Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International Second Quarter 2018 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. Actual results may differ materially from those indicated in forward-looking statements, and you should consult the company’s Form 10-K for the year ended December 31, 2017, and the company’s other SEC filings for information about important risk factors affecting the company that you should consider. These forward-looking statements speak as of today’s date, and we undertake no obligation to publicly update them to reflect subsequently events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of the second quarter 2018 earnings press release, which is posted to our website at choicehotels.com under the Investor Relations section. With that being said, I would now like to introduce Pat Pacious, President and Chief Executive Officer of Choice Hotels International Incorporated. Please go ahead, sir.

Thank you. Good morning, and welcome to Choice Hotels 2018 Second Quarter Earnings Conference Call. Joining me this morning is Dominic Dragisich, our Chief Financial Officer. After a strong first quarter, our second quarter performance delivered more positive news. For the second quarter of 2018, we experienced robust growth, highlighted by adjusted EBITDA growth of 20% versus the second quarter of 2017, and adjusted diluted earnings per share growth of 48% versus the second quarter of 2017. As a result, we exceeded the high end of our previously reported earnings per share guidance by $0.08 and have raised our full year adjusted EBITDA and earnings per share guidance by $2.5 million and $0.08, respectively, at their midpoints. These results are proof that our long-term strategy of investing in our brands is working. Our overall financial strength results from our ability to continue to deliver a strong and proven value proposition to our franchisees. This is exemplified by continued growth of our effective royalty rate. We attribute this growth to our ability to improve franchise agreement contract terms and offer limited royalty rate discounts over the last two years. These are clear indications that franchisees increasingly value Choice Hotels' brands. In addition to the increasing value owners place in joining the Choice Hotels family, they are also staying with us for the long term. Our franchisees are, on average, signing 20-year contracts with us. We have a best-in-class voluntary franchisee retention rate of 99%. We also know that our owners are satisfied with Choice because they keep coming back. Half of the new franchise agreements signed through June 30 of this year are with existing or returning owners. Our franchisee base is also highly energized. We had record attendance at our 2018 convention in May, and hotel owners rated it the…

Thanks, Pat, and good morning, everyone. We are very pleased with our second quarter financial results, which again exceeded our expectations and continued to build upon our robust first quarter performance. Lodging fundamentals remain strong, and our brands continue to perform for hotel owners. As a result, we continue to grow, invest in our business and return capital to shareholders. The continued strength in our operating performance, our low leverage levels and tax reforms have allowed us to expand our business in three major ways. Our acquisition of the WoodSpring Suites brand in the first quarter of 2018, best-in-class tools, technology and programs that we provide to our franchisees and customers, and as Pat highlighted, continued investment in our well-segmented brand portfolio, including the growth of Cambria, the transformation of Comfort and other key brand investments. Our significant cash flows allow us to both reinvest in our core business and return excess capital to our shareholders. In addition to our quarterly dividend, we repurchased an additional $29 million of our common stock in the second quarter. We have now repurchased over $70 million of Choice stock in 2018. We believe the strength of our business model, the positive economic environment and our runway for future growth will allow us to continue to execute on our capital allocation strategy. Now, let’s review our second quarter results and outlook in more detail. Our second quarter financial performance was highlighted by revenue growth of 13% over the prior year and quarterly adjusted EBITDA of $94.3 million, a 20% increase over the same period of the prior year. Furthermore, we reported adjusted diluted earnings per share of $1.11, a 48% increase over the prior year quarter. As Pat mentioned, this adjusted diluted earnings per share performance exceeded the high end of our guidance by…

[Operator Instructions] The first question comes from the line of Thomas Allen with Morgan Stanley. please go ahead.

Yes, good morning. Your procurement services in the quarter were really strong, up 24% year-over-year. Can you just talk a little bit about what’s driving that? Is it sustainable? And what kind of margins you’re driving in that business? Thank you.

Let me start with that, Tom. So really two key things are driving it. One is the volume of transactions or the procurement services team is going up, so there’s a lot more just volume going through our existing vendor agreements. And secondly is, last year, at the tail end of the year, we renegotiated our agreement with Bluegreen, which was sort of coming to the end of its 1st-year – first 5-year term, and we renewed that agreement, which, again, is providing a significant value to both Bluegreen and the Choice Hotels. So those are really the sort of two key drivers on the procurement services front.

