Choice Hotels International, Inc. · NYSE:CHH
Choice Hotels International — JP Morgan Gaming & Lodging Conference 2004
40 slides from Choice Hotels International's conference presentation, Mar 18, 2004
Slide 1: JP Morgan Gaming & Lodging Conference
JP Morgan Gaming & Lodging Conference March 18, 2004
Slide 2: Disclaimer
Disclaimer Certain matters discussed in this presentation may constitute forward-looking statements within the meaning of the federal securities law. Such statements are based on management’s beliefs, assumptions and expectations, which in turn are based on information currently available to managem
Slide 3: Company Overview
Company Overview
Slide 4: Company Profile
Company Profile One of the Largest Hotel Companies in the World 4,810 hotels open worldwide representing 388,618 rooms 491 hotels under development representing 39,877 rooms Our Brands Cover Many Segments Limited Service Full Service Economy Mid-Price Upscale Source: Choice Internal Data as of Decem
Slide 5: Company Profile (cont.)
Company Profile (cont.) Our Focus Is Solely on Hotel Franchising Highest returning model in the industry (vs. management/ownership) High margin, high cash flow with low capital requirements Scaleable and predictable Provides profitable growth opportunities Highly skilled in this area
Slide 6: Investment Thesis
Investment Thesis Strong, Stable and Growing System 4.4% increase in domestic rooms 470 new hotel contracts signed (up from 304) 20 year contracts, barriers to exit Strong and Growing Earnings and Cash Flow Cash flow from operations—$115 million (17% increase) 2003 EBITDA—$125 million (8% increase)
Slide 7: Investment Thesis (cont.)
Investment Thesis (cont.) Management Focused on Creating Value Share repurchases – 29.3 million repurchased at $17.54 per share Dividends – Initiated quarterly cash dividend of $0.20/share in 2003 Equity Performance 5 year annualized return in excess of 20%
Slide 8: Strategy
Strategy
Slide 9: Vision and Mission
Vision and Mission Our Vision: To generate the highest return on investment of any hotel franchise Our Mission: Deliver a franchise success system of strong brands, exceptional services, vast consumer reach, and size, scale and distribution that delivers guests and reduces costs for our hotel owners
Slide 10: Management Philosophy
Management Philosophy Brand Growth and Equity Increased Reduced Business Development Delivery and Operating Costs Customer Profitability Strong Vast Consumer Exceptional Size, Scale, Consumer Reach Services and Brands (Reservations/ (includes IT, Distribution (Brand Names Marketing) Purchasing) and
Slide 11: Build Strong Brands
Build Strong Brands Among World’s Most Recognizable Hotel Brands Improved Brand Consistency and Quality Improved ROI for Owners Significantly Enhanced Franchise Sales Capability
Slide 12: Vast Consumer Reach
Vast Consumer Reach $50 Million Marketing and Advertising Plan Creates brand awareness and loyalty Drives traffic Enhanced Loyalty Program 2.5 million members $ 1 billion hotel program revenue to date Strong Direct Sales Capability $ 600 million in revenue
Slide 13: Vast Consumer Reach (cont.)
Vast Consumer Reach (cont.) State-of-the-Art Reservations System – All Channels $ 1.3 billion room revenue booked in 2003 – 29% delivery Strong Synergies with Internet Distribution Channels New Internet Channels Strengthen Franchise • Increase distribution • Improve placement • Decrease complexity •
Slide 14: Exceptional Services
Exceptional Services Full Complement of Hands-On Services Improve Profitability and Create Loyalty Brand Complete Life-Cycle Service Offering 150 Field-Based Employees State-of-Art Training Capabilities Operational and Yield Management Technology Purchasing Assistance Generates $13 million revenue a
Slide 15: Size, Scale, and Distribution
Size, Scale, and Distribution Lowers Costs and Increases Revenues for Owners Enables Highly-Valued Capabilities Brand awareness National marketing Reservations Services Technologies Franchising Model is Difficult to Duplicate Scale required to generate reasonable returns for shareholders Capital req
Slide 16: Performance
Performance
Slide 17: Business Focus
Business Focus Profitably Grow Improve brand performance – “ROI” to owners (business delivery, products, marketing, services) Introduce new concepts (product design/innovation) Increase distribution (franchise development) Maximize Financial Returns and Create Value for Shareholders Capital allocati
Slide 18: Profitably Grow
Profitably Grow
Slide 19: Strong Financial Results: Franchising Revenues
Strong Financial Results Franchising Revenues ($ in millions) CAGR = 3.7% $ 200.0 $ 187.1 $ 190.0 $ 180.0 $ 172.1 + 9% $ 170.0 $ 166.2 $ 170.0 $ 161.6 $ 160.0 $ 150.0 1999 2000 2001 2002 2003 Source: Choice Internal Data, December 2003. See Supplemental
Slide 20: Strong Financial Results: Unit Growth
Strong Financial Results Unit Growth In Any Environment Domestic System Size CAGR = 6.1% 3,700 3,500 3,300 3,100 2,900 2,700 2,500 1997 1998 1999 2000 2001 2002 2003 Source: Choice Internal Data, December 2003.
