Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's Third Quarter 2019 Earnings Call. [Operator Instructions]. Please note, this call is being recorded. I would now like to turn the conference over to Oscar Oliveros, Investor Relations Director for Choice Hotels. Please go ahead.

Thank you, operator, and welcome, everyone. Before we begin, we would like to remind you that during this conference, 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 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 the third quarter 2019 earnings press release, which is posted on our website at choicehotels.com, under the Investor Relations section.This morning, Patrick Pacious, our President and Chief Executive Officer, will provide an overview of our third quarter 2019 operating results; Dominic Dragisich, our Chief Financial Officer, will then review our third quarter 2019 financial performance and provide an update on expectations for 2019. Following their remarks, we'll be happy to take your questions.With that, I'll turn the call over to Pat.

Thanks, Oscar. Good morning, everyone, and thank you for joining our third quarter 2019 earnings call. We're pleased to report another quarter of strong financial performance and remain confident that our long-term growth strategy is working. This morning, we announced earnings per share that exceeded the top end of our previous guidance and raised our full year earnings per share and EBITDA guidance despite a softer RevPAR environment. Don will share more of our financial results in just a bit.I'd like to begin this morning by highlighting our long-term strategy to grow in higher value segments and higher value geographic markets. We continue to strengthen our presence in the higher growth and more revenue-intense upscale, mid-scale and extended-stay segments where our brands reported a 3.1% increase in domestic unit growth as compared to the third quarter of 2018. Growth in these segments comes even as we transform Comfort, our largest brand. Our other midscale brands grew 4% in the quarter.Simultaneously, we continue to expand our presence in the high-value upscale segment with 13% domestic rooms growth for the quarter. We also grew in the extended-stay segment, where we drove a 10% increase in open hotels in the third quarter. We are also awarding a greater share of franchise agreements in more revenue-intense markets. In fact, the anticipated total rooms revenue of a hotel in our pipeline today is over 40% higher than that of the average hotel in our system today. As we'll share this morning, Choice's upward momentum in high-value geographic markets and segments is paying off for our hotel owners and shareholders alike.I'll begin with upscale, where we are successfully growing the Cambria Hotels brand. In the third quarter, we drove a 20% year-over-year increase in Cambria's room count by expanding the brand in major business hubs nationwide.…

Thanks, Pat, and good morning, everyone. We are happy to report our third quarter results, which built off the great progress we have made year-to-date. Our financial performance continues to be driven by the power of our franchise business model and growth across higher value segments, markets and brands. Overall, a combination of solid revenue growth and disciplined cost management resulted in a 7% increase in our adjusted EBITDA. Strong operational performance, coupled with the implementation of tax strategies that lowered our effective income tax rate, resulted in a 10% increase in our adjusted diluted earnings per share, which exceeded the top end of our guidance by $0.08 per share.Our franchise business model provides multiple levers to drive top line revenue growth. These include increasing RevPAR, expanding the number and revenue intensity of the hotels in our system, improving the pricing of our franchise contracts and continuing to expand our procurement services revenue by providing more value-added programs to our platform of over 7,000 hotels and other travel partners. Overall, third quarter revenues grew by 10%, excluding marketing and reservation system fees to $153.7 million.Let me drill down into our four revenue levers beginning with RevPAR. Overall travel demand during the third quarter with softer than industry expectations. As a result, our domestic system-wide RevPAR results for the third quarter fell below our expectations, but was generally in line with our competitive set, declining 70 basis points versus the third quarter of 2018.Despite the softer RevPAR environment, we are pleased that the initiatives we have implemented to improve the guest experience at our hotels and the tools we provide to our franchisees to maximize their top line revenues are working. This is especially true for our renovated Comfort hotels, which experienced share gains from our competitors. As Pat mentioned, the…

[Operator Instructions]. The first question today comes from Thomas Allen with Morgan Stanley.

Good results in a tough market. So just talking about the market, overall. It felt like, this quarter, the economy to upscale chain scales, which you're focused on, really underperformed largely in upper upscale, much more than it has in prior quarters. What's going on there, do you think?

