Choice Hotels International, Inc. Earnings Call Nuggets: Contract Growth vs. Unit Growth, RevPAR Guidance Range

On Friday, Choice Hotels International, Inc. (NYSE:CHH) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Contract Growth vs. Unit Growth

Felicia Hendrix – Barclays Capital: Few questions. Steve, for you first, you provided a really upbeat view of your new contract growth and it was nice to see those numbers this quarter for sure and then you discussed the prospect for that, but you maintained the guidance for unit growth to be flat this year, so the two points seemed contradictory to me. I was wondering if you could clarify that.

Stephen P. Joyce – President and CEO: Sure. We had a very strong quarter. It looks like that’s carrying through. We did not move the guidance up because we’re balancing, I think we’ve talked before about our desire to clean up Comfort brand and some of those hotels at the bottom of that. So what we’ve got is sort of a flexible termination budget that we are effectively managing through deciding how much and how fast we want to move, which is in part the develop environment and in addition to that in a market-by-market analysis we’re looking at when those properties that we take out can potentially be replaced with new larger more revenue intensive project. So the balancing act of all that is sort of we’ll look to see how much in addition we got we will determine whether or not which markets we want to move in on those comfort hotels and how quickly and when it makes sense based on replacement availability and so you could see our guidance move, but right now at this point given all that we’re going to stay with sort of a relatively flattish, which may be a little positive, but we also think we may take advantage to move on some properties earlier.

Felicia Hendrix – Barclays Capital: Okay, that makes sense, so it seems like one, you’re assuming one is offsetting the other for now?

Stephen P. Joyce – President and CEO: Yeah.

Felicia Hendrix – Barclays Capital: Then Dave, the SG&A in the quarter was higher than we expected. We are expecting actually it to decline year-over-year and it was up. What was the driver behind that and should we look at this as a run rate going forward or were there some things in your SG&A this quarter that were one time perhaps?

David L. White – CFO: Yeah, in this quarter the primary thing that’s causing that is the mark-to-market adjustment, the investments in our employee retirement plans, which is causing that investment gains down below the line. There’s an offsetting compensation expense increase tied to a portion of that, so that’s the biggest reason that you didn’t see a decline in the SG&A line during the quarter. As you think about the balance of the year and within our outlook, I think you can get back into this. We are still – remain committed to what we talked about on our last call in terms of an overall cost reduction exercise for the course of the year. You’ll see that unfold more in kind of the second half of the year as compared to the first half given the timing of how our SG&A rolls out.

Felicia Hendrix – Barclays Capital: Given how it came out in the first quarter, would you expect the full year to decline or should we just think about it on a quarter-by-quarter basis?

David L. White – CFO: We’re still expecting a full year decline in SG&A as we had talked about on last quarter’s call.

Felicia Hendrix – Barclays Capital: Just one last housekeeping question. Dave, you usually talk about the international royalties and if you did, I missed it, but if you didn’t, can you just tell us what that was?

David L. White – CFO: Yeah, I am going to have to – I’ll come back to that later on the call, I don’t have it right in front of me, but I’ll get back for you in just a second.

RevPAR Guidance Range

Unidentified Analyst: This is actually (indiscernible) calling for Robin. You raised the RevPAR guidance range obviously for the full year. It looks like EBITDA high end of the range was not raised. Could you walk us through sort of the flows through EBITDA line and what you’re thinking there?

David L. White – CFO: Yes, if you think about the assumptions in our outlook, really the one that we change was the one you pointed out, our full year RevPAR outlook taken the range of the RevPAR outlook up slightly. So if you think about the model, a 1% move in RevPAR translates to about $2.5 million of EBITDA. So that when you put that in the context of our previous range, it was $199 million to $203 million. We actually took up the bottom end of the range slightly, and then that prior point I made about SG&A, including the mark-to-market impact on the retirement plan asset, we don’t contemplate those mark-to-market adjustments in our initial EBITDA outlook. So that’s the other piece that’s working on the cost side against this. So it’s kind of a combination of the level of precision on our range is $2 million or $3 million spread, combined with that SG&A adjustment, we saw in the first quarter related to those retirement plan assets.

Unidentified Analyst: Then a follow-up question on Comfort and how many rooms are actually as of today out of the system, because I assume you talked about, I think, end of the year expectation of taking about 10% of out of the system rooms that do not actually meet the standards, could you update us on that?

Stephen P. Joyce – President and CEO: Sure. So, year-to-date between Comfort and Comfort Suites compared to last year, there has been about a net 2,700 rooms have left the system, that’s net of additions, and that 10% figure just to be clear, that’s not all expected to take place within the current year, that’s more of a longer term type approach. Then Felicia to answer your question just to go back the international royalties for the first quarter of ’12 were $5.5 million compared to $5.1 million for the first quarter of 2011.