Yes. I think that’s exactly right. We continue to expand other qualified vendor relationships as part of the program, and I think the other big driver just in the core business as well is just the increase in unit growth that you’re continuing to see. And as you tuck in other inorganic acquisitions like WoodSpring, you continue to further accelerate that procurement services revenue. Over the long term, you expect it to at least grow in line with our franchising revenues, if not, continue to outpace slightly due to the fact that we’re just continuing to strengthen some of those relationships.

So should we imply that as you continue to outperform the other revenue line items kind of through the end of the year [be it] Bluegreen?

In the short term, outperformance. I think long term, we’re closer to franchising revenues.

All right. And then just my follow-up. Based off of my math on the midpoints of your guidance range is you’re kind of implying fourth quarter RevPAR growth a little above 2%, but you can have a massive range there. How are you thinking about fourth quarter RevPAR growth, its helpful thank you.

So the way to think about fourth quarter RevPAR growth, I mean, the third quarter is the toughest comp that we have for the year obviously, and the two major impacts, obviously, it’s the eclipse. You also have the hurricane tailwinds that happened in the third quarter of last year. I think in the fourth quarter, we do expect to see acceleration, obviously, from what we’ll experience obviously in the third quarter. Two primary reasons for that. You also have the removal of the eclipse impact in the fourth quarter, and then you started to see some of those hurricane benefits dissipate in the fourth quarter as well. When you normalize for all of the calendar shifts and when you normalize for some of those hurricane tailwinds that we saw last year, you’re right around that 2% to 2.5% or so, which is what you implied in your question.

Alright thank you.

The next question comes from the line of Robin Farley with UBS. Please go ahead.

I wanted to clarify because I think your previous guidance has not included WoodSpring and now it does on both the not included WoodSpring and now it does on both the RevPAR and royalty rate. On the RevPAR front, it looks like RevPAR is lower, including WoodSpring. I don’t know if that’s just Choice – I’m sorry, the Comfort renovations that you talked about if that’s sort of making it maybe lower? And then also on the royalty rate. Backing out WoodSpring, is the royalty rate on the existing business going down maybe a basis point or two? It could just be a rounding errors so if you could just clarify.Thanks.

Yes, Robin, it’s a good point. You saw a slightly higher impact of WoodSpring in Q1 because of 13.5% RevPAR growth that the brand had from a RevPAR perspective. When you take a look at the RevPAR this quarter, it was 2.7%. When you remove the impact, when you remove WoodSpring, it would have been about 2.6%, so about 10 basis points. For the full year, the impact would be right around that, call it 10 to 20 basis points or so. So obviously, not a very material impact on the full year. So we did consolidated as part of our guidance for the year. And when you take a look at the effective royalty rate, up about 15 basis points, WoodSpring had about a two basis point impact on that. So call it about up 13 or so for this quarter. For the full year, it’s right around that as well, about a two basis point lift.

So is the lower RevPAR, is it the Comfort brand renovations? Or is that – or is there anything else there impacting.

It’s a big driver, about 70 basis points in quarter for the Comfort brand portfolio, which is somewhere just south of 50% of our overall revenue, so you can back out the impact there. And then we expect that to continue in Q2 and Q4. We expect the move to modern upgrades to be a net positive for RevPAR in 2019 and beyond, as we discussed in our prepared remarks.

Okay great thank you.

Thank you.

The next question comes from the line of David Katz with Jefferies. Please go ahead.

I wanted to just delve a little deeper into WoodSpring and that as a segment. Obviously, there’s some good initial gains there in both performance and development. Is that an underexplored segment of the business that is now sort of getting on our radar in part because of WoodSpring? Has it been fragmented or segmented across the country? What’s going on in that segment?

I think when you look at the economy segment, David, in general, the growth in the economy segment is coming from the economy extended stay segment, and WoodSpring is a key driver of that. So when you look at the STR data, you look at the data from highland that looks at that segment, a lot of the growth is coming from the economy extended stay segment and a lot of that growth is coming from WoodSpring. What WoodSpring is, I mean, you have to think about it in a couple of terms. One, the hotels we’re building are 122- room hotels. So these are not your sort of – when you look at the average room count on an economy hotel, they’re much smaller than that. So first piece is they’re larger hotels. Secondly, they’re running at about 80% occupancy. And thirdly, these are all new construction full fee, meaning no discounting on the royalty rate side of the house. So we’re very excited by the performance of the hotels once they get in our system. And as you mentioned, we’re really excited about the development prospects, both with existing WoodSpring developers, Choice developers who are now building WoodSpring, and as I mentioned, the interest of additional institutional capital that’s looking to come in and do not one or two hotels, but do 20 hotels. So all of those are significant positives for us as a business. And that segment, I think, is something that maybe a lot of people in the industry haven’t really focused on, but it’s a key driver of growth for us, both on the unit side, and as Dom mentioned, on the RevPAR side.

