, Morgan Stanley.

[Technical Difficulties]

Obviously Summit Hotels in their S11 filed some information on the four Cambria's that they own with a RevPAR of about $50 over the past 12 months. I'm wondering if you can give us any color on the brand itself -- whether that's indicative of the overall brand, if those properties might be underperforming the brand? If you can give us any color on RevPAR penetration and kind of any of the challenges you guys might be seeing with the brand as the economy has limited its growth during the first couple of years of its existence. Thanks.

Yes. Well, I would say you need to look at each of those markets. A number of them are underperforming markets. I think you can see that relative to the performance of those hotels in the start-up scenario. And I think it's hotel by hotel. So I'm sure they can give you more color if they want.

Okay. And then how about the brand in general? Are you seeing any challenges regarding the overall pick-up of the brand now that it's been a couple years out and we still don't have that distribution that you just mentioned, how badly you need?

Yes, I can tell you this is where we -- it was a couple years ago we recognized the need to put a direct selling force in place because we didn't have the distribution. So as a result we've done that and we've got rapidly accelerating RevPAR index and RevPAR performance. So we're getting the lift that we were hoping to get out of allocating those resources to the hotels.

We've seen several instances where hotels that are in good markets and in strong locations have performed strongly out of the blocks. We've announced two hotels in New York which we think are going to be significant contributions to the brand from an awareness standpoint, but also we think will be significant performers.

A number of the hotels that we started with in the brand were in more tertiary markets and that was the result of selling franchises without necessarily supporting with the balance sheet to get to the markets you wanted to go to. That we've changed. One of the things that we feel very confident about is as we get to more dense suburban and urban markets we have huge amounts of unmet demand.

So if you look to any major metropolitan area we literally have millions of non-priced turndowns. That's why Ascend has been so successful and that's why we feel very confident that because of our scale and because of the fact that we drive literally millions of customers looking for room nights in urban locations where we don't have distribution that Cambria is a good place for owners to be able to take advantage of that asset and that we'll be able to drive significant results. And I think you'll see that as we continue to move to more major markets from the tertiary ones.

Great, thanks a lot.

David Katz, Jeffries.

Hi, good morning, all.

Good morning, David.

Just looking at the guidance quickly, I'm drawn to the fact that the revenue looks like it's growing, but the EPS on a year-over-year basis looks flat. And I notice that there is a bit of a higher tax rate contemplated in there. But is there some other color on the cost side which I assume falls somewhere in the SG&A bucket that would be impacting that as well?

Yes, David, this is David. I'd say the color around that is on the cost side in terms of adjusted SG&A expense for 2011, we're kind of in the mid-single-digit percentage growth area, mid- to high-mid. That includes some initiatives that we have or that we've contemplated around the brands and around growth prospects and other types of things.

So I think depending upon how that plays out, that could prove to be conservative, hopefully. And then the other thing I think people should focus on is the bond deal that we did last fall the interest rate related to that is around 6% and that's the key thing I would say, that between the EBITDA and the EPS line you need to make sure you consider when you're trying to model it.

And then the other piece of it is the investment performance as it relates to our retirement plan assets that have been beneficial to us over the last couple of years, we normally in our guidance we just are neutral on those investments. We don't assume a gain or loss on them. So that's another piece of the story when you're looking at 2010 versus 2011.

Perfect. Can I ask one follow-up on a different matter? And I apologize -- I did get on and off, I got lost in there as well for a moment. But have you thought about adding additional brands to the portfolio? I know it's -- the standard answer is we try and look at everything and we always want to be opportunistic. But is that more or less likely today than it may have been 12 months ago?

Well, I'd say two things. One is, yes, we strongly desire a full-service brand in the upper to upper upscale space. We have been in a number of dialogues over the last several years, none of which resulted in an acquisition. I would say based on the environment today that that makes that less likely because in the turmoil of 2008 and 2009 we were not hoping for someone to get in trouble but we were hoping we could help someone out if they did get into trouble.

Because of the financing environment those interest rates stayed so low, you didn't see kind of the churn that you might have seen. We were in an excellent position with a strong balance sheet and a lot of dry capital, but you didn't see people get into the sort of trouble that may have created an opportunity for us. And clearly given the improving environment that means less so.

