Choice Hotels International Inc (CHH) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International third quarter 2012 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 or its management believes, expects, anticipates, foresees, forecasts, estimates, or other words or phrases of similar import. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Please consult the Company's Form 10K for the year ended December 31, 2011 and other SEC filings for information and important risk factors affecting the Company that you should consider. Although we believe that these expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, 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 third quarter 2012 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. Welcome to Choice Hotels third quarter 2012 earnings call. With me, as always, is Dave White our Chief Financial Officer. We issued our press release last night, and we are very pleased with our third quarter performance. You may recall that despite a sluggish economy, we had anticipated a good summer for choice and we were right. We performed on par with, and in some cases better, than our own expectations. Overall, we performed well, even when viewed against strong comps during the third quarter a year ago. And the travel industry continues to outperform GDP which we find encouraging.

People continue to travel but with a value mindset, which fits our sweet spot in the market. Development is tracking well, and we continue to see positive momentum in both the franchise sales and the RevPAR environments. We are pleased to see access to financing improve, and along with pent-up demand to build, we are seeing more transactions. We continue to believe our solid performance, even during these uncertain times, stems from the fact that our brands offer value- conscious consumers attractive and affordable lodging options and exceptional services and business delivery to our hotel owners.

Several factors contribute to a very good quarter, as reflected in the key indicators we use to measure our performance. RevPAR is up 5.5%, which was a bit better than our own expectation. These results reflect a mix of occupancy gains roughly 50-50 with 180 basis point gain in occupancy and an average daily rate increase of 2.7%. Domestic net unit growth increased 1.3% which was also ahead of our target, and these two drivers resulted in strong domestic royalty fee growth of approximately 6% for the quarter. Our EBITDA increased 4% for the quarter. So we are feeling good about the results overall.

Moving on to development, we are really feeling the momentum about our results and the growth in them. Both new construction and conversion franchise sales are higher. And our brands are attracting first-rate developers and owners in highly- desirable markets. New domestic franchise agreements across the board are up 27% year-to-date through September, including new construction and conversions. Quality Inn continues to attract substantial conversion interest with 88 executed contracts so far this year compared to 49 last year. So we are very pleased with this.

Through September, new construction is up 64%. Across our portfolio we sold 46 new domestic construction hotel franchise contracts year-to-date, as compared with 28 for the same period last year. We are seeing a lot of ongoing activity, particularly in markets with high domestic energy production like the Dakotas, Texas, and Pennsylvania. In these markets we are seeing a very positive response to our new Comfort Inn and Comfort Suites design package and prototype.

Sleep Inn continues to have strong momentum. The Designed To Dream redesign program is raising the performance of the overall sleep-in brand, leading to renewed interest from the development community. Developers see the cost-effectiveness of constructing the new sleep prototype as well as the great value it offers guests. Designed To Dream is all about a clean, contemporary design at a terrific price point. Developers are drawn to the new prototype which is highly efficient and offers low construction and operating costs than other mid-scale brands. Year-to-date Sleep Inn has added 46 hotels in the current system to the Design To Dream program, bringing the total number of design to dream hotels to nearly 100 or almost 25% of the Sleep Inn system. More importantly, those hotels that have completed the design to dream program are seeing, on average, a $10 increase in ADR.

We're also accelerating our expansion into up-scale markets and very attractive geographic locations with our Ascend Hotel Collection and Cambria Suites brand and we're seeing great results. This quarter, Ascend has added new member hotels in Las Vegas, South Beach, New Orleans, and Philadelphia. And Cambria suites is on a roll, attracting top owners and developers who have seen the brand success to-date in a number of good markets. We have just announced plans to build hotels in West Orange New Jersey, West Palm Beach Florida, and Williamsport, Pennsylvania. The West Orange property will be the first Cambria Suites Inn hotel in New Jersey. Cambria is also getting ready to celebrate the recent groundbreaking in two hotels in Manhattan and another one just outside the city of White Plains, New York. We also expect to break ground soon on a Cambria Suites which will be located across the street from our future worldwide headquarters in Rockville, Maryland just outside of Washington, DC. The bottom line is we are extremely pleased with new construction and conversion contract activity across the board.

