Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's First Quarter 2024 Earnings Call. [Operator Instructions] I will now turn the conference over to Allie Summers, Investor Relations Senior Director for Choice Hotels.

Good morning, and thank you for joining us today. Before we begin, we'd like to remind you that during 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 the forward-looking statements, and you should consult the company's Forms 10-Q, 10-K and 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 subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our first quarter 2024 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section. This morning, Pat Pacious, President and Chief Executive Officer, will speak through our first quarter operating results; while Scott Oaksmith, Chief Financial Officer, will discuss our financial performance and 2024 outlook. Following our prepared remarks, we'll be glad to answer your questions. And with that, I'll turn the call over to Pat.

Thank you, Allie, and good morning, everyone. We appreciate you taking the time to join us. It has been a successful start to the year. We drove our adjusted EBITDA 17% higher and our adjusted EPS, 14% higher year-over-year to record first quarter levels, and we expect to carry this strong momentum through the rest of the year. The impressive results we delivered in the first quarter clearly demonstrate that we are unlocking the revenue synergies from the Radisson Americas integration. The Radisson Americas acquisition has meaningfully enhanced our growth profile as it created a step function change in the size of our business, expanded our rewards program, broaden our geographic reach, unlocked new value through our platform capabilities and opened new incremental, non-RevPAR-related earnings streams, which are resulting in additional profitability. By increasing our scale, network of franchisee relationships and customer reach, we have significantly increased our future growth opportunities, resulting in a record global pipeline of over 115,000 rooms at quarter end, which is a 10% increase quarter-over-quarter. And our strategic focus on more revenue-intense hotels means that the pipeline continues to be a significantly higher value than the current hotel portfolio. Importantly, the hotels in our domestic pipeline now represent a more than 30% RevPAR premium compared to our existing portfolio, a meaningfully higher average effective royalty rate, driven by our strengthened value proposition to franchisees, and they have, on average, a 40% higher room count per hotel as compared to our current domestic system. With this positive momentum, we are very encouraged by our existing and future portfolio prospects. At the same time, the strategic investments we continue to make in our franchisee-facing systems and tools, our brand portfolio and our platform capabilities are increasingly contributing to our earnings results and are providing additional levers for…

Thanks, Pat, and good morning, everyone. Today, I will discuss our first quarter results, update you on our balance sheet and allocation of capital and comment on our outlook for the remainder of 2024. Throughout my remarks today, I would like to note that our figures exclude certain onetime items, including transaction pursuit costs, which impacted our reported results. For first quarter 2024 compared to the same period of 2023, revenues, excluding reimbursable revenue from franchised and managed properties increased 16% to $203 million and our adjusted EBITDA grew 17% to a record $124.3 million. This was driven by a combination of the successful integration of the Radisson Americas portfolio, organic growth in more revenue intense segments and markets, strong effective royalty rate growth and the robust performance of our international businesses and non-RevPAR dependent programs. Our first quarter adjusted earnings per share reached a record $1.28 per share, a 14% increase year-over-year. Let me first discuss our key revenue levers, which include our unit growth, royalty rate and RevPAR performance. In terms of unit growth, our strategic goal has been to accelerate quality room growth across more revenue intense brands and markets, while simultaneously growing our effective royalty rates, which ultimately results in an outsized increase in royalties. We have successfully increased our portfolio of these revenue-intense brands to now comprise 82% of our total domestic hotels. For the first quarter, we reported domestic unit growth of 1.2% year-over-year across our more revenue intense, upscale, extended-stay and mid-scale portfolio. We expect to see an acceleration for the remainder of the year and continue to anticipate achieving our full year target of approximately 2%. At the same time, we increased the number of domestic franchise agreements for our revenue intense brands awarded in the first quarter by 7% over the…

[Operator Instructions] Your first question comes from the line of Shaun Kelley from Bank of America.

