Choice Hotels International Inc (CHH) 2011 Q3 法說會逐字稿

Good morning, and welcome to the Choice Hotels International third quarter 2011 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 constitutes forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by such phrases at choice, or its management believes, expects, anticipates, foresees, forecasts, estimates or other word or phrases of similar import. Such statements are subject to risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such statements.

Please consult the Company's Form 10-K of the year ended December 31, 2010, and other SEC filings for information about important risk factors that about 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, 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 circumstance. You can find our reconciliation of our non-GAAP financial measures referred to in our remarks as a third quarter 2011 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, Incorporated. Please go ahead, sir.

Thank you very much. Good morning and welcome to Choice Hotels third quarter 2011 earnings conference call. With me as always this morning is Dave White, our Chief Financial Officer.

Last night we issued our press release with the results for the third quarter and we had a very solid quarter. A key takeaway is that our top line franchising revenues exceeded our internal expectations, and increased nearly 9% compared to last year's third quarter. We also remain very disciplined on the cost side of the equation.

While our third quarter SG&A costs benefited from lower compensation expense related to the performance of employee retirement plan investments, excluding this item which Dave will cover in some more detail and I'm sure we'll have a few questions, our SG&A growth rates still came in lower than we had expected. As a result, we were able to achieve solid margin expansion and solid EBITDA which exceeded our expectations. Our operating performance plus certain tax benefits resulted in diluting -- diluted earnings per share of $0.71 for the third quarter, which obviously exceeded our guidance.

On the macro economic front, the key factors that influenced our results, employment, consumer confidence and GDP growth, have not changed significantly since our last earnings call in July. Bottom line is, based on those factors, we continue to expect a gradual and steady recovery.

We continue to see positive momentum in a number of key areas that drive our success including RevPAR growth, franchise development, and central reservations contributions to our franchised hotels. During the third quarter, our domestic system RevPAR increased by 5.4% and exceeded our guidance for the quarter which was 5%. We are pleased that during the quarter we continued to see RevPAR increases for all of our brands driven nearly by across the board gains in both occupancy and rate.

More recently, we have not seen signs of a slowdown in the RevPAR environment with a domestic system-wide RevPAR for September and October, the first two months of RevPAR data included in our fourth quarter results, increasing at a mid single digit percentage growth rate, despite more challenging comps when compared to the same period last year. Considering our third quarter and our RevPAR results from September and October, we are increasing our full year RevPAR growth outlook to 6% from the outlook we shared with you in our last earnings call.

On the franchise development front, for the quarter we executed 79 domestic hotel franchise contracts, which was comparable to last year's third quarter. While our conversion franchise sales declined slightly from last year's third quarter, the silver lining in this result is that we achieved a nearly comparable result with dramatically less franchise sales incentives or discounting. You may recall that we had an aggressive franchise sales incentive in place last year and through the first half of this year. One we essentially discontinued due to an improving outlook.

We also remain focused on expanding our footprint in the upscale segment with Cambria Suites and the Ascend Collection. We made progress with both of these brands in the third quarter. In the third quarter, we executed two domestic franchise contracts for the Cambria Suites brand in marquee locations Washington, D.C., and White Plains, New York. We also announced a project in Houston as well that has now signed. We continue to invest selectively in the brand, and [incenting] its growth in high value markets with institutional quality developers. We believe these recent announced hotels will be exceptional representations of the brand.

Another highlight on the development front was our continuing success with the Ascend Collection membership program. We continue to capitalize on the strength of our distribution system by attracting upscale, independent hotels that want to join a network of historic, boutique and unique properties, while maintaining their local market identity. We executed six franchise sales agreements for Ascend in the thirty quarter, up from three in last year's third quarter.