Turning to the area of reservations contribution, our central reservation system, or CRS, continues to be on pace to have a record-breaking year. This is important because a core part of a hotel franchiser's value proposition to both existing and future franchisees is business-delivered or heads in beds. Fortunately, this is an area where we excel and are highly focused on differentiating ourselves from the competition.

Choicehotels.com's contribution is higher than it's ever been at 18% which is 140 basis points higher than this time last year. This year CRS revenue has exceeded $10 million in a day, 63 times more than double last year. A significant number of those $10 million days occurred in August and September, which is much later in the quarter than in prior years, suggesting continued solid demand growth moving into the fourth quarter. Choice drove more than $1 billion in revenue through choicehotels.com in 2011, and year-to-date revenue is 15% over that. The revenue is attributable to our integrated multi-brand marketing campaign which is helping to drive strong traffic growth, industry-leading [syke] conversion at a significant ADR premium over property direct reservations.

Choicehotels.com is attracting 100 million visits annually and we're tracking almost 20% higher year-over-year. According to Hitwise, a competitive intelligence service which measures website traffic, choicehotels.com has now been the leader in on-site conversion compared to competition in the industry for 16 consecutive months. One of the factors contributing to this growth is the continued expansion of our mobile reservations platform. As you recall, we were the first to come out with a iPhone mobile application, and our mobile revenue is up year-over-year more than 200% and now makes up 8% percent of our online revenue, which is double the industry average according to focus right. For the month of September alone it was up 10%.

Moving on to marketing, our summer Two Stays Pays promotion garnered record registrations and we are seeing strong response to our Two Trips, Earn A Free Night fall promotion. In fact, InsideFlyer ranked our promotion as one of the best bets this fall's travel season. Choice Privileges, our guest loyalty program, also continues to resonate with both our guest and with hotel developers of future franchises. As of September 30, worldwide Choice Privileges membership totalled 16 million, with nearly 2 million new Choice Privileges members added so far this year.

We continue to be everywhere our guests are and the numbers show our apps in our marketing initiatives appeal to our consumer base. Looking ahead, the travel industry continues to be strong despite ongoing uncertainty in the domestic and global economy. And within our industry, Choice is well-positioned with our value-oriented brands to have great appeal to travelers, developers, and franchisees. Thank you and I will now turn over the call to Dave White to give you a little more detail on the numbers.

Thanks, Steve. Last night, we reported diluted earnings per share for the third quarter of $0.76, which exceeded our previously-published outlook of $0.61 per share by $0.15. Compared to our outlook, I want to highlight a few items that impacted our results during the quarter. First, about $0.13 per share of our out-performance is related to lower-than-expected income tax expense on account of certain discrete and current tax benefits recognized during the quarter. As a result of these items, our effective income tax rate for the quarter was 20.3% compared to our forecasted rate of 34%. And we now expect our full-year effective tax rate for 2012 to be approximately 29.1%. And importantly, for future periods, our current expectation is that our recurring annual effective income tax rate should approximate 31.5%.

The remainder of our out-performance, or about $0.02 per share for the quarter, is related to better-than-expected operating and EBITDA performance resulting from better-than-expected top line revenue performance and from our continuing cost management and activities. As Steve mentioned, we are pleased with the RevPAR performance of our franchisees during the quarter, which exceeded our expectations. And as a reminder, our third quarter RevPAR results reflect our franchisees gross room revenue performance for the month of June, July, and August. While our third quarter domestic system-wide RevPAR growth of 5.6% reflect the deceleration which we had expected, and the pace of growth from the 7.7% reported in the second quarter of 2012, it did exceed our forecasted outlook which was for 5% growth.

While the pace of RevPAR growth is moderated, we are still experiencing solid gains in both occupancy and average daily rates. During the third quarter, we achieved system-wide occupancy and average daily rate increases compared to last year of 180 basis points and 2.7% respectively. In our view, this combination of strong occupancy and ADR increases is a good sign consistent with continued RevPAR growth. The size of the franchise system is also a critical metric for our financial performance. And on that front, we continued to grow the number of hotels operating in our system. I would highlight that the 1.3% growth of our domestic franchise system over the past 12 months compares favorably to the net unit growth experience of the overall US lodging industry during the same time period.