Thomas, I think that's a segment that depends a lot on corporate travel, which I think, as you look across the industry, that has softened somewhat. Where we're focused in Cambria is really in the upscale segment, not necessarily upper upscale. But I think it's a softening in that corporate travel environment. What's impressive for us or hopeful is what we're seeing on our Cambrias themselves, our ability to win more corporate account business, which has not been sort of where we've been focused in the past where, historically, we've been 2/3 leisure, 1/3 business. But when you look at the corporate accounts we're capturing in both Cambria and some of our other brands, we feel really positive. So while it is softening, we're taking share at a time when things are not growing, which is actually a strong indicator for us about the brand's strength.

I think one of the other things - sorry, Thomas. But I think one of the things - go ahead, please.

No, I just had to clarify. I was saying this economy through upscale. So I wasn't calling out upscale, specifically. I was just saying, it seems like the lower to mid-tier underperforming the higher tier right now in the market. Is that a - that's what the data is kind of implying.

Yes, I think - yes, I think you're seeing a broader trend of light on both the leisure side and on corporate, so the industry itself is softening somewhat. I mean, when we look into our system, in particular, the softest area geographically is the sort of the oil and gas markets, think Texas, Oklahoma, Louisiana. That segment in and of itself, really, we would have been flat from a RevPAR perspective if you back out what's going on in those oil and gas markets. So there is some softening in that part of the country that I think is adding to - is a driver rather of the softening.

Helpful. And then just my follow-up. You guys made a statement that you expect procurement revenues to continue to drive outsized growth over the next several years. Can you just remind us what's really driving them and what's driving your optimism there?

Yes, I think it's a number of things. One is the growth in the number of rooms, obviously, across our system. What's in there are - when our hotels buy everything from sheets and towels to soaps, those types of things. The other thing that we've added for our owners is access to things like cyber insurance and some other things that really discounted rates. So there's a lot of things that we can, through the scale purchasing that we as an organization can bring to our individual hotel owners, that's very attractive. So that's added to it as well. So it's both the system size growth and then also new programmatic things that our owners are asking for that we're able to bring to them at a discounted rate.

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

This is actually Danny [ph] on for Sean. My first question is on your SG&A. So it did come in a little bit lighter than what we were modeling for or we were looking for in the third quarter. And if you look at it kind of year-to-date, it's running sub-3% year-on-year. So if we like ex out all the onetime stuff, but what is like sustainable trajectory going forward? Is that something that we've seen so far? Is that normal?

Absolutely. So historically, we've grown our SG&A right around, call it, 4% to 5% mid-single digits or so. At the beginning of the year, we talked about guiding to a much higher SG&A growth as a result of some of the investments that we're making in the business. What we found is we were able to do a lot of those investments at a lower cost. Obviously, there's some timing implications as well. So we expect a slight tick up in Q4 in terms of our SG&A spend. But when we take a look at the full year, we're still looking at probably about a 4% growth year-over-year for the full year. We do anticipate that being our normal run rate as we progress into the future as well.

Yes. That's really helpful. And then just for my follow-up, how - then this is more on the royalty rate side. Maybe at a high level, are you guys able to maybe think about - or walk us through maybe like any of the big pluses and minuses looking to next year? Just the moving pieces between moving further up the chain scales, how new construction would impact? And then to the extent you're able to give any color, whether there's a meaningful difference between domestic royalty rates and international since international is actually - there is some traction there, too?

Yes. I think just to answer your second question, first, the international relative to what we do domestically. It's about half. So it's in the 4s domestically and in the 2s internationally. A lot of that is really a result of two things. One, master franchise agreements. And then also, in a lot of the countries where we do, do direct franchising, the franchise model there is not as robust, if you will, from a business delivery perspective. So it is a lower effective royalty rate marketplace.As far as what will drive it in the future, I think what - you got to look at two things. One is the amount of new construction we are doing, where we're not discounting the effective royalty rate. If you look at brands like Cambria and Comfort, WoodSpring, a lot of our new construction brands. Those are the value proposition that owners are looking for, they're willing to pay full rates for those. So we're not having to discount to drive unit growth on that front. And I do think some of the discounting that had to be done way back during the downturn as those hotels ramp to full rates, you're seeing the burn off of those discounting that had to be done back 6, 7 years ago.

