Ex99_1
JP Morgan
Gaming & Lodging Conference
March 18, 2004
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 management. Actual performance and results could differ from those expressed in or contemplated by the forward-looking statements due to a number of risks, uncertainties and other factors, many of which are beyond Choice’s ability to predict or control. For further information on factors that could impact Choice and the statements contained therein, we refer you to the filings made by Choice with the Securities and Exchange Commission, including its report on Form 10-K for the period ended December 31, 2003.
Additional corporate information may be found on the Choice Hotels’ Internet site, which may be accessed at www.choicehotels.com Choice Hotels, Choice Hotels International, Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, MainStay Suites, Econo Lodge, Rodeway Inn, 1-800-4CHOICE and The Power of Being There. Go. are proprietary trademarks and service marks of Choice Hotels International.
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Company Overview
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 December 2003.
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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
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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)
Adjusted Diluted EPS—$1.87 (23% increase)
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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%
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Strategy
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
Our Passion: Customer Profitability
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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 Products)
Franchise Success System
Franchisees • Hotel Guests • Shareholders
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Build Strong Brands
Among World’s Most Recognizable Hotel Brands
Improved Brand Consistency and Quality
Improved ROI for Owners
Significantly Enhanced Franchise Sales Capability
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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
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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
• Lower cost
• Increase yield
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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 $13 million revenue and lowers owner costs
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Size, Scale, and Distribution
Lowers Costs and Increases Revenues for Owners
Enables Highly-Valued Capabilities
Brand awareness
National marketing
Reservations
Services
Technologies
Franchising Model is Difficult to Duplicate
Scale required to generate reasonable returns for shareholders
Capital required to generate scale
Scale is a barrier to entry
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Performance
Business Focus
Profitably Grow
Improve brand performance – “ROI” to owners (business delivery, products, marketing, services)
Introduce new concepts (product design/innovation)
Increase distribution (franchise development)
Maximize Financial Returns and Create Value for Shareholders
Capital allocation – focus on returns
Capital structure – prudent leverage to maximize returns
Share repurchases Dividends
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Profitably Grow
Strong Financial Results
Franchising Revenues ($ 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
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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.
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Strong Financial Results
Recurring EBITDA ($ in millions)
CAGR = 5.3%
$ 130 $ 125.2
$ 125
$ 120 $ 116.0 + 8%
$ 115
$ 108.7
$ 110
$101.9 $104.1
$ 105
$ 100
$ 95
$ 90
1999 2000 2001 2002 2003
Source: Choice Internal Financial Data, December 2003. See Supplemental.
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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.
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Strong Financial Results
Franchise Development
Executed Contracts (New Contracts Sold) $ in millions
500 $ 12.0
$ 11.0
450
$ 10.0
400 $ 9.0
350 $ 8.0
$ 7.0
300
$ 6.0
250 $ 5.0
1999 2000 2001 2002 2003
Deals Initial Fee Revenue
Source: Choice Internal Data, December 2003.
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Strong Financial Results
55% Franchise Sales Improvement (304 to 470 deals)
Year End Development Results
200
180 182
150
160
Deals 127 138
Executed 140
of 120
Number 100 92 85 2002
80 2003
60
40
20
0
Limited Service Full Service Economy Service
Source: Choice Internal Data, December 2003.
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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 1 200.0% 6 1 500.0%
Sleep 29 7 314.3% 0 0 0% 29 7 314.3%
Subtotal 111 48 131.3% 71 79 -10.1% 182 127 43.3%
Clarion 2 2 0.0% 36 15 140.0% 38 17 123.5%
Quality 10 10 0.0% 102 65 56.9% 112 75 49.3%
Subtotal 12 12 0.0% 138 80 72.5% 150 92 63.0%
Econo Lodge 4 3 33.3% 80 59 35.6% 84 62 35.5%
Rodeway 1 0 0% 53 23 130.4% 54 23 134.8%
Subtotal 5 3 66.7% 133 82 62.2% 138 85 62.4%
Total 128 63 103.2% 342 241 41.9% 470 304 54.6%
Source: Choice Internal Data, December 2003.