Finally, our effective domestic royalty rate for the quarter remained at 4.29% compared to the same period to the prior year which is an improvement from the 1 basis point decline experienced in the second quarter of 2012. The growth rate of our effective domestic royalty rate continues to be impacted by various incentive programs we have implemented that provide royalty rate discounts and are helping to increase franchise sales and customer acquisition. These discounts are greater in the early term of the franchise agreements compared to prior discounting tactics, and are expected to burn off at a steeper rate and add a positive impact on the effective royalty rate in future periods. As a result of our net unit growth in RevPAR gains, we achieved a 6% increase in domestic royalty fees for the third quarter, which increased to $74.3 million from $70.2 million last year.

Turning to development during the third quarter of 2012, we executed 89 new domestic franchise sales contracts representing a 13% improvement compared to the same period of the prior year. In addition, the number of relicensing and renewal contracts executed during the third quarter improved 59% as these types of transactions continue to accelerate within our system. Despite the increase in the number of new domestic franchise agreements and relicensing and renewal contracts executed during the quarter, initial fee and relicensing revenue declined by approximately $300,000 to $3.2 million. The decline in these revenues primarily reflects delayed timing of revenue recognition related to contracts executed under incentive programs. We expect these timing differences to reverse in future periods as the new franchise hotels open.

On the cost side of the Business, the measures we implemented in the fourth quarter of 2011 to increase productivity and streamline services continued to have a positive impact on our margins. As a result, the combination of the top line revenue growth we achieved during the third quarter and disciplined cost management resulted in our franchising margins expanding from 71.6% in the third quarter of last year to 72.1% in the current quarter. While our SG&A during the three months ended September 30, 2012 increased by $600,000, or 3% to $23.2 million, it is important to remember that our SG&A expense for the third quarter of 2011 included the reversal of approximately $800,000 of bad debt expense related to the partial recovery of a development loan that had been reserved for in prior years.

And in addition, the SG&A cost for the third quarter of 2011 were also reduced by approximately $1.4 million on account of lower compensation expense attributable to the performance during that quarter of employee retirement plan investments. 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 the other gains and losses captioned on our income statement. When you back out the impact of those two items, our SG&A cost for the third quarter of 2012 would've declined by $1.6 million from the prior year.

Diluted EPS increased 7% from $0.71 per share to $0.76 per share for the third quarter 2012. As a reminder, our third-quarter results reflect an increase in borrowing cost resulting from the special cash dividend paid on August 23 of $10.41 per share for approximately $600 million in the aggregate to our shareholders. As a result of the financing transactions entered into at the end of the second quarter and the beginning of the third quarter of 2012, our interest expense increased by approximately $7 million and we recognize a loss and extinguishment of debt of $500,000.

Turning to our outlook for 2012, we currently expect fourth quarter diluted earnings per share to be at least $0.40 and full-year 2012 diluted earnings per share to range between $2.05 and $2.07 per share. We expect full-year 2012 EBITDA to range between $201 million and $202.5. This reflects a reduction in the high end of our EBITDA range from our previous guidance of approximately $1 million. This adjustment is primarily on account of a reduction of the high end of our full-year RevPAR growth guidance from 7% to 6.5%. The figures assume our domestic system-wide RevPAR increase for the fourth quarter is 4% and ranges between 6% and 6.5% for full-year 2012. We are expecting our net domestic unit growth for 2012 to increase by approximately 1%. And we are expecting the effective royalty rate to remain flat for the full year of 2012.

We also assume an effective tax rate of approximately 33% for fourth quarter and 29.1% for full-year 2012. All the figures in our outlook assume the existing share count which was approximately 58.1 million shares as of the close of business yesterday. So overall, we are very pleased with our results thus far in 2012 and are focusing our resources on the levers that give us the best opportunity to continue to build upon what we have accomplished so far this year. Now let me turn the call back over to Steve.