It does not mean our interest is lessened. We are broadening our scope of what we might look to for that. And we are clearly in the mode to look at additional brands, particularly in that upscale and upper upscale space.

Got it, perfect. Thank you very much.

(Operator Instructions). Kevin Milota, JPMorgan.

Hey, good morning, guys; most of my questions have been answered, but one quick one on CapEx. What are your expectations for 2011 as you think about CapEx for the year? Thank you.

Sure. Yes, when you look at the investment in [CP&E] during 2010, one of the key things that was in there was we did leave some additional space where our technology center resides out in Phoenix, so that had a pretty meaningful impact on that $24 million number you see on the cash flow statement. So that kind of goes away in 2011, so I think that CP&E number, I typically think about that somewhere in the $13 million to $16 million range, somewhere in that order of magnitude.

And then when it gets into the development incentives, obviously we've talked about up to $20 million to $40 million being kind of the target. And then our more standard development incentives, which we do for more of our conversion brands, typically runs anywhere from $3 million to $5 million per year.

Okay, thanks a lot.

Chris Woronka, Deutsche Bank.

Hey, good morning guys. Can you share with us maybe the RevPAR progression by month during the fourth quarter? I'm just trying to kind of bridge that to what you've said so far for the first quarter. I know there is a typical seasonal impact, but just so we can kind of bridge that a little bit better.

Yes. Essentially what we saw in September, October, November, was pretty steady between 9% and 10.5% on a month-in/month-out basis. And then in December, January, we saw kind of it move more into that mid-single-digit area that we talked about, kind of 5%, 5.5% area. And that is kind of where we have been hovering.

Okay, do you think there was any kind of weather impact there, or was this just a function of seasonality and tougher comps?

Yes, I think you have had some interesting holiday comps and some interesting weather comps, particularly recently. I think the other thing you've got to keep in mind is what we saw during the course of 2010. You saw a pretty significant ramp-up in RevPAR. First quarter we were down 10% of 2010, kind of flat in Q2, plus 7% in Q3, and plus almost 10% in Q4.

So that is the other thing I think you need to keep in the back of your head as you're thinking about modeling out RevPAR for 2011. But certainly the trends for December, January. and the first 20 or so days of February has been kind of spot-on what we guided to.

Great. And then we noticed a little bit of a tick-down in the comfort total size, excluding the suites. And I know Quality and Clarion have been ramping up a little bit. How much of this is -- how many of these comforts are you kind of keeping within the system but changing to a different brand, versus how much of it is kind of just going out?

Yes, I'd say somewhere between in 2010 we probably did somewhere between 70 and 80 conversions from those brands into other brands.

Okay, great. And then just finally a housekeeping item. In terms of incentives that you might provide to franchisees, are those -- and I'm talking more about up-front incentives -- are those going through the SG&A line? Are they going through -- are they reducing your initial franchising fee revenues? Where do they fall in the model?

Yes, there are a couple different pieces. So the current incentive program that we have in place involves a rebate of a portion of the initial fee. So the way that plays out is through the initial fee line over time. The other piece of the incentive is a discount on the effective royalty rate for a period of time; so obviously that flows through your effective royalty rate and the royalty line.

And then to the extent that we were to do one of our incentive programs over time has been forgivable [bond] notes for more of our conversion brands. So you see the capital for that go out on the cash flow statement down in the investing activities area. And then as those amortize off over five to seven years that flows through amortization expense.

Okay, very good. Thanks, guys.

Those are two different pieces of it. So --.

Great.

Josh Attie, Citi.

Good morning, thanks. Just to give us a sense of how quickly the unit growth can turn around, can you remind us of the timing of the P&L impact? In other words, what on average is the initial franchise fee you get up front and then how long on average does it take -- how long is the conversion timetable until the hotel opens and starts generating fees?

So let's talk about, first, so obviously we're hoping the new build environment improves, but we're talking mostly about conversions this year, which is one of the reasons we're optimistic of our performance vis-a-vis the other hotel companies because we do more and a stronger job of the conversion business than the others do. So -- but it can vary.