Thank you for the all the prepared remarks and the overview. If I could, for Scott or Pat, you would love to just kind of run through a little bit on the cash flow side. So we've talked a lot about investments across the platform, obviously, what you're doing to drive the revenue intense strategy. We're getting a lot of questions around sort of the free cash flow conversion and free cash flow bridge. So specifically, I just want to drill in a little bit more. If you could help us kind of think through the major buckets, what's your expectation for key money that's going into some of the franchise support side? what's the expected investment for Cambria? And then I think third and most important, we're seeing a pretty big set of just pure CapEx and would love to kind of understand a little bit more about is that the platform that you're investing in? Or what's driving that? Because it is pretty high relative to a lot of your peers in the asset-light hospitality space?

Thanks, Shaun. I'll take that one. So in terms of our operating cash flow, we expect to continue to increase that over the 2023 levels. In terms of key money, last year, we were about $98 million for the full year. And as we talked about on our prior call, we expect to be generally in line with that, maybe a little bit slightly higher, really reflecting higher openings for the year. For instance, in the first quarter, our openings were up 20%. So our key money was up about the same amount, but the actual average amount per deal was slightly less than what it was in the first quarter of 2023. In terms of our recycled capital support, we should be roughly around about $130 million of capital that for this year. And really, that's a mix of the support we've done for both the Cambria and the Everhome brand. As a reminder, that is really around joint venture investing, some small mezz lending as well as a few self-developed assets to really get those brands going with the idea of being -- growing those brands to scale quickly, then recycling the capital and going to your franchise model with those brands. So when you take those puts and takes, and I think the other question was around CapEx, some of that self-development assets does show up in the capital expenditure line item. So if you kind of look at the capital expenditures, the investment in joint ventures and lending, all of that is what I refer to as about $130 million for the year. So when you look at those just our normal CapEx, we look at cash flow conversion, looking at our free cash flow, which is defined as operating cash flow excluding key money and those support -- recyclable support programs, we should be in that kind of mid-60%, 65% free cash flow conversion from EBITDA to free cash flow for the year.

Okay. And then just could you just give us the latest update on what you're seeing across the consumer? Obviously, you talked about April, you saw some improvement. Could you help us put a little bit of a number around that? And I'll ask -- I'll tell you why. I mean, we've certainly heard -- some people tell us that later in April, they saw sort of a reversal back after Easter because of passover. And then we've heard others, particularly some of the lower-end chain scales, actually tell us that April is fantastic and is really robust. So just give us a little bit of a maybe a teaser on how Q2 is starting. We appreciate the visibility is pretty short here.

Yes. Thanks, Sean. I mean it's -- our forecast sort of how we're progressing is very consistent. We expected Q1 to be softer. April did turn positive. So we are feeling pretty good about the trend. And as we expect to see both in our forecast and is in our guidance, we expect to see RevPAR improvement from here forward. So we would be in the camp where April was better and not seeing a shift backwards. When you look forward, the research that we're looking at shows that family travel, in particular, is really up this year and families do expect to travel and we have effectively the right brands for that type of traveling consumer. Their budgets are higher. We look at consumers that are continuing to prioritize travel, the employment numbers are strong. And when people have a job, they're going to travel, so they might cut back in other areas like fast food or retail, but travel has been pretty resilient and the research shows that's expected to continue. And the thing we keep looking at, and which I think people keep missing is, if you look at the Atlanta Fed numbers, the middle-class wages have grown 5%, which is now ahead of where inflation is. And that continuation of continuing to outpace inflation gives us a lot of confidence that the RevPAR expectations we expect to see, particularly for our brands and for our segments will be pretty strong throughout the rest of the year.

Your next question comes from the line of Michael Bellisario from Baird.

This is part for Scott. Just can you add some color on the reservation income that you guys record and help us understand the mismatch between the reimbursable line items on the income statement versus what gets added back in the EBITDA reconciliation. It looks like you got about $12 million of earnings in the first quarter. Any one-timers in there? Is that the right run rate? And then what's assumed in your full year guide would be helpful.