Yes. And we've run an analysis internally, if you think about just the long-term potential for that effective royalty rate line item, we basically say that there's probably about 70 basis points or so over the course of the long term, if every one of our contracts is actually issued at rack rate. And so we still do see, when you take a look at our historical averages of, call it, mid-single digits. We see that being sustainable over the course of the next several years.

The next question comes from David Katz with Jefferies.

Nice quarter. I just wanted to go back to one thing that I wasn't quite sure about from the comments versus the text around Cambria's RevPAR. I know it's still relatively small. Was it plus 2% or was it - what - we were seeing minus 2%, we thought.

No. On a same-store basis, it's plus 2%, which when we look at the segment, it competes in, it's 250 basis points of bare where the segment came in. So that - because we've got hotels that are ramping, we wanted to look at same-store to provide an apples-to-apples.

It's a math equation, David, with how successful we've been in terms of opening new properties and those properties that open towards the tail end of last year as well. All of those hotels are in ramp so the RevPAR stats that we issue are on a portfolio basis versus a same-store basis.

Right. And just more broadly speaking, you're obviously getting some solid momentum here. But just given the landscape out there, where, from our perspective, we see public companies putting up pretty strong unit growth across the board. And we always ask ourselves the question - or trained to ask ourselves the question, can everyone win here or someone has to lose? How should we think about that matter? Can everyone continue to add unit growth at the rate that they have?

It's interesting, David, I've got a couple of slides that I look at that came out of the hotel data conference a couple of months ago, that just talk about the 30-year trajectory of consumed room nights per capita across the U.S., and that number continues to accelerate. So if you look at the long-term trends, population growth, you look at the retiring baby boomers who are living longer, have more discretionary spend or spending it on travel, the long-term trends are for greater demand. And so when we look at that environment, there is an opportunity for a lot of companies to participate in this segment or in this industry. I think for us, in particular, the unit growth that we're looking at and the strategic segments that we're focused on are really those higher demand segments. The upscale limited service segment is where developers want to build and consumers, be they boomers, GenXers or Millennials want to stay. And so when we look at those demand and supply trends, those are positive trends for not just our brands, but for others in the industry. So we feel pretty confident about our ability to take share, but also as the pie itself is getting bigger for us to be successful on those segments.

The next question comes from Robin Farley with UBS.

Great. First, I wanted to ask on your unit growth, which is unchanged for the year. Kind of implies that the fourth quarter would be the biggest increase, sequentially, in unit growth. And just wondering if there's any risk to that, given some other companies have talked about construction delays because of labor shortages. Just how comfortable you are that Q4 will sort of get you to the full year number?

So when you take a look at Q4, it's obviously our strongest quarter in terms of new openings. When we take a look at the pipeline, both in terms of the conversions as well as new constructions, we are confident in that approximately 2% guidance. Now a 5 or 10 hotel push into January could shift that 10 basis points either way. And so from that perspective, we expect to be pretty close to that 2% unit growth number.The only other thing I would add is if you take a look at our rooms growth, in particular, we expect our rooms growth to actually outpace our unit growth this year, and this goes back to the prepared comments where growing in higher revenue segments, larger room counts, especially on the extended-stay side of the house. And so we do anticipate from a room's perspective, probably coming in slightly above that 2%, but units, we - best guess right now is approximately that 2% range.

Okay, great. No, that's helpful. And then just wondering if there are any other ownership situations like the JV that you bought in those 4 units. When you look out and you're taking measures to grow the brands, are there other sort of temporary ownership situations like that, that you're considering?

So that joint venture was actually our largest from the standpoint of open hotels and assets. We don't have anything similar to that. We - from a development perspective, have, call it, a handful of joint ventures. We also put, obviously, key money out and are doing some lending. So from the standpoint of using multiple vehicles to grow the brand, we're going to continue that strategy. But we don't have anything from a joint venture partner that is of similar size.