But our general view is it's somewhere between four to six months that it can happen. And the varying factor is how much work they have to do before we convert them to the brand. So if they need a total renovation it can run a little bit longer than that, but we typically see an average of four to six months which is sort of --.

So for example, if we saw a strong swing up in conversions and other hotels pushing their hotels out early in the year that might have some impact for this year. But on the other hand, if that happened sort of mid to later in the year then that will be an impact for early 2011. Dave, do you want to talk a little bit of P&L impact when one comes on?

Yes, on the initial fee side of things for our conversion brand, the initial fee typically averages somewhere between $25,000 and $30,000. And then as Steve pointed out, the timing varies, depending upon the specifics of the property, but three to six months is pretty standard for a conversion and it can certainly happen faster.

So it can have a pretty quick impact in terms of hitting our P&L. But obviously, as we've talked about this incentive program that we have in place, has a discount of the effective royalty rate. So some of the ramp up in the royalties wouldn't be experienced until a little bit later in the year or even into 2012. But that's kind of how it plays out on the P&L.

So then the 160 new franchise contracts you executed in the fourth quarter, almost all of those should be in the system at some point in 2011?

Yes, that would be the expectation, yes.

And I guess is the fourth quarter a seasonally strong period for executing contracts? Because that seems like a really big number. Last year you said 300 gross openings. If you did at 161 in the fourth quarter it seems like you're on a pretty good pace for openings in 2011.

Fourth quarter is usually a bigger quarter and it's just because people are driving to make their decisions about changing their brand before the year ends. Sometimes there are tax consequences to that as well. So you typically -- fourth quarter is usually the strongest quarter that we have in terms of development.

What was particularly encouraging though about this fourth quarter was, as we noted with you in the earlier calls, we were trailing 2009 pretty significantly and we didn't quite make it in terms of hotels, but we were pretty flat room wise, and caught it all up in the fourth quarter. And there was a sense amongst, if you look at our application flow and you talk to our sales guys, that they're pretty optimistic that that pace that ended the year is sort of where we're heading.

They're looking at a lifting environment and if you looked at our application flow that would tend to support to that. Obviously depending on the actions of the other brand companies in terms of their aggressiveness with their brands, and then also the availability of financing for transactions and things changing, that's going to have a significant impact on our overall performance for the year and then -- overall performance in terms of deals done. And then the impact to actually the P&L is dependent upon how early in the year that happens. The earlier the more impact it will have.

And maybe can you just tie that back into the unit growth guidance of net unit growth of 1%? If that momentum does continue that you saw in the fourth quarter, does that put you on pace to hit the guidance of 1% or beat the guidance of 1%?

Well, we have set the target at roughly the level we were at last year in terms of deals. And because we're looking to see how quickly things -- and whether or not that pace from the fourth quarter ends. So no, if the pace from the fourth quarter ends we would do better than that, but where we've set the target and what our assumption is that we're going to be at roughly the same level as our total performance for 2010.

Okay, thank you.

[Dori Kespen], Wells Fargo.

Hi, I think this almost was just answered. But I'm wondering if you can tell us how you're thinking about relicensing fees in 2011, if maybe just kind of the ramp up as the year goes on?

Sure. Yes, for 2010 I think we had about 100 relicensings, somewhere in that order of magnitude and that would be about 2% of the system side, which is probably about half the rate we would think of as kind of normal in terms of relicensing in a normal environment. For 2011 we're expecting that to increase slightly, I would say kind of a modest increase in that.

So to the extent that transactions accelerate, then that could certainly give us some additional upside on the relicensing side of things. But we're not expecting a dramatic increase in relicensings, more of kind of a steady as you go increase.

Okay, thanks.

Thank you. There are no other questions. I would like to hand the call to Mr. Steve Joyce for closing remarks.

Well, thank you. We appreciate your participation in this call. We are looking forward to a strong year in 2011 and, as we have discussed today, we have some question about how strong it will be, but we're very optimistic that the environment is improving. And depending on how rapidly it improves and how quickly we see transactions picking up will depend heavily on where we end up for the year. But we're very happy with our performance in 2010; we think it positions us well for significant movement in 2011 and we're looking forward to a pretty good year. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.