And I wanted to – at the other end of the spectrum or your spectrum is Cambria. And we’ve seen quite a few announcements that you’ve made. Have you told us how many Cambrias there are in the pipeline? And what we can reasonably expect in the next year or two?

Yes. So we’re expecting to sort of cross the 50 open hotels, really, at this time next year, probably by the end of that in the second quarter of 2019. I think total pipeline is close to 90 hotels, somewhere in that – 80 hotels, David. So the growth of that brand and our confidence level that we’re going to get, act to critical mass, and ultimately, as we talked on previous calls, have to use less capital to incent the brand. We’re well on our way to doing that. So we’re at 39 open today. We’ll be crossing the 50 threshold by this point next year. We have 19 under construction, so we feel really good about the opening space in 2019 and beyond.

Perfect thank you very much.

Thank you.

The next question comes from the line of Jared Shojaian with Wolfe Research. Please go ahead.

Pat, you cited a 99% retention rate with your owners. You talked about the long-term, 20- year contract. But when I look at your room exit historically, they’ve averaged 5% per year. So can you help me bridge that gap and understand the difference between some of those stats you’ve cited? And then, with the Comfort refresh winding down, how are you thinking about the right level of room exits going forward?

I think the way we look at terminations is some of them are terminations we force, meaning the hotel is not meeting the brand standards or it’s a strategic move like we’ve done with Comfort over the last several years, where those are brand-driven or Choice Hotels-driven terminations. When we talk about voluntary terminations, really there’s only – I mean, the 99% I mentioned means that only 1% of our franchisees are actually taking their routes and saying they’re going to go independent or maybe to a different brand. So we look at that as a very key driver of the health of our brand and the attractiveness of our brands to our franchisee base. So that’s how we think about it. And I think if you go back and look historically on the overall terminations rate, much of that is us driving it because the owners aren’t willing to put the capital and to keep the brand up to the standards that we’re looking for, or it’s something similar to what we did with Comfort, where we are intentionally looking to move that brand up higher. And some of our owners who don’t want to stay in the brand, they may move to Comfort, they may move to a different brand of ours or move out of the system altogether.

Okay, that’s helpful. Thank you. And then just switching gears here. I mean, can you give me a sense as to, on the international side, what percent of your rooms are direct versus masters? And one of your competitors is talking about the opportunity to grow the direct piece, and the subsequent positive effect that, that would have on the total system royalty. So I think for you, international is 20% of your rooms, but it’s still a very tiny percent of your revenue, presumably just because of the master franchise agreement. So can you talk a little bit about that opportunity going forward?

Yes. So if you look at our international portfolio, we can get you the exact number, Jerry, but I think it’s probably over 50% fall into that master franchisee category. So those are markets like Brazil or Japan or the Nordic countries where we have a master franchise agreement in place and great hotels. But to your point, they don’t drive the type of profitability that if we do, we’re in the direct markets. On the direct front, we’ve been executing a strategy. If you look at our European footprint, really shrinking the number of hotels but growing the number of rooms. And so if you look at the exits we’ve had versus the adds we’ve had over the last really three years we’ve been executing this strategy, the goal was to go out of these sort of tertiary markets in Europe and move into more secondary and primary markets, one to drive the brand awareness higher, but two, also to drive the profitability of these hotels higher. So that’s kind of the strategy on the direct front. Yes, I think we talked about on the previous calls some of the things we’re doing around the international business. Our alliance with Sercotel that we announced on the last call really helps us in an area that we don’t have capability wise, which is hotel management. And we’re beginning to see some opportunity there going to market with our brands and Sercotel’s management in certain parts of Europe that, I think, are really going to help us to grow the European footprint.