Thanks, Dave. So as Dave mentioned, we're very happy with the results this quarter and encouraged by the continued strength of the recovery of the travel industry. We have had a very good year so far and continue to see positive development environment which is driving expansion of the franchise system. We are also benefiting from strong RevPAR. We will continue to invest in programs designed to drive more reservations to our central channels, improve guess loyalty, and improve the value of our brands in an effort to drive incremental business to our franchisees. I am very optimistic about our long-term growth prospects as well as our ability to continue to drive excellent results for our Company and our shareholders.

With that I would like to open it up to take any questions you might have.

Thank you.

(Operator instructions)

First, Steven Kent for Goldman Sachs.

Good morning. I just wanted to talk to you a little bit about the unit growth story and how some of your franchisees are getting capital to build their hotels. It certainly sounds like there is an acceleration going on, and I just wanted to understand the financing environment and whether that has improved to allow this to occur.

Good morning, Steve. The overall environment is improving. The money that is going out into these deals today comes from several sources. So, EB-5 money is moving into the marketplace; we're seeing that in some deals. The SBA money is probably the biggest single factor in some of the deal culminations. Then we are also seeing the return of some of the regional and local banks lending to our franchisees with which they have a relationship. And the conversation is -- look, we just got a new allocation which can go into hotels. We've got $10 million, you can have $4 million of it if you want it. So I have heard that story, and we just had a meeting with a number of our larger franchisees and that is coming back in a way that we have not heard in several years.

And then the last piece for our bigger players, they are getting access to capital at pretty reasonable rates from the nationwide lenders and the broker business. And they are accessing it in ways that are beginning to get attractive enough to satisfy their investors and move the deals forward. And then I would say the last piece -- so you got the positive lending environment, and then they are looking into a positive environment for the industry from a performance standpoint for the next several years.

Even with the recent developments, and if you look at the other companies out there, there is really not going to be much supply added until at least '15 or maybe even into '16. And so as a result, our guys are getting pretty bullish about now is a good time to start a project open into late '13 or '14 have some pretty strong performance through '16, maybe even '17, given how graduated this recovery is coming. So you can feel the momentum building. You can see when you sit down and talk to them, their level of interest in starting new projects has moved up considerably over the last year.

Okay, thank you.

Thank you for your question, Steven. Next, Robin Farley for UBS.

Great, thanks. I am trying to square some of your comments about basically kind of lowering the guidance for Q4, your implied guidance for Q4, with beating your guidance for Q3, and I know you mentioned the pace of recovery moderating. Is it primarily what you have seen in the -- just these few weeks in October, that's gotten you more concerned since Q3 actually came in above your guidance?

Yes, where we sit today near the end of October and keeping in mind that our fourth-quarter RevPAR is basically September, October, November franchisee performance. We have a -- I would say a relatively clear, a very clear picture of how the performance in the franchisees has been within our system in both of those months. So September was obviously across the industry a relatively soft month. There was some kind of -- some timing things going on there. We saw a pickup -- somewhat of a pickup in October. But when you kind of put the two months together and think about what November should look like, that kind of got us into that 4% range from RevPAR perspective.

Even with the out-performance in the third quarter, when you kind of bake that into the full-year RevPAR outlook, kind of get you to the top end of the range. We backed it up about 50 basis points and then that is what essentially flew through to the EBITDA line. Really not making any meaningful changes to the cost side of the equation from where we were a quarter ago. So it's really just -- what you're seeing there is a reduction of the top line revenues on account of a slightly lower pace on the very upside of the RevPAR outlook.

So are you thinking about the softness that we saw in the month of September as not necessarily being driven by sort of one offs with some of the holiday timing? So in other words, you're kind of thinking of that as normalized and carrying that through the full quarter?

Well, we really got a strong view at this point on October even, right, because we're sitting here on the 25th of the month. So we're seeing what is happening with RevPAR in October. It has been slightly better than what we saw in September, so it has been an improvement. But when you look at those two things on average and really only have another 30 days in the quarter, that is kind of where the numbers shake out.

