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 Choice Hotels International Reports 2nd Qtr 2004
Net Income of $18.5 million Compared to
Prior Year Net Income of $17.1 million
-
Gains 151 New Domestic Hotel Franchise Contracts in 2nd Qtr
Hotel Operating Statistics

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New Domestic Hotel Franchise Contracts Rise 31% in Quarter; 
Domestic Unit Growth Rises 4.5%

SILVER SPRING, Md. - July 27, 2004-- Choice Hotels International, Inc. (NYSE:CHH) today reported second quarter 2004 net income of $18.5 million, or $0.53 diluted earnings per share (EPS), a 13% increase in EPS over the same period of a year ago. At the end of second quarter 2003, the company reported net income of $17.1 million, or $0.47 diluted EPS.

The company also announced that its operating income increased to $32.1 million for second quarter 2004, a 12% gain over the $28.7 million reported at the end of second quarter 2003. Franchising margins increased to 61.5% for second quarter 2004 from 58.1% for the same period of a year ago. Operating cash flows for second quarter 2004 increased to $47.4 million, or 18% compared to the same period of 2003.

"Choice continues to enjoy very strong franchise development while seeing increased travel demand at our franchised hotels," said Charles A. Ledsinger, Jr., president and chief executive officer. "We experienced 31% growth in our new domestic hotel franchise contracts, compared to a record development performance in 2003. This sustained high level of demand by hotel owners and developers underscores the strength of our brands in the segments in which we compete."

He added, "Because of our very strong development activity, including continued growth in franchise applications, our pipeline of new hotels for entry into our system is robust and will drive strong unit growth into the future. We also are pleased by the continued solid growth in RevPAR, which provides our franchisees with a better return on their investment."

Second Quarter Performance

The company reported total revenues of $107.2 million for second quarter 2004, compared to $103.5 million for the same period in 2003, an increase of 4%. Franchising revenues, which include royalty fees, initial and relicensing fees, partner services revenue and other revenue, for the second quarter of 2004 were $51.8 million, an increase of 6% from the $49.0 million reported in the same period a year ago.

The company reported royalty revenues of $41.7 million for second quarter 2004, compared to $37.6 million for the same period in 2003, an increase of 11%.

System-wide domestic revenue per available room (RevPAR) was $36.10 in second quarter 2004, compared to $33.81 for the second quarter of 2003, an increase of 7%.

For the first six months of 2004, Choice reported net income of $29.1 million or $0.83 diluted EPS, increases of 9% and 15% respectively over the $26.8 million and $0.72 diluted EPS reported for the first six months of 2003. Operating income through June 30, 2004 increased 11% to $51.0 million, compared to $45.9 million for the same period a year ago.

Royalty revenues for the first six months of 2004 were $72.4 million, compared to $64.9 million for the same period a year ago. Domestic RevPAR was $31.62 for the first half of 2004, compared to $29.89 for the first six months of 2003.

Net income and diluted earnings per share for the quarter and six months ended June 30, 2003 included approximately $1.2 million ($0.7 million, net of the related tax effect) and $2.3 million ($1.5 million, net of the related tax effect), respectively of interest income attributable to a note receivable from Sunburst Hospitality Corporation, which was repaid to the Company in December 2003. Second quarter 2003 revenues, operating income, net income and diluted earnings per share also included approximately $1.7 million ($1.1 million, net of the related tax effect) of liquidated damages received from Sunburst for franchise terminations. These items represented diluted EPS of $0.05 and $0.07 for the three and six months ended June 30, 2003.

2004 Unit Growth

The total number of domestic Choice hotels on-line grew by 4.5% to 3,723 (301,182 rooms on-line) as of June 30, 2004 from 3,562 (289,701 rooms on-line) as of the same period a year ago. Net domestic property additions in the second quarter of 2004 were 35, compared to 46 net domestic additions in the same period of 2003. For the first six months of this year, net domestic property additions were 87, compared to 80 for the same period of a year ago.

Choice executed 151 new domestic hotel franchise contracts representing 13,094 rooms in second quarter 2004, compared to 115 new contracts representing 10,125 rooms for the same period a year ago, increases of approximately 30%. For the year 2004 through June 30, Choice has executed 232 new domestic hotel franchise contracts, representing 19,987 rooms, compared to 186 contracts, representing 17,695 rooms, for the same period in 2003. This 25% increase in executed contracts and an increase in the number of existing franchise relicensings resulted in a 11% and 18% increase in initial franchise and relicensing fees respectively for the three and six months ended June 30, 2004, compared to the same periods in 2003.