So Jared, Pat is right on. It’s about 60% of the total portfolio falls into that master. However, a good portion of that is also a JV that we have with can – not technically a master, we get slightly higher rates obviously there. Well over 50% of that is in the form of a JV, but about 60-40 in terms of master and direct. We’re continuing to see that direct proportion grow year-over-year and expect to do it going forward as well.

All right. Thank you very much.

The next question comes from the line of Patrick Scholes with SunTrust. Please go ahead.

Hi, good morning, thank you. A question for you. When I think back to the last cycle and when we saw an uptick in gas prices in 2018, Choice was the only hotel company at that time to call out the bet that gas prices were in fact hurting their business. With the recent uptick in gas prices, are you seeing any impact as of yet on your business? Thank you.

The answer to that Patrick is no. We’re not seeing any impact. I think in previous years, we’ve done some studies that really look that even when gas prices in real terms were getting close to $5 a gallon in some parts of the country, even at that – those high elevated rates, we didn’t see an impact to hotel demand. So yes, we’re not seeing anything at this point that’s indicating it’s at all hurting any demand.

Okay, thank you. That’s it.

The next question comes from the line of Dan Wasiolek with Morningstar. Please proceed with your question.

Good morning guys, thanks for taking the question. So I believe last quarter, you guys had given guidance for net room growth 2018 excluding WoodSpring. Just wondering if there’s any change to that. And if you have any pipeline growth excluding WoodSpring that you’d be able to share for the quarter, what the growth was excluding that?

There’s not. When you exclude the impact of WoodSpring, we had guidance of 2.5% to 3.5% on our full year unit growth. We will be maintaining that. So at the midpoint, call it right at 2% or so. In terms of the pipeline, the pipeline was up about 32% with WoodSpring. If you remove WoodSpring from that equation, it was up about 18%.

Okay, very good, that’s it thanks.

The next question comes from the line of Carlo Santarelli with Deutsche Bank. Please proceed with your question.

Yes, hey guys. Good morning. I was just wondering if you could quickly maybe just go through some of your capital allocation strategy here going forward, specifically kind of CapEx and other capital deployment needs. And how we should maybe think about as the leverage continues to kind of trend lower, where your heads are?

Sure. So I think if you look at our capital allocation strategy, and we’ve talked about this multiple times, but it’s about really investing back in our brands where it makes sense. If you look at the $475 million we have allocated for Cambria, today only about $280 million of that has actually helped. But we’re going to allocate capital really to projects that make sense for us on our core business and growing that. Secondly, we’ll look at acquisitions, which we demonstrated this year with the acquisition of WoodSpring in segments that makes sense. We like to buy brands that are ready to scale and that are kind of the brands of tomorrow. So we’ll continue to do that. And then we have returned capital to shareholders when it makes sense to do so. And so I think if you look at that sort of strategy, that’s kind of been our strategy over the last, really, our history really since we’ve been a public company. Dom, do you have anything to add on it?

No, I would just say that any excess capital, we sit at about 2.4 times our leverage ratio, and we talked about that publicly. We want to be right around three to four times. So we are certainly underlevered at this point in time, and so I think we can continue to take a look at piling some of the capital back in the business in organic or share repurchases, and we do expect to continue share repurchases in Q2 as well.

Great, guys. And just quickly if you don’t mind, just a little housekeeping. What was the diluted share count at the – as of June 30 as opposed to the average just the end of period share count?

Right around $57 million.

Thank you.

Do we have any more questions?

Apologies. The next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi good morning. I have a follow-up on the capital allocation question. The buyback activity has been the highest really since really in 10 years or so. Could we expect this level of buybacks to continue on an ongoing basis, excluding any kind of larger acquisitions?

So I’ll just go back to Pat’s original comment, right? At the end of the day, we evaluate in terms of what opportunities we had internally, be it Cambria or another brand as well as inorganic activity. Like I said, I think you can continue to anticipate some buyback activity in Q3, and we’ll continue to monitor it in Q4 and beyond.

All right, great thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Pat Pacious for any closing remarks. Thank you.

Thank you. And thank you all for joining us today. As you can see, we have a lot to be excited about. Our long- term strategy of investing in our brands is paying off, as demonstrated by our strong key financials, robust development pipeline and powerful franchisee base. We’re pleased with our performance and look forward to a successful second half of the year. Have a great summer, and we will talk to you in the fall.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.