As of the end of September, the Ascend Collection stood at 66 properties, 46 properties in the continental US, 15 outrigger properties in Hawaii, and five hotels located outside of the United States that are a part of the system. During the past 12 months the Ascend Collection system increased by 12 hotels, or nearly 35%. Interest in joining the Ascend Collection is predicated on our ability to deliver high value business to these hotels via our proprietary central reservation channels. Year-to-date, the Ascend Collection hotels are seeing, on average, more than 40% of their reservations from Choice central channels, which is the highest contribution rate of any brand in our domestic system.

Finally, I'll again highlight our unrelenting focus on innovating in the areas of business delivery. As you know, providing high-value central reservations to our franchisees' hotels is the key reason that hoteliers affiliate with us. Our propriety central reservations channel, meaning our choicehotels.com website and our call centers, provide our franchisees the highest daily rate at the absolute lowest cost.

We continue to see robust growth in central reservation systems, contribution, and revenues in 2011. For the nine months of the year, our domestic central reservations contribution increased more than 120 basis points to 33% of all reservations. This is driven a 10% year-to-date increase to central reservation system wide revenue. Choicehotels.com, the most profitable channel for our hotels, represents approximately half of all of our centrally delivered reservations.

Our intergraded marketing campaign, yourvoiceyourchoice.com, which we launched this summer, is continuing to educate travelers that by booking directly on choicehotels.com, they can get the best rate available on any online channel. This campaign has driven more guests to book at choicehotels.com year-to-date. Through the end of September, choicehotels.com visits have increased 7%, driving revenue up 12% for that channel.

So before I turn the call over to Dave, I want to reiterate that we remain encouraged by the positive momentum we're seeing in many parts of our business. Now let me turn it to Dave to cover our third quarter performance in more detail. David?

Thanks, Steve.

As you saw in last night's press release, we reported diluted earnings per share of $0.71 which exceeded our previously published outlook of $0.59 per share by $0.12. Compared to our outlook, I want to highlight several items that impacted our results during the quarter.

First, about $0.04 of our outperformance is related to better than expected operating and EBITDA performance, driven by top line revenue performance and cost management. Specifically, our domestic royalty revenues were better than we had expected, primarily on account of domestic RevPAR growth for the quarter of 5.4% exceeding our forecasted outlook at 5% growth.

Similarly, our international royalty revenues for the quarter were stronger than we had anticipated, primarily on a account of better than expected RevPAR performance. Those two factors, combined with the results of other revenue categories, resulted our franchising revenues exceeding the expectations contemplated in our guidance by approximately $2 million for the quarter.

On the cost side of the equation, during the third quarter or SG&A costs were lower than expected. Our costs were approximately $1.3 million lower than contemplated, on account of reduced expenses attributable to the performance during the quarter of employee retirement plan investments. In our guidance, we don't forecast these capital markets-driven expense adjustments.

From an EPS perspective, the SG&A benefit related to the employee retirement plan was offset with losses on investments, included below operating income and other gains and losses captions on our income statement. Backing out the impact of this item, our SG&A costs still ended up being less than the levels we contemplated in our previous earnings guidance on account of prudent cost control. The remainder of our outperformance, or $0.08 per share for the quarter, is related to lower than expected taxes, primarily on account of certain discreet tax benefits realized during the quarter.

As Steve mentioned, we were very pleased with the RevPAR performance of our franchisees during the quarter. As a reminder, our RevPAR results for the third quarter reflect our franchisees' gross room revenue performance for the months of June, July, and August. Domestic system wide occupancy increased by 200 basis points compared to last year, with nearly all of our brands seeing solid improvements. And we also achieved a nearly 2% gain in overall domestic system wide average daily rate. As Steve mentioned, our RevPAR results in September and October have continued to be strong, in the mid-single digit percentage area, and this is reflected in our outlook for the fourth quarter.