In second quarter 2004, 33 contracts for new construction hotels, representing 2,226 rooms were executed, compared to 28 contracts, representing 1,899 rooms for the same period a year ago, each representing an increase of better than 17%.

As of June 30, 2004, the total number of Choice hotels worldwide grew 3% to 4,884 from 4,743 as of the same date a year ago. This growth represents an increase of 3% in the number of rooms open to 396,013 from 383,592. At the end of second quarter 2004, Choice had 475 hotels under development worldwide, representing 37,997 rooms compared to 396 hotels and 33,906 rooms in 2003.

Third Quarter & Year 2004 Estimates

The company's third quarter 2004 earnings are expected to be in the range of $0.75 to $0.77. Full year 2004 diluted EPS are expected to be between $2.10 and $2.13, assuming second-half 2004 RevPAR growth of approximately 4.0%.

Notable Events

Among the notable company events occurring since the previous earnings report:

  • During the second quarter of this year, the company purchased 0.9 million shares of common stock at a total cost of $40.6 million. For the six months ended June 30, 2004, the company purchased 1.8 million shares of common stock at a total cost of $79.7 million. The company has remaining authorization to purchase up to 3.0 million shares. Since Choice announced its stock repurchase program on June 25, 1998, the company has purchased 31.4 million shares of common stock at an average price of $19.30 per share and a total cost of $606 million, as of July 23, 2004. Total shares outstanding as of June 30, 2004, are 33.4 million.
  • On May 4, 2004, Choice's Board of Directors declared a cash dividend of $0.20 on outstanding shares of common stock payable on July 26, 2004 to holders of record on July 12, 2004. 
Non-GAAP Financial Measures

Franchising revenues and franchising margins are non-GAAP financial measurements. These financial measurements are presented as supplemental disclosures because they are used by management in reviewing and analyzing the company's performance. This information should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States (GAAP), such as total revenues or operating income margins. The company's calculation of franchising revenues and franchising margins may be different from the calculation used by other companies and therefore comparability may be limited. The company has included an exhibit accompanying this release which reconcile these measures to the comparable GAAP measurements.
 
 

Choice Hotels International, Inc. Exhibit 1
Consolidated Statements of Income (Unaudited)
(In thousands, except per share amounts) 

                                  Three Months       Six Months
                                       Ended             Ended
                                   June 30, June 30, June 30, June 30,
REVENUES:                            2004     2003     2004     2003
                                   ----------------- -----------------

  Royalty fees                     $41,682  $37,599  $72,391  $64,850
  Initial franchise and
   relicensing fees                  5,231    4,652    8,619    7,259
  Partner services                   3,988    4,371    6,255    6,677
  Marketing and reservation         54,418   53,557  103,729  100,910
  Hotel operations                     931      947    1,744    1,784
  Other                                925    2,371    1,672    3,573
                                   ----------------- -----------------
      Total revenues               107,175  103,497  194,410  185,053

OPERATING EXPENSES:

  Selling, general and
   administrative                   17,437   17,416   33,238   30,902
  Depreciation and amortization      2,502    3,130    5,036    5,889
  Marketing and reservation         54,418   53,557  103,729  100,910
  Hotel operations                     682      727    1,372    1,453
                                   ----------------- -----------------
      Total operating expenses      75,039   74,830  143,375  139,154

Operating income                    32,136   28,667   51,035   45,899

OTHER INCOME AND EXPENSES:
  Interest and other investment
   income                             (170)  (1,888)    (668)  (3,242)
  Interest expense                   2,808    3,068    5,356    6,092
                                   ----------------- -----------------
      Total other income and
       expenses                      2,638    1,180    4,688    2,850
                                   ----------------- -----------------

Income before income taxes          29,498   27,487   46,347   43,049
Income taxes                        10,995   10,376   17,250   16,251
                                   ----------------- -----------------
Net income                         $18,503  $17,111  $29,097  $26,798
                                   ================= =================
 

Weighted average shares
 outstanding-basic                  33,395   35,726   33,834   36,253
                                   ================= =================

Weighted average shares
 outstanding-diluted                34,794   36,558   35,196   37,015
                                   ================= =================

Basic earnings per share           $  0.55  $  0.48  $  0.86  $  0.74
                                   ================= =================

Diluted earnings per share         $  0.53  $  0.47  $  0.83  $  0.72
                                   ================= =================
 
 
 

Choice Hotels International, Inc.                            Exhibit 2
Consolidated Balance Sheets
(Unaudited)
 

(In thousands)                                 June 30,   December 31,
                                                 2004         2003
                                             ------------ ------------
 

ASSETS

Cash and cash equivalents                    $    25,154  $    20,031
Accounts receivable, net                          35,159       33,631
Deferred income taxes                              2,256        1,957
Other current assets                               3,308        3,613
                                             ------------ ------------
      Total current assets                        65,877       59,232