Yes, Robin. And if you take a look - because we've gotten a couple of questions on this, so I think it's important to share it. When you take a look at that $555 million that's out there, that's not all key money and recyclable, call it a couple hundred million or so, that's really those owned assets that we talked about. Couple of hundred million are in the form of JV and loans, and then everything else, about $75 million or so, is key money, because it is a question, we've got in terms of that decomposition of that $555 million that's tagged towards Cambria.

And then just last thing on that point. I think you - the way you described, you're willing to commit up to $725 million, so there's a little bit under $200 million left to go. Is there a time frame we should think about that being put to work by? Is that sort of like in the next 12 months, you'll have that full amount put to work or is it a longer term?

Yes, I think on the current pace we're at, you're probably looking at another two years is where we would expect to reach that ceiling. But keep in mind, there is the opportunity to recycle. And so it's a - while there is a ceiling there, this is not a buy-and-hold strategy. This is a recycle the capital in order to continue to grow the brand in the strategic markets that we're focused on.

So year-to-date, Robin, if you take a look at what we've put out in terms of capital and what we recycled back in, we've made about $90 million worth of investments. We've actually recouped $45 million from previous investments. So it's showing that, that recycling - those recycling efforts are already actually paying dividends, asset-light, hotel open and we're monetizing through a franchise fee.

The next question comes from Alton Stump with Longbow Research.

I just have two questions. First off, as you mentioned, if it were not for oil and gas, you have probably been flat in the quarter. Could you remind us kind of ballpark what percentage of your properties are in oil and gas markets? And secondly, as to your point about a breakout mix as you look at leisure versus high corporate travel, and just kind of look out 4 to 5 years in a row, what would be your ideal mix between those two versus where it is now?

It's about 7.5% of our inventory is sitting in the oil and gas markets. And on the business leisure travel, we're really looking at it more from a segment perspective. So as the upscale brands, both Cambria and Ascend, grow I would expect that to be 2/3 business, 1/3 leisure. Our Comfort brand were really targeted to be more of a 50-50. So when you think about those - the heaviness of those three brands, in particular, that will skew our segments in those particular brands more towards business travel. But that's - those are sort of our internal targets on what we're looking at from a brand perspective.

The next question comes from Jared Shojaian with Wolfe Research.

So last year, at this time, you gave us some color on the forward year in terms of net unit growth, RevPAR and royalty rate. You touched on the royalty rate earlier in the Q&A, but anything you can share on early thoughts on 2020 for net units in RevPAR? And I guess, are the trends that you're seeing for this year, is that kind of a fair extrapolation into next year in terms of low single-digit net unit growth, flattish to down RevPAR? Is that kind of how you're thinking about next year?

Yes, I think there's a couple of factors that - I mean, obviously, the industry itself is on trend to continue to soften. But when I look at our brands and our performance, there's a couple of positives for us. The first is that Comfort renovations are really moving, as we talked about on the script from a headwind to a tailwind. We expect that to continue to accelerate into 2020. And then just across our system, we've been closing the gap against our segments. So from the standpoint of catching up to fair share of our segments, that gap has closed each quarter, and we expect that trend to continue. That's being really driven by a greater share of business travel, as I mentioned. And then there's also the revenue potential of hotels that we're opening in those higher RevPAR markets. So I do think there's opportunity for us to exceed or, at a minimum, meet where the industry is headed as we move in on RevPAR.

Okay. And then, Pat, I think you gave some stats in the prepared remarks on the Comfort renovations, which I may have missed, but can you just give us an update on where you stand in that transformation? What percent of the hotels still need to be renovated? What's the time line for those renovations? And then you just mentioned that you expect to flip from a headwind to a tailwind on the RevPAR side. What quarter is that next year, if you had to pinpoint where you think you start to outperform the industry on RevPAR?