On the unit growth front, we continue to expand domestically and abroad the footprint and quality of our franchise systems. Our net domestic online unit growth rate of 4/10 of 1% over the past 12 months was comparable to the net unit growth experience of the overall US lodging industry during the same period. Finally, we achieved a 2 basis points improvement in our effective domestic royalty rate for the quarter. As a result of our net unit growth, RevPAR and royalty rate results, we achieved a 6% increase in our domestic royalty fees for third quarter, which increased to $70.2 million, compared to $66.4 million last year.

The Company's international fees, included in royalty fees revenue, were $7.2 million for third quarter 2011, compared to $6.1 million last year. Our balance sheet and liquidity position remain strong. We finished the third quarter with approximately $125 million of cash on hand, and total long-term debt of approximately $250 million, which represents a net debt EBITDA multiple of less than one times our expected 2011 EBITDA.

During the third quarter, we repurchased approximately 700,000 shares of stock under our share repurchase program at an average price of $29.79 per share. Since the end of the quarter, we have repurchased an additional 600,000 shares at an average price of $32. We currently have authorization to purchase up to an additional 2.3 million shares of stock.

Turning to our outlook for the fourth quarter, we currently expect fourth quarter diluted earnings per share of $0.43. We're increasing our full year 2011 adjusted EBITDA guidance to $183 million and we increased our full year 2011 adjusted earnings per share projections to $1.89 per share. The primary reason we are increasing our full year EBITDA and EPS outlook from our previous guidance is an account of better than expected performance in the third quarter, compared to our previous outlook. In addition, this reflects our updated full-year domestic RevPAR growth outlook, which we increased to 6% from 5% previously.

Our current outlook assumes net domestic unit growth will be essentially flat compared to last year. The figures assume our domestic system wide RevPAR increase for the fourth quarter is 6.5%, and the figures assume a 2 basis points increase in the effective royalty rate for full-year 2011.

And finally, an effective tax rate of approximately 34% for fourth quarter and 30.5% for full-year 2011. Our EPS figures assume our existing share count, which was approximately 58.6 million shares as of October 26.

Now, let me turn the call back over to Steve.

Thanks, Dave. To wrap up, before opening the call for your questions, our hotel franchising business remains strong. Our franchisees continue to see solid RevPAR growth, and because of record low supply growth forecast for the medium term, we are anticipating hoteliers to have an opportunity to continue to see RevPAR gains even in the projected slow growth environment.

Choice is in an enviable position, as we possess the industry's most powerful family of value-oriented brands, a hotel for every stay occasion, one of the most generous rewards program in the business in Choice Privileges, which, by the way, is closing in on 14 million members, and what matters most to consumers, a free breakfast, a free newspaper, and free internet access.

We remain committed to continuing to innovate in areas that strengthen and grow our brands, and the business that we deliver to our franchisees. We are highly focused on expanding and innovating our reservation channels, both domestically and abroad, through ongoing innovation and the international rollout of our property management system which is cloud based.

And we are enabling customers to book our hotels where, when, and how they want by maintaining a leadership position in the mobile application space. Technology-savvy travelers using iPads, iPhones and Androids can use their devices to book rooms at Choice brand Hotels. We also continue to identify and implement program that improve our success, efficiency, and speed to market in high opportunity areas for us, such as corporate travel market and franchise sales.

Finally, over the long-term our number one priority, as it has always been, remains creating value for our shareholders and effectively allocating the capital generated by the business, including dividends and share repurchase as a priority.

Now I'm going to open the call, and we'll try to answer any of your questions.

Thank you. (Operator Instructions). And our first question comes from the line of Jeffrey Donnelly of Wells Fargo. You may proceed.

Good morning, guys. Steve, can you talk a little bit about just the appetite you've been seeing for adding units? I apologize if you touched on it in your remarks, I had a little bit of difficult. I'm curious what the reaction has been to some of the stimulus that I guess you guys have been providing to drive franchise growth, and do you see that picking up as you move into 2012?