Thanks, Michael. So as we discussed in prior calls, the full integration of the Choice and the Radisson platforms at the beginning of the fourth quarter of 2023 provided us an opportunity to unlock the ancillary incremental revenue streams. These are not onetime benefits, but ongoing earnings streams, and we believe that we can further drive additional profitability through these as we expand our scale of our portfolio of network of franchise relationships and customer reach. In terms of kind of run rate during the fourth quarter of last year, these generated about $8 million of incremental EBITDA, and we were about $10 million in the first quarter of 2024, we would expect this run rate of about $8 million to $10 million to continue per quarter for the remainder of the year.

And then just on the Wyndham shares, it looks like you did not sell any in late March, if you could comment on what you did in April and how you've funded the buybacks quarter-to-date so far that would be helpful and that's all for me.

Yes. At the end of March, we still own about 1.3 million shares of the Wyndham stock, which was valued at around about $110 million. But as we discussed, we're not long-term holders of the stock and the proceeds of those sales will be available along with our outstanding debt capacity and free cash flow to execute our share repurchase program. So we'll be unwinding those shares over time and the initial share buybacks in April were mainly funded with debt.

Your next question comes from the line of Stephen Grambling from Morgan Stanley.

You mentioned that your capital allocation priorities are unchanged, and you just talked about this a little bit. But I think you had mentioned that you were willing to take up the leverage to a degree now that you're not pursuing the Wyndham transaction. Can you just remind us maybe where you are, where that could go and how you think about buyback versus other areas of investment?

Yes, Steve, I mean our target range has been 3 to 4x gross debt to EBITDA. That's been -- we've traditionally been more at the lower end of that just because of the free cash flow generation that Scott mentioned earlier. Over the years, we've looked at opportunities where we can find sort of a transformational acquisition, where the leverage levels would be closer to the high end or slightly above with a path to get that back down below. That's where we've looked at that opportunity. But we've been able to successfully -- if you look at last year, we bought back a lot of stock. We invested in our brands. We did a lot of key investments, all staying within that sort of lower end of the leverage ranges that we set out as targets. So as Scott mentioned, our capital allocation strategy is unchanged. We're going to continue to invest in our brands and in our business. And a lot of what we talked about in the prepared remarks was really related to those, and those are really paying off. When you look at the convention we had last week, we had 6,500 -- over 6,500 people at that convention. And a lot of the excitement around brand refreshes for Sleep Inn, for the Comfort Inn, Rise & Shine prototype. All of those investments are things that we are going to continue to make to keep the brands relevant and fresh, and then look to launch new brands or relaunch in the case of the Park Inn brand. So those investments continue to be something we're able to do, including looking at the tuck-in M&A. When we did the Radisson acquisition that was something we were able to do effectively with our current capacity without taking the leverage levels up. So it's a really a reflection, I think, of the growth of the business, the size of the business and the free cash flow generation we have that allows us to do all of that but stay within that 3 to 4x range.

And then one other clarification. Just in response to the last question, where you were referencing the mismatch and the reimbursed costs versus reimbursed expenses, and I think you said $10 million a quarter. Is that going to continue into next year [indiscernible] I guess I just want to make sure that I understand if that's recurring or not?

Yes, those are recurring fees. So on an ongoing basis going forward for the quarter -- for the rest of the year, it's $8 million to $10 million per quarter, but that will continue into 2025. And then obviously, we'll be looking to grow that as the size of our portfolio continues to grow and our consumer reach continues to grow.

Your next question comes from the line of David Katz from Jefferies.

Number one, I know you sort of talked about RevPAR. But could you maybe give us a bit more insight about RevPAR cadence for the remainder of the year, whether that's exactly or relative or qualitative as possible. And then my follow-up is, post the endeavors with Wyndham, were there or are there any opportunities that may have been on hold that may be coming back to life or becoming more active now that you've moved on from that?

