Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International Fourth Quarter and Full Year 2014 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 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 as 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 for the year ended December 31, 2014, 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 to 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 our fourth quarter and full year 2014 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, Inc. Please go ahead, sir.

Thank you. Good morning. Welcome to Choice Hotels Earnings Conference Call. Joining me this morning, as always, is Dave White, our Chief Financial Officer. This morning, we're going to update you on our performance for both the full year and fourth quarter of 2014, including the results of our core hotel franchising business and our key strategic growth initiatives. 2014 was a record year for Choice Hotels. Our performance for the year was driven by strong RevPAR growth and our strategic franchise development results. Our fourth quarter and full year 2014 results exceeded our expectations. Domestic RevPAR gains improved each quarter in 2014, culminating with an 11.2% increase in the fourth quarter, outpacing the gains of our competitive set based on Smith Travel Research data. Occupancy and average daily rates increased 370 basis points and 3.8%, respectively, in the fourth quarter. Franchising revenues grew by 12%, driven by an 11% increase in domestic royalty fees for the quarter. As a result of strong revenue growth and disciplined cost management, franchising EBITDA increased 15% in the fourth quarter. Domestic hotel franchise agreements totaled 269 hotels for the fourth quarter, a 25% increase year-over-year. Overall, our new hotel franchise contract executions for the year were up more than 10% after factoring out the impact of the 24 hotel multiunit Bluegreen portfolio transaction, which occurred in 2013. The franchise development growth strategy we're implementing is generating positive results. We continue to be an industry leader in our core mid-scale and economy conversion segments due to our well-recognized brands combined with our strong distribution channels and franchisee services. We are also seeing very strong growth in our new construction pipeline. In the fourth quarter, contracts for new-construction hotels increased by 78% compared with the same quarter last year. New construction activity is being driven…

Thanks, Steve. Our fourth quarter results closed out a strong year for the company and propelled us to new records in terms of franchising revenues, franchising EBITDA and franchising margins. In this morning's press release, we reported diluted earnings per share of $0.43 for the fourth quarter of 2014 and $2.10 for the full year. These results exceeded our previous guidance of $0.34 per share for the quarter and $1.99 to $2.02 per share for the full year. Our full year 2014 franchising EBITDA totaled $240 million, which exceeded the high end of our previous outlook for that metric. We are pleased that the fourth quarter financial performance of the company exceeded our expectations and continued to build on the strong momentum we saw in the first 3 quarters of last year. We outperformed our earnings per share and franchising EBITDA guidance primarily due to a combination of better-than-expected revenue performance and lower-than-anticipated selling, general and administrative expenses. Franchising EBITDA for the fourth quarter increased 15% over the same period the prior year due to a 12% increase in franchising revenues and a 150 basis point expansion of our franchising margins. The increase in our franchising revenues for the quarter was driven primarily by strong domestic RevPAR performance, franchise development results which drove growth of initial franchise and relicensing fees, and by growth of procurement services revenues. Approximately 75% of the fourth quarter top line franchising revenue growth of $9 million flowed through to franchising EBITDA. As a result, our franchising margins expanded from 60.6% in the fourth quarter of 2014 to 62.1% in the current quarter. Domestic royalty revenues increased by approximately 11% to $59.2 million, driven by an 11% increase in RevPAR. Our fourth quarter RevPAR growth exceeded our guidance of 9% and was driven by a combination…

Thanks, Dave. It was another strong year and obviously a great quarter. We're finally getting some cooperation from the economy, which is giving us even more encouragement. The macroeconomic outlook is favorable and the components of GDP that are most tied to lodging demand are strong; hiring and consumer spending. Blue Chip forecasts indicate job and wage growth is predicated to accelerate modestly. It's encouraging to see continued strong gains in household employment. The labor force participation rate has also been stabilizing after lengthy periods of declines. Consumer confidence and sentiment indices are also looking positive. We are very optimistic about our business in both the short term and the long term because of those improving economic conditions and the fact that franchise revenues grew, RevPAR increased, new construction deals are on the rise, development is up overall and our brand strategies are delivering results for our franchisees. With that, I'd like to open up to any questions you might have.

[Operator Instructions] . Our first question comes from Felicia Hendrix with Barclays.

Steve, just to tag on to your closing remarks there, you just mentioned a lot of drivers behind the strength that you're seeing in your consumer. Just wondering how much of the recent strength that you've seen in the quarter could you attribute to easy weather comps and then also lower gas prices. And do you think that, that's a large part of the strength you saw in the quarter? Or is it more macroeconomic-related?