So, let me just give you some color on it. Good morning, by the way. So, you know, I think what we're seeing, our deals were flat and we're still forecasting for the year to be sort of flattish on the growth side, what we're seeing though, I think, is more of an appetite. We just finished our regional conferences with all of our franchisees, and I can tell you, since May and then following through into those conversations, the deal flow conversation has picked up considerably, which is why we felt comfortable backing off the incentive program, and the fact that we got the same number of units without that pretty strong incentive program was very encouraging to us.

We're going a number of things to improve our speed to market, and how quick we do deals, and how friendly we work with the franchisees on a number of our brands that we think probably will help. On the other side, we're still not seeing transactions pick up yet, and we're still not seeing the other brands terminating their hotels which are both pretty strong sources for us, so you know, we believe that's coming, but we haven't seen signs of either of those. But I think, generally, our viewpoint is we're pretty encouraged where the sales are today, and I think we're looking at an improving environment probably next year.

Okay, and I'm curious. There was a -- there was a increase, a sort of sharp increase in the initial franchise [in new licensing] fees this quarter. Is that a fairly clean number? Was there anything non-recurring there?

Jeff, the way to think about that is, under the accounting rules when we execute a franchise agreement that has one of the incentives in it, where it essentially requires us to do a rebate or something of that type, we have to defer the recognition of the revenue until we've met that requirement, actually disburse that forgivable prom note or rebate, and typically that happens when the hotel opens, which is a quarter or two after the contract was executed. What you see there is actually the revenues reflect the recognition of cash we'd received in prior periods, but had deferred on account of the opening of the hotels and the disbursement of those incentives. So it's not perfectly clean, but it's more just driven by the accounting, and the same goes on the commission side, so we also defer the commission's expense, which hits SG&A, until we recognition those revenues.

Actually, one last question on the SG&A front. Can you talk about what your thoughts are for SG&A in 2012 and related to that, just because there was some mention of some other compensation-related charges in the quarter? Do you guys have a -- remind me, do you guys have a defined benefit pension plan, or is that just sort of retirement plan accounting related to specific members of management?

Sure. So, first of all on '12, we are not -- we're not planning to provide 2012 outlook until a little bit later this year or early next year, so we'll come back to you when we're ready to have those discussions. The charge, or the adjustment that we talked about in last night's press release and that I mentioned in my remarks, relates to a deferred compensation plan, which was not a defined benefit plan, but it's a deferred compensation plan and under the accounting rules, you know, the changes in the liability to the participant in that deferred compensation plan, either up or down, goes through your compensation expense, and the corresponding change in the value of the investments which are essentially, you know, contra to that liability, go down in that other income section.

Okay, thanks, appreciate that.

And now next question comes from the line of Harry Curtis of Nomura. You may proceed.

Good morning, guys.

Good morning, Harry.

Just a question over the use of cash over the next 12 months to build-out your newer brand, Cambria. How much have you spent so far this year, and what do you anticipate using next year? I'll just leave it that.

Sure, Harry, let me talk about it more broadly year-to-date. On the cash flow statement there's -- in the investing section, there's a $4 million -- $4.3 million figure, which really relates to incentives we've paid out on all of our brands, which is predominantly not Cambria. And then, as we think about the rest of this year, in terms of the deals that we've -- we've got agreements in place on, you could see the balance of this year, I guess I would say several million dollars, somewhere between I'd call it $5 million to $8 million in the fourth quarter. Potentially that could slip into next year. And then next year, depending upon one fairly significant deal that we've previously announced, which is a New York City deal, where we have a mezzanine loan planned that's kind of in the mid teens in terms of millions of dollars. Depending upon the timing when that deal gets financed that could happen basically in the first half of next year. Then obviously, we're continuing to look for great opportunities for the brand, so above and beyond what we've all ready committed to, we're hopeful that we'll find some other really attractive opportunities to get that brand expanded and potentially use some of that -- some of the capital to help make that happen.

