Choice Hotels International (CHH)

Q3 2011 Earnings Call

October 27, 2011 9:30 am ET


David L. White - Chief Financial Officer, Senior Vice President and Treasurer

Stephen P. Joyce - Chief Executive Officer, President and Director


Harry Curtis - Nomura Securities Co. Ltd., Research Division

Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division

Sule Sauvigne - Barclays Capital, Research Division

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

David B. Katz - Jefferies & Company, Inc., Research Division

Mark Strawn - Morgan Stanley, Research Division

Tim Wengerd - Deutsche Bank AG, Research Division



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Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International Third Quarter 2011 Earnings Conference Call. [Operator Instructions] 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 result, 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 10-K of the year ended December 31, 2010, and other SEC filings for information about important risk factors affecting the company that you should consider.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, 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 a part of the third quarter 2011 earnings press release, which is posted on our website at, 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.

Stephen P. Joyce

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 our results for the third quarter, and we had a very solid quarter. A key takeaway is that our top line for 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 cost benefited from lower compensation expense, related to the performance of employee retirement plan investments, excluding this item, which Dave will cover into more detail, and I'm sure we'll have a few questions, our SG&A growth rate still came in lower than we had expected. As a result, we were able to achieve solid margin expansion and EBITDA performance, which exceeded our expectations.

Our operating performance plus certain tax benefits resulted in diluted earnings per share of $0.71 for the third quarter, which obviously, exceeded our guidance.

On the macroeconomic 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 franchise 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 continue to see RevPAR increases for all of our brands, driven by nearly across-the-board gains in both occupancy and rate. More recently, we have not seen signs of a slowdown in the RevPAR environment, with the domestic systemwide RevPAR for September and October, the first 2 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 2 domestic franchise contracts for the Cambria Suites brand in marquee locations: Washington, D.C. and White Plains, New York. We also announced the project is in Houston as well that has now signed. We continue to invest selectively in the brand, and in ascending its growth in high-value markets with institutional quality developers. We believe these recent announced hotels will be exceptional representations of the brand.

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