Slide 21: Strong Financial Results: Recurring EBITDA
Strong Financial Results Recurring EBITDA ($ in millions) CAGR = 5.3% $ 130 $ 125.2 $ 125 $ 120 $ 116.0 + 8% $ 115 $ 108.7 $ $101.9 $104.1 $ 105 $ 100 $ 95 $ 90 1999 2000 2001 2002 2003 Source: Choice Internal Financial Data, December 2003. See Supplemental.
Slide 22: Strong Financial Results: Adjusted Diluted EPS
Strong Financial Results Adjusted Diluted EPS CAGR = 16.1% $ 2.0 $ 1.87 $ 1.8 + 23% $ 1.52 $ 1.5 $ 1.16 $ 1.3 $ 1.03 $ 1.03 $ 1.0 $ 0.8 $ 0.5 1999 2000 2001 2002 2003 Source: Choice Internal Financial Data, December 2003. See Supplemental.
Slide 23: Strong Financial Results: Franchise Development
Strong Financial Results Franchise Development Executed Contracts (New Contracts Sold) $ in millions 500 $ 12.0 $ 11.0 $ 10.0 400 $ 9.0 350 $ 8.0 $ 7.0 $ 6.0 250 $ 5.0 1999 2000 2001 2002 2003 Deals Initial Fee Revenue Source: Choice Internal Data, December 2003.
Slide 24: Strong Financial Results: Franchise Sales Improvement
Strong Financial Results 55% Franchise Sales Improvement (304 to 470 deals) Year End Development Results 180 182 Deals 127 138 Executed 140 of 120 Number 100 92 85 2002 80 2003 Limited Service Full Service Economy Service Source: Choice Internal Data, December 2003.
Slide 25: Year End Development Results
Strong Financial Results Year End Development Results NEW CONSTRUCTION CONVERSION TOTAL 2003 2002 2003 2002 % 2003 2002 % Units Units % Change Units Units Change Units Units Change Comfort Inn 35 17 105.9% 63 68 -7.4% 98 85 15.3% Comfort Suites 44 24 83.3% 5 10 -50.0% 49 34 44.1% MainStay 3 0 0% 3 1
Slide 26: Significant Upside: Market Share Analysis
Significant Upside Market Share Analysis CHOICE Units Share COMPETITOR Units Comfort Suites 370 Holiday Inn Express 1,199 Comfort Inn 1,413 Hampton Inn/Suites 1,175 Sleep 309 Clarion 138 Other Franchised Properties 3,225 Market Share 2.8% Independents 1,193 Quality Inn/Suites 508 Other Franchised Pr
Slide 27: Maximize Returns
Maximize Returns
Slide 28: Maximize Returns
Maximize Returns High Margins, After-Tax Free Cash Flow, and Returns on Capital Year Ended December 31, ($ in millions) 2002 2003 Percentage Franchising Margins 67.2% 66.4% (1.2%) Cash Flow From Operations $ 99.0 $ 115.5 16.7% CAPEX $ 12.2 $8.5 (30.3%) After-Tax Free Cash Flow $ 86.5 $99.3 14.8% ROI
Slide 29: Create Value
Create Value
Slide 30: Create Value
Create Value Management Focused on Creating Value Share repurchases – 29.3 million repurchased at $17.54 per share Dividends – Initiated quarterly cash dividend of $0.20/share in 2003 Equity Performance 5 year annualized return in excess of 20%
Slide 31: Closing Comments
Closing Comments Strong Earnings Per Share, EBITDA, and Cash Flow Growth Proven Earnings Stability Even through Industry/ Economic Downturns Pure-Play Franchise Focus, Highest Returning “Model” in the Industry High Operating Margins Significant and Growing Free Cash Flow Experienced Management Team