So, Harry, just to add a little bit on to that. If you think about where we are sort of in the financing environments, the deals that we've announced this year, we've been working three years and they finally got financed, so one of the pleasant surprises this year has been for urban construction projects, financing is more available than it's been in -- actually, that market recovered a little more quickly than we'd thought. We're not sure what the whole European debt situation is going to do to affect that yet. We haven't seen anything specific. It could slow it down some, but we just don't know. And so -- and we're working several other urban major deals that if they can pull their financing together, we may believe able to pull off. But I would still say we're still going to be in that range that we said, which is not very significant to us, which is -- I would love to put more capital out to build that brand, but I really don't see us getting more past the $20 million to $40 million in a really -- in a good year that we had, so the deals that came through in '12, we'd still be in that neighborhood that we've discussed with you before.

Okay, that takes care of it, thank you.

And our next question comes from the line of David Katz of Jefferies. You may proceed.

Hi, good morning. I think you touched on the SG&A question earlier, but the recurring theme for us, or one of the issues we're always looking at, is share repurchases and I know that that is a sort of a broad long-term philosophy, but we note that this quarter you did buy some and there really hadn't been any for a while. If you could maybe talk about what changed or what drove that this quarter versus some of the others? And I know there's a number of factors in there, but if you could talk about any of the factors that may have altered your view on it and obviously any help for the future would be appreciated as well, and good morning by the way.

Good morning. You know, our view is really not altered from what we talked about in the past and that's basically over time do the right things with the capital, including opportunistic share repurchases. So in terms of the recent activity, obviously, there was a pull back in the price of the stock which, from an opportunistic perspective, certainly made it more attractive. That's not the only factor, but that was one of the key factors that we saw and decided to take advantage of. Then just when you think about the broader macro type things that are going on, it feels like we're kind of centered around continued, kind of gradual, slow, steady recovery, so it's that macro backdrop and the things going on in the capital markets and with our own stock price, we thought it was an opportunistic time to act, but going forward I don't think you should think about that program any differently, it'll -- it will be choppy, but we'll continue to do -- to do the right things with the capital in terms of buying back stock open opportunistically.

All right, one other if I may. I noticed this week about some press with IHG launching another brand, and I don't recall where that fits segment-wise, but it just begs the question about the competitive landscape out there and one of the things that has traditionally pressured the market has been, you know, too many brands out there competing for the number of deals. How does that -- how do you expect that to evolve? I assume it's competitive, but do you expect it to get better or worse in the next year or so?

Well, I think as I mentioned earlier, our expectation is it will probably improve some. We're not expecting any sort of dramatic turnaround, but we believe that because the industry is going do better, some of the normal factors of our growth, which relate to transactions and to pruning of other systems, and to confidence of franchisees going forward and reinvesting in their hotels or building new ones, we think that we're at a point where next year we should see some improvement in that. As it relates to IHG entering that space, it's a relatively recent announcement. Our view is we've got significantly distributed brands for every stay occasion and one of the stronger mid-scale presence. We're one of the leading gainers in market share in the last five years with 9.6% of all of the hotels in the US, that's an increase of 110 basis points. The next few years is primarily going to be driven by conversions, which we are the premiere conversion Company. Our understanding, and don't quote me on this because I don't know, we haven't seen the announcement, that that would probably be a new build brand, which is a tough thing to launch in today's environment. However, we're not expecting that to change our competitive position. We've got strong brands that are well-liked by consumers. We think the value equation for our franchise is strong, the returns are strong, and the fact that most of the action for the next two years is going to be conversions puts us in a uniquely attractive position.

Okay. We won't repeat the quote, the secret's safe with us. Thanks.

I wish them all the luck though. Launching a new construction brand in this market is tough.

And our next question comes from the line of Miss Felicia Hendrix. You may proceed.

Hi, this is actually Sule. How are you?

Good, how are you.