Sure, David. So let me just start with the sort of seasonality of RevPAR, just as a reminder. So when you look at the weighting of each quarter for us, about 20% of the RevPAR for the year is in the first quarter, you get about 60%-ish in Q2 and Q3 and then another sort of 20% in Q4. So the fact that Q1 is -- was softer and we're seeing the trend turn is the reason why we feel pretty good about the cadence as you call it, going forward. And I mentioned the drivers that we feel really good about with regard to employment numbers and wages and the like. When you look at projects that were on pause, if you will, during the Wyndham pursuit, there's always opportunity out there for additional tuck-in acquisitions. There's opportunity for us to launch brands. And so some of those things, while we have the -- in our long-range plan, we might have hit the pause button just as we were reflecting on how putting the 2 companies together would create a lot of value and maybe there's no need to do a specific project. But there's certainly a number of things that we have in the queue to continue to sort of grow our portfolio. As we've mentioned in past calls, we have some white space in our portfolio. I think the relaunch of Park Inn as that sort of gap filler between Quality Inn and Econo Lodge is a key aspect of that. We're really excited about what we're seeing in upscale. We had a really fantastic set of sessions with our upscale owners at convention last week and the growth we have in now 8 brands that are in that segment for us, we feel really good about that. And then the one that's sort of lying in front of all of us is the international front. And there are a lot of what we do last week is meet with our international franchisees in Asia Pac, in the Americas and in EMEA. And there's a lot of interest in growing with us with regard to our brands and other brands that might be available out there. So to your point, there are a lot of future growth opportunities, both organic and inorganic that will present themselves to us. And that as we have in the past, we're going to continue to take advantage of.

Your next question comes from the line of Robin Farley from UBS.

I wonder if you could tell us if you're still expecting a full year increase in total units. I know the revenue-intense units, it sounds like your view on that is unchanged. Just wondering what's happening outside of that segment? And then also, can you help us think about how to size the opportunity of the Park Inn by Radisson where you think that could go, say, on a full year basis in '25. And you kind of alluded to -- you referenced you potentially still looking at acquisitions, I think. So I wonder if you could just clarify that a little bit more. You kind of made the comment, I think, more having to do with your leverage levels. But if you could talk about what your latest thoughts are on that?

Sure. So the first question with regard to total units, we do expect to grow total units. If you look, Robin, at the pipeline, we're really excited by what we're seeing. And I'll just remind everybody what's in that pipeline is worth double what's in our existing system. So we talked about a 30% RevPAR premium, 40% more rooms and a higher effective royalty rate. It translates to what we've been saying on prior calls that what's coming is worth double what's leaving. So that pipeline of 115,000 rooms, that grew 10% quarter-over-quarter. It's grown 20% year-over-year. And as Scott mentioned, our Q1 openings grew by 20%. So that more robust earnings potential per unit is starting to flow into the system. With regard to Park Inn by Radisson, if you look at that segment, there's about 20,000 existing properties that are in the independent sector unbranded, which are ripe for conversion. So the total available market there is significant. We mentioned that the enthusiasm at last week's convention, the booth around Park Inn was full for the full 3 days that we were there. A lot of owners who are looking for that opportunity and looking for a fresh brand that's connected to a robust delivery platform that we offer we're pretty excited about where that can go. But I wouldn't try to put a number on it yet. I think we want to try to get some traction here first. And then just to clarify on acquisitions. As a company, if you look at our current portfolio today, probably half of the brands are ones we've grown ourselves, half are ones we've acquired over time. This is a scale business and finding the right acquisitions, be they transformational like Radisson or more tuck-in like WoodSpring, that's something we're going to continue to look at. We don't have anything that we're pursuing today, but it is something that I think when you look out in the near term here, there'll be more domestic opportunities, but also more international opportunities that come available. And just given the strength we have internally, to acquire brands, integrate them and grow them. It's what we did with WoodSpring. It's clearly what's happening with Radisson and Country Inn & Suites. We feel really good about our internal capability and core competency to execute M&A really well and create a lot of shareholder value and value for our franchisees.