Slide 32: Supplemental
Supplemental
Slide 33: Non-GAAP Financial Measures
Non-GAAP Financial Measures Recurring EBITDA, adjusted net income, adjusted diluted earnings per share, franchising revenues and margins, net operating profits after taxes (NOPAT), return on invested capital (ROIC) and after-tax free cash flows are non-GAAP financial measurements. These financial me
Slide 34: Continuing Cash Flow Potential
Continuing Cash Flow Potential Multiple Revenue Levers Revenue Driver Impact on Impact on Royalties Diluted EPS1,2 RevPAR 1% = $ 1,400,000 $ 0.02 Improvement 5% = $ 7,000,000 $ 0.12 New Franchise 1% (36 units) = $ 878,000 $ 0.02 Growth 5% (180 units)= $ 4,390,000 $ 0.08 Improvement in 1 bps increase
Slide 35: Recurring EBITDA Analysis
Recurring EBITDA Analysis (Unaudited) December 31, December 31, December 31, December 31, December 31, Recurring EBITDA 2003 2002 2001 2000 1999 Adjustments Depreciation and Amortization 11,225 11,251 12,452 11,623 7,687 EBITDA $ 125,208 $ 115,951 $ 86,029 $ 104,050 $ 101,857 Adjustments Impairment
Slide 36: Calculation of Adjusted Net Income and Adjusted Diluted EPS
Calculation of Adjusted Net Income and Adjusted Diluted Earnings Per Share (EPS) (Unaudited) December 31, December 31, December 31, December 31, December 31, 2003 2002 2001 2000 1999 Net Income $ 71,863 $ 60,844 $ 14,327 $ 42,445 $ 57,155 Adjustments: Loss(Gain) on Sunburst Note Transactions (3,383)
Slide 37: Calculation of Franchising Revenues and Margins
Calculation of Franchising Revenues and Margins (Unaudited) (In thousands) Twelve Months Ended December 31, December 31, December 31, December 31, December 31, 2003 2002 2001 2000 1999 Franchising Revenues and Margins Total Revenues $ 386,104 $ 365,562 $ 341,428 $ 352,841 $ 324,203 Adjustments: Mark
Slide 38: Calculation of NOPAT and ROIC
Calculation of NOPAT and ROIC (Unaudited) (In thousands) Twelve Months Ended December 31, December 31, 2003 2002 Pre-Tax Income $ 112,407 $ 95,818 Depreciation Expense 11,225 11,251 Interest Expense 11,597 13,136 Other Income and Expenses (10,021) (4,254) EBITDA 125,208 115,951 Less: Depreciation Ex
Slide 39: Calculation of NOPAT and ROIC (cont.)
Calculation of NOPAT and ROIC (cont.) (Unaudited) (In thousands) Twelve Months Ended December 31, December 31, 2003 2002 Long-Term Assets: PPE $ 54,253 $ 64,650 Intangibles 96,003 96,956 Other 58,439 104,730 Total Long-Term Assets: 208,695 266,336 Working Capital: Current Assets 58,577 50,437 Less:
Slide 40: Calculation of After-Tax Free Cash Flows
Calculation of After-Tax Free Cash Flows (Unaudited) (In thousands) Twelve Months Ended December 31, December 31, 2003 2002 Net Cash Provided by Operating Activities $ 115,485 $ 99,018 Investment in property and equipment (8,480) (12,233) Issuance of notes receivable (4,433) (3,440) (Purchases) sale
Choice Hotels International — JP Morgan Gaming & Lodging Conference 2004 on 6ix