Good morning, I'm well. Just had a follow up on a question -- or an answer you gave earlier. You said that -- and I might have missed some of this -- in the fourth quarter you were going to invest $5 million to $8 million, I believe. Was that to support the Cambria brand or other brands, or a mixture of both?

That was related to Cambria.

Okay. Thank you. And speaking of Cambria, have you -- or can you provide the performance for the brand, RevPAR-wise?

We don't list that because we've got a policy that's been discussed with the SEC that we don't give numbers out for brands that don't have more than 25 hotels open for more than a year, so we're not doing that. What I can tell you is that the ramp up of those Cambria hotels is proceeding nicely and we're, very encouraged by their performance.

Okay. Do you -- would you say they're out-performing the segment they're in, or the chain scale they're in?

Well, there -- you've got to remember that most of them are relatively new, so they're ramping up, so the answer to that would be yes, but you can't make that comparison against a set of stabilized hotels.

Okay, thank you.

Our next question comes from the line of Mr. Mark Strawn from Morgan Stanley. you may proceed.

I was wondering if you could give us some insight into how you're thinking about a potential international brand acquisition at this point?

Well, we've made no secret of the fact that we would love to find an acquisition in international would clearly fit what we're looking for. We think that would blend well with --we're introducing our technology platform, which is the cloud-base into the international place for the first time. That's being very well-received. It's in Australia, in a pretty significant way, and it's being introduced in the UK now, will be in France and Germany before, probably, the end of the year, and so we think that's going to give us a big moving advantage, so that allows us to be at an attractive buyer of a brand and bring significant costs and distribution benefit to those brands. Having said that, I will tell you we've been scouring the brands available and there's just not a lot out there for sale. There's some smaller brands that we've looked at and some short-chained type of stuff, which we're aggressively in the market looking, but I can tell you there's nothing pressing that we see as anything that would cause us to have hope that we could pick something up in the near term.

Okay, thank you very much.

And our next question comes from the line of Jonathan (Inaudible) of Robert W. Baird. You may proceed.

Hey, guys, congrats on a decent quarter, a solid quarter. One quick question -- most of my others have been take -- I was just wondering, on these discrete items related to lower effective tax rate, could you shed some light on what those are related to?

Sure. There's a couple of different things going on there, but the gist of it is there's been some recent guidance from the IRS on a couple of different positions that we had taken in some open tax years, and that that guidance gave us an opportunity to take some favorable -- some more favorable positions that we have had taken previously. Also, another piece of it was that we had an ability this year to use a higher level of our foreign tax credits because some other things are going on internationally there, and we also had, from like a tax contingency perspective, we picked up a benefit just in terms of the lapse of statute of limitations for number of open tax years. It's a combination of things. I think what's -- what I would highlight, if you think about what is our normalized -- what we think of as our normalized effective tax rate, I think if you look at what's happened with that over the past few years and factoring out the discrete items, you're kind of in that 34% range, which is how we like to think about it, kind of from a going forward perspective.

Great. One follow-up question on sort of the composition of the business you're look at for 2012. I know last quarter you talked a little bit about SMERF business being one of the strengths for you guys. Is that composition trending more towards perhaps higher rated business at this point, or are you seeing the same type of composition?

Yes, what we're benefiting from significantly is we're a 2/3 leisure company, and so that's a good thing, because leisure has been more stable, but what we're seeing is we're getting a big pick up in business travelers. That's where the increase is coming from across the industry, is basically leisure is holding up pretty well but the increase is coming from more business travelers on the road. And we've got a much more aggressive sales force in place than we had previously, we're much more aligned against the right kinds of companies, so I think we're selling much better, but I also think we're benefiting from -- people are putting their travelers on the road, but restricting what they can pay, and that plays right into our scenario. So, sort of across the board as you're looking at business opportunities and where we get our business, our channels are looking on a business side, the revenue increases are high teens. So it's very encouraging to see that and there's two things we like about it, one is we're obviously getting our RFPs are way up from last year, our general business traveler numbers are up based on that revenue significantly, but the other thing that's encouraging is we think that mindset is not even midterm, it's probably long-term. And so I think companies are telling folks that you need to get on the road, and you need to visit your customers, you need to sell, but by the way, find a hotel that gives you free breakfast and I don't want to pay for the internet charge either, and by the way, you need to keep it under a certain price point, that really plays to our strength.