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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 Properties 7,814
Market Share 4.2% Independents 2,415
Econo Lodge 734 Other Franchised Properties 3,211
Rodeway 138 Independents 3,471
Market Share 7.3% Super 8 2,003
Days Inn 1,836
MainStay 26 Extended Stay America 322
Market Share 5.0% Homestead Studio Suites 115
Townplace Suites 105
Candlewood 104
Other Extended Stay Hotels 123
Source: Smith Travel Research 2002. Choice Internal Data, December 2003.
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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%
ROIC (Net Income over Debt + Equity) 35.8% 35.6% (20 bps)
Source: Choice Internal Financial Data, December 2003. See Supplemental.
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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%
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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 Focused on Shareholder Value
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Supplemental
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 measurements are presented as supplemental disclosures because they are used by management in reviewing and analyzing the company’s performance. This information should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States (GAAP), such as operating income, net income, diluted earnings per share, total revenues or net cash provided by operating activities. The calculation of these non-GAAP measures may be different from the calculation by other companies and therefore comparability may be limited. The company has included exhibits which reconcile these measures to the comparable GAAP measurement.
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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 = $ 371,000 $ 0.01
Royalty Rate 5 bps increase = $ 1,855,000 $ 0.03
• (1) Assumes Outstanding Diluted Shares of 35,510,780
• (2) Assumed tax rate of 37.75%
Source: Choice Internal Analysis, December 2003.
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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 of Friendly Hotels plc investment - - 22,713 - -
Recurring EBITDA $ 125,208 $ 115,951 $ 108,742 $ 104,050 $ 101,857
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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) - - 4,721 -
Impairment of and Equity Losses in Friendly Hotels
PLC Investment - - 37,166 7,532 -
Adjusted Net Income $ 68,480 $ 60,844 $ 51,493 $ 54,698 $ 57,155
Weighted Average Shares Outstanding-Diluted 36,674 40,057 44,572 53,253 55,667
Diluted Earnings Per Share $ 1.96 $ 1.52 $ 0.32 $ 0.80 $ 1.03
Adjustments:
Loss(Gain) on Sunburst Note Transactions (0.09) - - 0.09 -
Impairment of and Equity Losses in Friendly Hotels
PLC Investment - - 0.83 0.14 -
Adjusted Diluted Earnings Per Share (EPS) $ 1.87 $ 1.52 $ 1.16 $ 1.03 $ 1.03
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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:
Marketing and Reservation Revenues (195,420) (190,145) (168,170) (185,367) (162,603)
Hotel Operations (3,565) (3,331) (3,215) (1,249) -
Franchising Revenues $ 187,119 $ 172,086 $ 170,043 $ 166,225 $ 161,600
Selling, General and Administrative 62,860 56,520
Net Franchise Margin $ 124,259 $ 115,566
Net Franchise Margin Percentages 66.4% 67.2%
(1) Marketing and Reservation Revenues are excluded as these represent contractual pass-throughs and are not profitable components of the company’s business.
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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 Expense 11,225 11,251
Net $ 113,983 $ 104,700
Cash Paid For Income Taxes $ 49,559 $ 14,674
Interest Expense (Tax Shield Add-Back) @ 38% 4,407 4,992
$ 53,966 $ 19,666
Cash Tax Rate 48.0% 20.5%
(1) NOPAT $ 59,261 $ 83,211
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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: Current Liabilities (100,850) (84,308)
Working Capital (42,273) (33,871)
(2) Invested Capital $ 166,422 $ 232,465
ROIC (1)/(2) 35.6% 35.8%
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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) sales of investments, net (2,673) 191
Other items, net (618) 2,972
Total Adjustements: (16,204) (12,510)
After-Tax Free Cash Flow $ 99,281 $ 86,508
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