I don't think there is anything -- from a trend perspective, I guess what I would say is, we have seen now -- really last year was a pretty strong gradual continued improvement in the RevPAR growth curve. We have seen that this year -- we have seen deceleration of the growth rate, but we have seen continued growth in RevPAR and when you look forward, I think our view is, in the current environment, if you just assume the current environment looking forward, it feels like you've got a pretty good environment for RevPAR to continue to be positive for a while.

Obviously there's a lot of uncertainty that will presumably be cleared up somewhat as this year progresses and we get past the election and whatnot. And maybe we get some more clarity around what is going to happen in the world economies in Europe and whatnot that will be positive and towards that outlook. But right now, given the environment, given the economy, what we're seeing on the growth side of things and GDP, it feels like RevPAR is behaving about like you would expect it to and not seen any catalyst to move one way or the other, directionally.

So I think the way that I would think about it was September was a tough month, in part driven by the positioning of the holidays. And September is also one of our bigger months. So it is also weighted more heavily. As Dave suggested, we saw improvement in October. We're looking at positive environment, but the forecast reflects that September was not great -- as strong; it is a heavy month in that calculation. We know what October looks like, which is better, September, we will see what we get in November. And you also -- we had very strong comps at the back end of last year so that is also coming into play. Overall, that is where we get to the number. But as Dave suggested, we have pretty good insight into the number.

Okay, that is great. Thanks very much.

Thank you for your question, Robin.

(Operator instructions)

Next, Sule Sauvigne from Barclay Capital.

Good morning. Domestic conversions definitely seem to be improving the last few quarters. I was wondering if you could talk a little bit about the environment for international conversions, please.

Yes, I think internationally we feel -- continue to feel good about the opportunity there. And it is primarily a conversion gain internationally for us. I think that the particularly strong markets for us, in terms of international recently have been kind of Canada and Australia in terms of the opportunity. I think that we're continuing -- one of the things that we've talked about on previous calls I think is really important -- really important to the more the medium-term is what we are doing on the technology front.

We have this exceptional property management system, Choice Advantage, which we've got really fully deployed across our US system. And we are in the early stages of rolling that out internationally. I think we have it now in about 60 of our international hotels and we are on pace to accelerate from there. This technology is really one of the key tools that we use to deliver the value proposition to our franchisees and meeting business delivery heads and beds. We're pretty excited about what that is going to mean in terms of improving the economics in the franchise internationally and improving our opportunity there.

Otherwise right now, from a unit growth perspective, in the past quarter the conversion environments have been okay internationally, but we are expecting it to improve as we continue to gradually roll out that property management system and improve the value proposition. Or Steve, if you want to add to that?

We have talked about -- as we roll out we are seeing solid improvements in the returns for those hotels which we thinks puts us in a good position into probably next year and the following years to start pushing particularly Europe. But we are seeing strong results this year in the markets Dave suggests, as well as India and Brazil; we're the number two hotel company there.

Great. Have you rolled that out in Europe yet? At all?

It is being rolled out, and we are in the UK, France, and Germany at this point. We got held up in Germany because the privacy laws there are very difficult. But now we are installing those, as we speak, into Germany. So we believe we're going to have a pretty positive story to tell, sort of beginning of next year, and you'll see us probably start making a lot more noise in Europe about moving on the conversion market which is one of our -- what we're targeting as one of our primary growth opportunities.

Great. And then, just on the -- I'm sorry, the effective royalty rate, can you give us a sense for how long it will take for the incentive to burn off? You mentioned that they're more front-loaded this time, David. But (multiple speakers) for how long?

Yes, generally what is happening there is, the first three to four years we're giving a discount on the effective royalty rate. One of the things that we are getting, essentially in return for that, is we are moving one of the windows from the franchise agreement, so instead of having a five-year window, where the franchisee or the Company can take an out, that window gets pushed back a couple of years. As we add hotels, as they come online into the system with that particular program in place, those individual hotels obviously will take three to four years before you see, really, a very aggressive step up in the last year where the discount burns off. So it could take a few years before you see it really kind of playing out in the numbers.

Okay, so would you expect your royalty rates to be flattish next year?