Your next question comes from the line of Joe Greff from JPMorgan.

A couple of quick questions here. Looking at your 2024 guidance, what's embedded for royalty fee growth this year? Can that match the level of EBITDA growth? Or does it lag? And then I have a follow-up.

If you look at the building blocks of our royalty growth, so we've guided to our ring net unit growth of 2% and our RevPAR of 0 to 2%, so the midpoint of that being one. And then obviously, royalty rate in the mid-single digits. So that should be a good growth lever. But EBITDA should actually grow at a faster pace than that. Our EBITDA at the midpoint is between 9% and 10%. So with our ancillary revenues, cost control and other levers will actually grow our EBITDA faster than the royalty line item.

And then within that royalty line item, can you remind us maybe you talked about it and I didn't catch it. What the composition within that royalty line is between the higher RevPAR intensive chain scale segment brands versus the lower ones? I don't know if you want to look at it on the first quarter or last 12 months? Or how do you see that for this year, but just to give us some proportionate weighting related to those segments that have better growth, that would be helpful.

Yes. If you look at our overall portfolio, 82% of that in hotels is our revenue-intensive brands. It's actually a little bit stronger when you look in terms of rooms. It's 87% of that. So the lion's share of our royalties are generated from our revenue-intensive brands. So most of the growth will be coming from there. We've talked about the 2% target for the revenue intense brand growth. Overall portfolio for the U.S. will be positive. We do expect the Econo Lodge and Rodeway to be slightly negative for the year. So most of that revenue intensity will come through there, which is obviously where we want to grow stronger RevPAR, a stronger number of rooms per hotel and a higher effective royalty rate for those brands. So we feel good about the way we can grow those brands to really drive our overall royalty revenue.

Joe, it's important to look at the pipeline, too, because while 82% of the system today is revenue, intense over 90% of the pipeline is revenue intense. So it speaks to the sort of future growth that, that trend is going to continue here.

And I think the last thing I would just add, as we've talked about in the past with our revenue intention strategy, it's not just between the brands, it's within the brands, too. So despite the fact Econo Lodge and Rodeway may decline in overall number of units, the royalty contribution of them should be relatively flat as we're bringing in on hotels that are generating 20% higher revenue than the ones we're exiting. So while the absolute number of hotels may be declining, the royalty contribution is not.

Actually, one final question or maybe a comment. Are you guys thinking at all to disclose and guide similar to your peers? And just in terms of net rooms growth, and I don't know if it's an absolute RevPAR, but just to kind of validate some of the targets that you set for your peers, it's a much more straightforward way of disclosure. And to be honest if you changed your disclosures or is this probably beneficial in your best interest to do it, but I don't know if you got any thought to that, but that's all for me.

It's something that, I know we've talked about this in the past, Joe, and we'll continue to look at that. But of switching as we've started to talk more about our pipeline and number of rooms and starting to talk more about the system as international. Full global system as our international continues to grow. So we've given out guidance on a number of units, so we've stayed with that for now. But something we'll take under advisement as far as guiding to more on our rooms growth on a global basis on a go-forward basis.

Your next question comes from the line of Patrick Scholes from Truist Securities.

My first question, then I'll have a follow-up question. Pat, would you completely rule out trying again for Wyndham and sort of lay out a scenario here. Let's say Wyndham stock a year from now is still hovering at $75. And we all know they've laid out a plan sort of in defense to your proposed acquisition to organically get their stock at least to $90 or above. But hypothetically, if the stock was still at $75 a year from now, would you try again for Wyndham? Or because of your concern -- hovering concerns around FTC and Department of Justice and all that, would that not be something you would be interested in, in that scenario? I'm just trying to see if it's something at this point you would completely rule out if that were the case, say, a year from now?