Well, look, the strongest and the correlated factor we look at the most is employment. So if we were going to point to one factor that had the biggest impact is that positive job growth, particularly because it's an inverted hiring curve. The folks that are getting hired are our customers. So they are getting their jobs back or they're going back to -- and they're going back to work and on the road for business. And then when they do that, they also take vacations. Now having said that, we also are looking at gas prices to be a net positive for us, because we're seeing a situation where the cost of it is creating a more drive-oriented sentiment on the consumer's part and the fact that airline prices are not coming down and the hassle of flying is going to continue to impact that. So we obviously think that's going to be positive for us. And then just the general consumer sentiment is strong. And quite frankly, I think we're doing a good job in the distribution game in terms of getting our product out there in front of the consumer in the way that they want to buy. And I think that's contributing as well.

That's very helpful. And then just for my follow-up, I wanted to move on to SkyTouch. I mean, it sounds like you continue to be successful with sign-ups. But just where your EBITDA is trending and revenues are coming in lighter than we anticipated, I'm just wondering are there any plans to divest that business? Is there a reason why it needs to be on your P&L?

Well, because of accounting rules, number one. So we are -- look, if we had done this in previous years, it would have been an investment on the balance sheet, but because the accounting rules are it runs through EBITDA. But no, we have no plans to divest at this point. It is, down the road, an option. We now have a proven model that third parties want to buy. We think we're going to sign somewhere between 2,000 and 3,000 hotels this year, so we are very pleased with where this is going. We think it's going to be a net contributor in the not-too-distant future for us, and then that gives us lots of options on what to do with it. Holding a technology company within the confines of Choice may not be the long-term strategy, but there are 5 or 6 different ways that Choice shareholders could share in the value of what's being created and we're going to keep our options open.

Okay. Just with the 2,000 to 3,000 sign-ups, and I know you're only giving guidance for 2015, but do you see this as breaking even in 2016?

We -- well, it depends on the pace that continues in '16. We're looking at most likely a '17 breakeven position. But we'll see. We've got a lot of interest in this product.

Our next question comes from Thomas Allen with Morgan Stanley.

Just following up on some of those earlier questions. Can you remind us what your leisure versus corporate mix is? And can you give any more color or quantify how the RevPAR trends were one versus the other, if you could?

Well, let's start with the mix. The mix now is roughly 2/3 leisure. But business for us is growing very rapidly, more rapidly than leisure, because we are very focused on the business traveler, particularly for Ascend and Cambria, but also for Comfort Suite. And so we are growing our business traveler numbers at a strong clip. And so -- and we expect that to continue this year, because a lot of the things we started last year to help drive that business are being accelerated this year and we think they're going to have a big impact.

Yes. For just more specific figures, I mean, for 2014, if you look at kind of the GDS channel, that net revenue for our system, for the Choice brand system, grew at about 11%. So real strong results there on the corporate side of things. But to Steve's point, both the leisure and the business travel demands are showing real strength in '14, and that's continued so far here in the first couple of months of '15.

Helpful. And then I just want to understand the unit growth better. A couple of questions. So first, when you guide to unit growth, are you discussing number of hotels or are you guiding to number of rooms? You guys gave a lot of good color about record numbers of executed contracts and all that. But if you look at your number of rooms at the end of the fourth quarter, they're actually down year-over-year. So just want to understand the attrition levels and maybe some of the impacts of those owned hotels that left the system. Any color on that would be helpful.

Yes, sure. I think when you step back from our net unit growth figures for '14, you really have to think about it on a brand-by-brand basis and think about the strategies we're executing, particularly around Comfort. So Comfort, on the Comfort family, as we've talked about in the past, we're in kind of the middle innings, I would say, of a significant brand rejuvenation. And part of that brand rejuvenation strategy includes terminating Comfort product that doesn't fit the -- meet the grade, so to speak. So you'll really see that in the Comfort family net unit growth figures, been seeing those declining, and that quite candidly will probably for that brand continue for another year or 2. But on the flip side, right, if you look at our development results franchise sales for Comfort and the strength of new construction sales, I mean, that's the pipeline that's going to, over the next several years, replace these terminations of opening probably we're taking down now. So that's kind of Comfort. And obviously, since Comfort represents about half of our portfolio, it has a big impact on the consolidated net unit growth figure. But then the other thing, and I think sometimes people don't focus on this, is if you look at our, I'll call them our primary conversion brands -- Quality, Clarion, Econo Lodge, Rodeway -- and you parse through the '14 numbers looking at just those brands, which is the primary conversion brands, on a unit basis they were up about 4%. And for those folks who have followed the Choice story for a long time, back in the, I guess call it '04 through '07 time frame, we were clipping along net unit growth in that call it 4% to 6% range. So when you look at those particular conversion brands, we're touching the bottom end of the range as we were seeing back then, which is pretty -- which is encouraging, particularly when you combine it with what we're seeing on the development side from new construction and conversion. So it's like you've got to focus, in other words, on the brand-by-brand. We feel good about what we're doing with our brands. And the other piece of it, obviously, is reflected in really strong RevPAR results relative to the industry. So to some degree, we probably traded a little bit of unit growth for stronger RevPAR performance. But for the long term, we think that's the right strategy.