You know, we are still looking at the numbers for next year, so we're getting ready to go into our board meeting to present our plans for next year. It's a little premature to get into what that effective royalty rate would look like for 2013, because there is a lot of variables around the mix of what we sell. Our views on the new construction openings and whatnot that we're still working through at this point.

Okay, thank you.

Thank you for your question. Next, Patrick Scholes for SunTrust Robinson Humphrey.

Great, thank you. Good morning. I apologize if you may have mentioned these already in the prepared remarks. I do have two questions. First, if you can give us, now that you've laid out your dividend, where your preference lies in the use of cash flow? Is it via -- is it primarily pay down debt at this point? Continue to raise the dividend like you have annually done? Where do share repurchases fit in the equation?

Then my second question is, can you give a little bit more color on the status of the ongoing Comfort Inn system upgrade? Where you stand with that? And have some of those properties been going down to the Quality Inn brand where I see you have had a nice jump up in the room count there? Thank you.

Sure. On the capital allocation, it is relatively unchanged. But we are -- we saw a unique opportunity to pay out this dividend. Clearly, dividend tax rates are never going to be lower. The yield markets were never going to -- are never going to be better than the position they were in. And it allowed us to give a significant return to our shareholders, which would've taken several years through a repurchase activity because the limits that are on it. So we thought that was a great opportunity to do that. We clearly have always stated we kind of like being at that -- at the lower end of the investment grade rating. And in our discussions with the folks that issued those, we prioritized the fact that we would pay down that debt to levels that got us into that range relatively quickly.

However, having said all that, with the cash flow from this Company, we have sufficient capacity to make investment in our brands as we'll continuing to do through Cambria, as well as look at the dividend policy based on where things will go and what we should do as a result of that, as things get clearer after the elections and into next year, and then also for share repurchase activity. So our priorities are the same as they always were which is return capital to shareholders. You will see us in the right opportunities and the right timing exercising any and all those depending on how we see the priorities going. But there is also a focus to pay down the debt, because we want to make sure that people feel comfortable that we are following through with what our commitments were during that process.

Yes, just to kind of build on that, when we file our 10-Q in a few days, one of the things we highlighted, I think in the last call and in that conversation about the capital raising the dividend, is that in terms of our agreements, the bank agreements actually require us to gradually de-lever and stay in compliance, obviously. And the numbers are out there. Over the next several years you can look at that and keep that in your model as a place to start about thinking about how we've got to de-lever gradually over the next couple years, while at the same time balancing the deleveraging story with using capital -- excess capital beyond the deleveraging requirements to do the right things to create value for shareholders, be it share repurchases or investments in Cambria and those types of things.

Great, thank you.

Thank you for your question, Patrick. Next, Tim Wengerd for Deutsche Bank.

Hi.

I'm sorry. Can I? Patrick, we're having trouble. Two-pronged questions are beyond our ability. On Comfort, it is actually a great story. So, actually, I appreciate the question. We are sort of in the first third of the ballgame with Comfort and the results are very encouraging. The programs that we're rolling out -- what we're seeing from the customers for the hotels that are making the changes to the new design and the impact on guest scores are all very positive. You have obviously seen the increase in termination activity around Comfort that is related to that program as well. One of the encouraging things, as you suggested, is we're capturing about 40% of those hotels into primarily Quality but also into Econo Lodge. So we are retaining a number of those hotels in the system.

And then the other piece of that, which as I discussed the numbers about, what we thought we might have to terminate to get that brand to the position we wanted, one of the nice surprises about the program is as we're getting into it, more of the hotels than we anticipated are actually making significant investments and meeting the requirements that we have put on them in order to stay in the system. We'd estimated that the termination rate might have been higher, because people would not invest and then we were going to either encourage them to be another part of a brand, or last-case scenario, we'd end up exiting them from the system. But we are seeing a lot of folks are reinvesting at levels that we did not quite anticipate.