Yes, Patrick. I mean, I think if you look at the press release we put out when we pivoted away from trying to acquire the business, the strategic rationale still makes sense. So that's really a question for the Wyndham shareholders to answer. I think the other aspects you mentioned around regulatory, as we said in our press release, we felt very confident about the progress we were making on that front. So this is more back to -- we really got no price discovery, and we had laid out a $90 offer, we felt that was a full premium value for the value that could be created. And you don't see a lot of opportunities to create over $2 billion in value creation for shareholders on both sides. And so it's really a question, I think, which should be answered by the Wyndham shareholders in the future.

Okay. I did not hear a definitive no in there. My next question, a little bit more straightforward here. On your earnings, it looks like your other revenue line was up materially year-over-year. Can you talk about what drove that? I think it was up 55% year-over-year. I know in the past, when we've seen outsized growth that's from termination fees. Just a little bit more color on that and then expectations for that revenue line item for the rest of the year.

Yes. So to your point, that line item has various revenue streams, including termination awards, which were -- there was one larger termination award that we received during the quarter. We would expect that line item to be up kind of in the mid-single digits for the year. So a little bit of timing on the recognition of some revenue in the first quarter compared to the rest of the year.

Your next question comes from the line of Alex Brignall from Redburn Atlantic.

The first one, just on the reimbursed revenue and cost dynamic. It's slightly different. IHG has had something slightly similar in that quarter, but it is a slightly different methodology to some of your peers in terms of the accounting for other fee types and suggest that you're not going to be running that line item to break even. Is that going to move into a different line in terms of where you account for those revenues? And the revenues or the kind of permanent gains, the $8 million to $10 million a quarter that you talked about, do they come into your guidance of mid-single-digit royalty rate increases because you're kind of [indiscernible] permanent net revenue that you got to keep?

Yes. In terms of presentation, we talked about this a little bit since the acquisition of Radisson just because of the way our contracts were structured a little differently, some of the fees were treated differently. They've been in that other revenue. Once we get a full year behind us, we do expect in Q1 of 2025 to be able to break out those line items into separate categories where we'll get back to the traditional presentation of where other reimbursable revenue equals -- that line item is truly just the reimbursable line items. But due to some of the accounting requirements and consistency of where it's reported in the financials there in that line item. So we do expect in Q1 to break those out. Those are ancillary revenue streams that are not royalty related. So there will be a separate earnings stream for us that will be outside of the royalties that we earn, but they certainly will be dependent on the ability for us to continue to grow our scale, add more services that improve the operations of our franchisees to be able to grow those in the future. So we'll be more on the non-RevPAR-related growth vectors that we have, which actually plays into the versatility of the business to be able to grow not only through unit growth and RevPAR but through other value-added services that we can provide to our franchisees.

Fantastic. And then just as a follow-up, your -- obviously, a big part of that pipeline increase came from the rooms that you signed in France. Could you just talk about the economics of that deal? Is that a kind of [ hold back ] conversion deal? What's the source specifically of the sort of owners of those properties? And how does kind of fee stream and key money going into any brand changes or property changes working?

Yes, Alex, that's -- it's a direct franchise market for us. So those are direct franchise agreements. It's a full fee sort of model there. And it's effectively doubled the size of our footprint in France. So that's kind of how we're doing it. The brand is [ Sanitude ]. So they're going to continue to sort of operate with that flag as well. So it's a good opportunity for us to continue to drive the growth of our direct franchise business in Europe on the continent in particular.

So sorry, just to be clear, what kind of franchise fee do they come with relative to the group?

Yes. So they're paying. They're paying full fees in line with what we receive in the French market.

There are no further questions at this time. I will turn the call back to our speakers for any closing remarks.

Great. Well, thank you, operator, and thanks again, everybody, for your time this morning. We'll talk to you again in August when we announce our second quarter results. Have a great rest of your day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.