Okay. And then understanding that you want to focus guidance on 2015, but given your commentary you just made, I mean, can we think about like a goal of unit growth, once the Comfort rejuvenation is done and kind of a little later in the cycle?

Yes. I think, as we get a little later in the cycle and as that Comfort story unfolds over the next 2 years, following that, you should expect to see -- our expectation would be that the net unit growth figures start to move on a consolidated basis more back towards those historical levels that I talked about.

The other thing that you've got to keep in mind is as Cambria ramps up in terms of its construction activity, we're expecting to see, in those later years, significant impact from those hotels on our overall revenues and profitability, because the size of those hotels are dramatically larger than our core hotel and they're -- and are much more revenue-intensive. So a typical Cambria is worth something on the order of 3 to 4x a Comfort. So as that brand ramps up with these major urban properties and the brand begins to accelerate its development across the country, we think that's going to have a big impact for us.

Our next question comes from Patrick Scholes with SunTrust.

Just 2 questions here. One, a follow-up on the previous one. When I look at the 1% unit growth this year, can you drill down a little bit more and just quantify how many points of unit growth you're losing in 2015 from that -- from the Comfort Inn? That's the first question.

Yes, I'd probably think about that in the context of 1 to 1.5 points. Something maybe 1 to 2 points is probably the way to think about it.

Okay, good. And then a second question, something I wondered if you could help me with, when I think about what Street expectations were for 2015 EBITDA and EPS, certainly looks like EBITDA was in line though EPS versus what we on the Street and investors were expecting a little bit lighter, it appears, the best I can tell, that's partially due to a tax rate, but is there something else below the line that we can help bridge that -- you can help us bridge that gap? Was it higher depreciation or whatnot?

Yes, you kind of answered your own question, actually. Good pickup. And in fact, really, there's 2 pieces to it. About half of it is driven by the tax rate. So for '14 we finished at right around 30%. And for 2015, our expectation is around 31%. So that explains about half of that gap. And then the other half is really being driven predominantly by depreciation and amortization related to our Comfort rejuvenation program, where we provided for close to 300 hotels some forgivable key money essentially. And the amortization of that key money is going to flow through really in 2015. And that's the other piece of it. I'd think about the expectation level, or just to kind of give a little more clarity, is somewhere between kind of $2 million and $3 million for 2015 is kind of about the incremental lift on depreciation and amortization related to that program.

Our next question comes from Shaun Kelley with Bank of America.

I just want to check in, I think, on -- towards the end of your prepared remarks, you talked about the domestic relicensing fees being, I think, at peak, closer to 8% to 10% of your system renewing each year. Could you remind us of where that number is right now? You may have mentioned it and I might have just missed it.

Yes. So right now, we're right around 5% or 6% of the system. 6 -- I'm sorry, 6.5% of the system was the 2014 figure. So about 2/3 of -- yes, about 2/3 of the way back to peak levels.

And I don't know if that's something you -- do you have an expectation or something implied in guidance for where you think that ends up in 2015?

Within 2015, we have implied modest increase in terms of relicensing fees. We don't imply getting all the way back to that peak level.

Got it. And then totally to switch gears, but just kind of curious on the balance sheet. So leverage continued to come down obviously as cash flows are strong. There was a period, I guess it was a number of years ago at this point, where the board chose to do a little bit of a recapitalization. Could you just remind us of your kind of leverage target and how you think you're matching up against that right now?

Sure, yes. Our overall leverage target for the company is a range on the gross debt to EBITDA between 3 and 4 turns. When you look at our balance sheet, we are right about 3.5 at the end of the year. There's some -- you have to bake in, we have a few credit enhancements out there for some Cambria Suites which would take it a little bit north of that 3.5 but still underneath the high end of that range. I talked about that 4. So that's kind of our overall leverage target in terms of where we're comfortable on the balance sheet side of things.

Our next question comes from Robin Farley with UBS.

Just looking at SkyTouch and the loss kind of expected to widen in 2015. Is that a wider loss because of kind of the onetime cost of getting properties on the system? Or is it just kind of increased investment in marketing? And in October, you had kind of given a revenue run rate guidance of saying kind of -- that you were on track for $4 million to $6 million in annual revenues at that point. Can you kind of update where that revenue run rate is now?