Yes, Jared. That occurred in Q3. So that occurred this quarter, which was our expectation at the beginning of the year. The first two quarters would be a headwind and it would flip to a tailwind in the second half of the year, so Q3 demonstrated that. Those hotels that finished the renovation in the second quarter had a 60-basis-point increase in RevPAR above the industry, so we feel really good about that.The other question about how many are left to do, there's really about 25% that remain to be done in the fourth quarter. If you remember, the type of business we run, a lot of seasonality here. So owners waited to get through the summer. They don't want to renovate during the summer, which is their peak season. So there are some who schedule their renovations to begin in the late third quarter and into the fourth quarter. So we do expect those folks to get the bulk of that work done this year. And what we're seeing is the longer the renovations in place, that once the sign goes on, and then the ad campaign that we kicked off this summer to really introduce the brand to the customer, all of those are having a positive impact, both on overall RevPAR, but more importantly, at the local RevPAR index level as well. So the hotel owners are really seeing the benefit of the investment. And we, as a brand, are accelerating that through our additional advertising.

Okay. So just to clarify then on that comment. Like I know the hotels under renovation, I think you called out the 50 basis points RevPAR growth, outperformed the industry by 60 bps. But in your entire portfolio overall, the minus 0.7% RevPAR contraction in the third quarter. Are you saying that, that number outperformed the industry that you gained RevPAR index share in the third quarter?

I think what I was saying was for Comfort, specifically, there were RevPAR index share gains for the entire portfolio, or for all intents and purposes, we track pretty close to the industry in terms of the comp set in terms of those segments in which we compete, and it's, call it, 10-basis-point gap against the industry. I think, more importantly, when you take a look at the Comfort renovations and the progress that we've made for the overall portfolio, for all intents and purposes, it was a net neutral in Q3. You were seeing a tailwind for the Comfort brand. As we head into next year, we expect the tailwind to accelerate and for it to become even a broader tailwind for the overall portfolio.

Yes, it's about 45% of our revenue is that brand, which is why it has such an outsized impact.

Next question comes from Joe Greff with JPMorgan.

I'm Rick Sunderland for Joe. Just one question on the pipeline. The domestic pipeline of hotels grew on a year-over-year basis, but can you give color of the growth on a rooms basis, both on a year-over-year and a sequential basis, please?

So I think when you take a look - I don't have the data point right off hand, but when you take a look at the overall portfolio of Cambria, when you take a look at WoodSpring, it looks like it's around 10% or so higher than our historical averages in terms of room growth rate. Now, we're at 70 - our average room size in terms of those units that are in the pipeline, it's about 77 versus 67, so seven additional rooms. So I think that you could probably take about a 10% premium, but we can get back to you on the exact data point.

The next question comes from Michael Bellisario with Baird.

Just with RevPAR growth down this year on your chain scales, are you sharing anything differently today from franchisees that might slow the pace of new signings going forward or change the way they're thinking about new investments?

Yes. I think it's really two stories, Michael, on the new construction side. Those are owners who are looking at if you sign an agreement today, you're going to be opening your hotel three years from now. So these are long-term investors, and most of our sales that we do are to existing owners, about 2/3 of the new franchise agreements we sell are to existing owners. So these are long-term holders, and there - many of them are multi-unitholders as well.I think on the conversion side of the house, that's where you get a little bit more of, I would call it, lumpiness. If I look at this year, our development has been a little bit more - we've had spikes, if you will. We had a record month in June. But I think you have to really kind of look at where those individual owners are looking for a value proposition. And I do think, as the environment softens, you're going to see more independent hotels and you're going to see owners of weaker brands want to join our system. That's historically what's happened in - as the environment softened somewhat. So those - the conversion brands of ours generally pick up share during times of softening.

Got it. That's helpful. And then just one kind of housekeeping question. Aside from the oil and gas market weakness that you referenced, do you guys have any meaningful impact from the hurricane in September that affected your RevPAR growth?

It was minimal. The timing of it wasn't good because it did hit during the Labor Day weekend, so there may have been some demand that was out there that didn't show up. But it was really hard to measure any meaningful impact here in the domestic United States.

This concludes our question-and-answer session. I would now like to turn the conference back over to Patrick Pacious for any closing remarks.

Thank you, Operator. Thanks, everyone, for your time this morning. We wish you have a great holiday season, and we will talk to you again in the new year. Have a great day.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.