Perfect, thanks a lot.

(Operator Instructions). And our next question comes from the line of Miss Robin Farley of UBS. You may proceed.

Robin, I'm not sure if you're on mute. We can't hear you. Okay, so I don't know how to answer that question. Operator? (Inaudible - Multiple Speakers)

Our next question comes from the line of Tim Wengerd of Deutsche Bank. You may proceed.

Hi, good morning, guys. Can you talk a little bit about the change in the pipeline as it stands now versus three months ago?

Yes. So the biggest thing you're seeing there -- okay, so if you think about our pipeline, kind of the inputs to the pipeline are obviously executed contracts, and so we've seen the executed contracts over the last couple of years has been trending down. I mean, the outputs from the pipeline are openings of hotels, as well as terminations of contracts that for whatever reason, a variety of reasons, don't open. So I think the way -- the important thing about the pipeline, particularly in this environment that we're in, is to focus on the conversion side of things. And the reason that's important is that when we execute a conversion franchise contract, it goes into the pipeline but there's a good chance that it'll -- that it doesn't necessarily stay in it for the full quarter, because the hotels open so quickly because they're all ready opening an operating hotels, so the pipeline is a little less relative for the conversion brands. Frankly what you're seeing on the pipeline side is just a gradual opening of hotels and as we clean up previously executed contracts that didn't open, it's not being completely refilled with our franchise sales at this point, kind of for the reason I talked about on the conversion side. So that's one of the reasons we also provide outlook for the size of the net domestic system, which at the end of the day is what drives the royalties, so that's typically what we focus on.

Yes. And I would add to that, not only do we only put executed contracts in our pipeline, which is a different standard than others may use, we also scrub that pipeline continuously, and if we don't think a deal is going to go forward we pull it out. We obviously would benefit if we listed our international pipeline as well. We don't, because the system in the US is what drives our EBITDA. So if we listed the pipeline for the international brand that's expanded, obviously more based on some of the activities that are better there than in the US. I think the point about the conversions is the one to watch, and also I think what you ought to understand is that we want to have a pipeline that represents the number of hotels that we think are going to be added to the system.

Okay, alright, thanks for that. The other -- one other question. You announced a Cambria deal in White Plains not too long ago. I was just wondering roughly how much capital you plan to invest in a project like that, and what sort of return you would expect when you invest capital?

Yes, so, on that particular project I guess I would say cash capital outlay would be mid-single digit in terms of millions of dollars. I don't want to give too many specifics, because of the [confidentiality of the] developer, but basically from a returns perspective, when we think about the outlay for our Cambria program, we're typically targeting mid- to upper-single digit percentage return on the capital in addition to what we're going to do for the brand in terms of getting good brand representatives out there in the right markets, which builds a franchise business which can be very valuable.

Which would give you a higher return on a levered basis, and also if you threw in the agreement would give you a higher return on that.

Right. If you considered the royalties, you would be above those levels that I talked about.

Okay. Thank you.

Sure.

And we have no further questions at this time. I would now like to turn the call back over to Mr. Joyce for closing remarks.

Thanks very much for joining us on the call. We're encouraged by our results, and the resiliency of the lodging market in spite of -- sort of the level of distraction, both from Europe and in the United States, and we're encouraged by that resiliency. We haven't seen anything that would suggest that that's not going to continue, so our viewpoint is as it was in last call, that we're gradually improving, and that's probably going to be the condition for, as we can see it, for the next several years. So we look forward to talking with you again and exploring 2012.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.