Sure. So there's 2 components there. On the cost side, what you're seeing is that as we ramped up during 2014, the SkyTouch organization, particularly in the sales and marketing team and the product development teams, that happened during the course of 2014. So what you're seeing in there is the impact of the annualization of the impact of those hires. And in 2015, as we think about the cost and as we think about the range we provided for the investment in SkyTouch, it will depend to a degree on customer-specific milestones when we acquire customers and the level of customization if any that's required to support their expectations. So in terms of the revenue side of things, as we talked about, we generated about $600,000 of third-party realized revenues in 2014. For 2015, we haven't provided specific revenue guidance. But we're thinking about the right way to think about success for a startup. Eventually SkyTouch is really the number of hotels we kind of add to the platform, third-party hotels. And so I think the best way to think about the answer to your question is just we'll report back out on the number of hotels signed. And our target is to have somewhere between 2,000 and 3,000 hotels signed up during the course of 2014, and that essentially corresponds with the revenue that's implied in our investment guidance for SkyTouch for '15.

Okay, great. And my other question had been on your unit growth, and you've made a couple of comments that mostly answered it. I guess just looking at unit growth of about 1% last year and then a pretty significant increase in your pipeline and new signings that it seems like it would be higher unit growth on the 1% to 2%, it sounds like maybe the Comfort rejuvenation takes like 150 basis points off. Is there anything else that, whether it's expecting other removals from the system or is it just longer time to open some of the new -- maybe because it's more new construction weighted versus previous years that it takes longer for pipeline to actually enter the system as unit growth? Just trying to think about what other factors are kind of keeping that pipeline from getting to unit growth.

Yes. So that's exactly right. So in 2 instances, because of the upswing in new construction, those projects are typically 2 to 3 years from application to opening. So that's clearly having an impact. Then the other is, we are being more demanding of the product coming into our system, so the conversion time has lengthened. A lot of the Ascends we did, we did -- particularly the 24 Bluegreens, they were in such good condition, we could bring them on almost immediately. But as we bring in other of our core product, we are demanding more work be done, and so that's lengthening that conversion time.

And what's your percent of pipeline that's conversions versus new construction now versus a year ago, just to kind of think about that?

So the percentage of the pipeline that's new construction would've increased. Here, it's on the -- let me get the schedule, sorry. We have an exhibit. On Exhibit 7 we lay that out. So basically, at the end of last year, we had 235 new construction on a base of 420 total contracts, so a little over 50% there. Now we've got 326 new construction on a base of 510. Conversion pipeline is about the same year-over-year in terms of absolute number of contracts.

[Operator Instructions] Our next question comes from James Kayler with Bank of America.

Just one follow-up on the balance sheet questions that Shaun asked. I guess, strategically, do you guys see value in getting back to investment grade? Or are you comfortable sort of being in the high BB crossover area? I guess that's question 1. And question 2 is, if getting back to investment grade is a target, what are the conversations that you're having with the agencies? What have they said they want to see to get there?

Yes. I would say the way we think about our leverage is around the right level of leverage for this business model, which is kind of where that 3 to 4x gross debt to EBITDA came from. We believe that, that leverage level corresponds to a rating, a credit rating that's at the low end of the investment grade spectrum. So that's kind of the leverage level where we're comfortable. We think it corresponds over time to a leverage level that's consistent with a low investment grade credit rating. In terms of the strategic guide of investment grade credit rating, I think, obviously, over time, over a long period of time, depending upon what's going on in the macroenvironment, it can be beneficial. But in some periods of time it's obviously, from a cost of debt, it's not as advantageous as kind of where we're positioned. So I don't think there's always an answer to that question. It depends upon kind of where you are in the lodging cycle, where you are in the credit market cycle and then the other factors going on within your business.

And then philosophically, the reason that we were comfortable moving into the lower end, where we actually got a split rating, was because the high-yield markets at the top end looked a lot like investment grade. So if that continues, then we're going to continue to think that they're somewhere in between. The other is quite frankly we saw that we don't get credit or rewarded for much lower levels of leverage. In fact, just the opposite. When we did that special dividend and paid out and raised our leverage levels we had a significant increase in the share price as well, which is sort of inverse of what you'd expect. So we believe that 3 to 4x is correct. And whether or not we are at the upper end of high yield or at the lower end of investment it more about, as Dave mentioned, the conditions of the credit market at that point.

We have no additional questions. I'll now turn the call back over to management for any closing remarks. Please proceed.

So obviously we're very pleased with the results and we are obviously very encouraged about the environment we're in for 2015. We look forward to sharing those results on our next call. Thank you.

This concludes today's conference. You may now disconnect. Have a great day, everyone.