So it is all a very positive story and what we're seeing is it looks like it is beginning to build some momentum and accelerate as these programs tend to do. So, like Sleep, both those programs are very important. Comfort is obviously the most important brand we have. But we are very encouraged by the early results and are looking, actually, to begin pushing that even faster, because we're seeing terrific responses from the guest, from the performance of the hotels, and from the franchisees in terms of they're willing to invest to get to this new level and look that we want so that they can retain that flag.

In the long run, the termination levels that we had anticipated might be a little bit less, but in either case we're certainly getting to the place where we want where we lift both the overall impression of the brand in the guest's mind, but also the rate performance which is what we see coming with that. So now we will take the next question.

Yes, thanks for taking my question. I'm wondering if you could discuss the tax strategy a little bit if there was a change there and why the 31.5% going forward?

Yes, so over the past several years we've obviously been, from a strategic tax-planning perspective, making investments to basically make sure that we are being as efficient as we can within the boundaries of the rules. So this quarter, what you saw was the recognition of an adjustment of our -- some of our transfer pricing allocations were adjusted. We obviously went through a pretty thorough analysis before we made that -- took those changes in the positions, looked at appropriate outside advisers to support it.

So it is more -- I would call that more of a -- transfer pricing's one of these things that you kind of regularly look at and make adjustments. Nothing unique, no strange energy tax credit plays or anything like that is playing into that 31.5%. It's just more of the normal course, constantly looking at our tax positions, make sure we are optimizing, and then being as efficient as we can within the boundaries of the guidelines.

Okay, and then in the SG&A line, was there any market impact or impact from employee benefit programs? What was that impact in the third quarter?

In the third quarter of '12, it was pretty small. I think it was around $300,000.

Okay.

And then of course for that to be a -- down below the line within investment income on the opposite side of that.

Right, okay. All right, and what is the right way to think about that going forward? What -- is there a [permanent] move in the market that will lead to, say, $100,000?

Yes, see it's -- so if you look at the investments, there is around, I think it is around $12 million of investments in the deferred compensation plan, and the individuals who have deferred compensation get to choose what investments to put them in. It is a mix of money market, equity, fixed income type funds.

It is tough to give you a -- I guess if there is a 10% adjustment in that portfolio, then you would be looking at $1 million to swing in your investment income or loss and offset on the compensation side of things. So it is tough to [demonstrate] further and I guess our kind of commitment has been to just make sure when we get on these calls and do our release and publish our SEC filings, that we try to isolate that very clearly, very transparently, as to what the numbers are related to those, essentially pass through the gain or loss on those investments.

Okay. What do you think a clean SG&A number is for 2012? Roughly?

A clean SG&A number for 2012? I think that what we talked about on the last call, actually, was at the beginning of the year we had basically articulated that we were looking to reduce our GAAP SG&A expenses by about $15 million. And then a piece of that was there was fairly large severance charge last year, somewhere around $4 million, was a piece of that. And so that differential was kind of what we were targeting. And then on the last call, we talked about how we were going to get to about half of that. And that is still kind of the case as to where we think we'll end up for the full year.

And you look at the differential between where we were targeting and getting the half of it, there's a couple different pieces to it, of which I would say, it is pretty evenly split between investments and growth opportunities that aren't necessarily generating revenues today, but we think can give us some new opportunities in the future. And the other half is kind of things that are more variable in nature -- commissions type cost, this mark to market on the investment side of things for these employee benefit plans, those types of things. So overall, we are really, between last quarter and this quarter, not in any meaningful way adjusting what we thought the four-year SG&A outlook would be.

Okay. Thanks.

Sure

Ladies and gentlemen, if there are no further questions, I would like to turn it back to Steve Joyce.

Well, thanks. We appreciate your time on the call. We are very encouraged about the year. Obviously, a very strong year for our shareholders. We are very proud of what we were able to accomplish through that special dividend. We are also, though, very excited about the prospects for the Company going forward. The environment continues to improve, albeit at a steady pace, which means maybe not as quick a ride up, but probably a longer ride for us going forward. We're encouraged by the improvements in the financing and the development environment, as well as our opportunities internationally, and expect to be able to report results on those things to you next call. So thank you. Have a good morning.

Thank you for joining in today's conference. This concludes the presentation. You may now disconnect. Have a good day.