Fixed assets and intangibles, net                143,580      150,256
Receivable -- marketing and reservation fees      29,226       32,368
Other assets                                      28,636       25,416
                                             ------------ ------------

                    Total assets                 267,319      267,272
                                             ------------ ------------
 
 
 

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current portion of long-term debt                  8,500       23,829
Other current liabilities                         82,061       78,382
                                             ------------ ------------
      Total current liabilities                   90,561      102,211

Long-term debt                                   292,423      222,823
Deferred income taxes                             17,682       21,562
Other liabilities                                 41,858       38,863
                                             ------------ ------------

      Total liabilities                          442,524      385,459
                                             ------------ ------------

      Total shareholders' deficit               (175,205)    (118,187)
                                             ------------ ------------

                    Total liabilities and
                     shareholders' deficit   $   267,319  $   267,272
                                             ------------ ------------
 
 
 

Choice Hotels International, Inc.                            Exhibit 3
Consolidated Statements of Cash Flows
(Unaudited)
 

                                                     Six Months Ended
                                                          June 30,
                                                       2004     2003
                                                     -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                           $29,097  $26,798

Adjustments to reconcile net income to net cash
 provided by operating activities:
  Depreciation and amortization                        5,036    5,889
  Provision for bad debts                                 93      249
  Non-cash stock compensation and other charges        1,835      948
  Non-cash interest and other investment income         (335)    (652)
  Equity in net income of affiliates                    (276)    (154)

Changes in assets and liabilities, net of
 acquisitions:
  Receivables                                         (1,583)  (2,141)
  Receivable -- marketing and reservation fees, net    8,283   (1,689)
  Current liabilities                                 (2,393)   4,587
  Income taxes payable/receivable and other current
   assets                                              8,729      697
  Deferred income taxes, other liabilities and other
   assets                                             (1,103)   5,682
                                                     -----------------

 NET CASH PROVIDED BY OPERATING ACTIVITIES            47,383   40,214
                                                     -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:

Investment in property and equipment                  (2,976)  (4,972)
Proceeds from disposition of property                   -         498
Acquisition of Flag                                     -      (1,211)
Issuances of notes receivable                         (1,227)  (2,450)
Purchases of investments, net                         (2,280)    (775)
Other items, net                                        (994)     238
                                                     -----------------

 NET CASH USED IN INVESTING ACTIVITIES                (7,477)  (8,672)
                                                     -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from long-term debt                         101,400   89,800
Principal payments of long-term debt                 (47,161) (75,243)
Dividends paid                                       (13,564)    -
Purchase of treasury stock                           (79,729) (43,676)
Proceeds from exercise of stock options                4,271    3,465
                                                     -----------------

 NET CASH USED IN FINANCING ACTIVITIES               (34,783) (25,654)
                                                     -----------------

Net change in cash and cash equivalents                5,123    5,888
Cash and cash equivalents at beginning of period      20,031   12,227
                                                     -----------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD           $25,154  $18,115
                                                     =================
 
 
 

CHOICE HOTELS INTERNATIONAL, INC.         Exhibit 4
              SUPPLEMENTAL OPERATING INFORMATION BY BRAND
                         DOMESTIC HOTEL SYSTEM
                              (UNAUDITED)
 

                            For the Quarter Ended   Six Months Ended
                                   June 30,              June 30,
                                2004      2003        2004     2003
                             ---------- ---------   -------- --------

COMFORT INN
  Hotels                         1,420     1,391      1,420    1,391
  Rooms                        111,667   109,626    111,667  109,626
  Avg. Daily Rate               $64.07    $62.90     $62.39   $61.49
  Occupancy %                     60.7%     57.9%      54.5%    52.2%
  RevPAR                        $38.89    $36.44     $34.03   $32.11
 

COMFORT SUITES
  Hotels                           376       361        376      361
  Rooms                         29,610    28,611     29,610   28,611
  Avg. Daily Rate               $73.83    $72.96     $72.41   $71.97
  Occupancy %                     66.7%     62.2%      60.3%    57.1%
  RevPAR                        $49.24    $45.39     $43.69   $41.09
 

QUALITY
  Hotels                           531       490        531      490
  Rooms                         54,769    50,932     54,769   50,932
  Avg. Daily Rate               $63.10    $63.77     $61.11   $61.75
  Occupancy %                     54.9%     51.2%      49.3%    46.3%
  RevPAR                        $34.64    $32.66     $30.14   $28.58
 

CLARION
  Hotels                           153       139        153      139
  Rooms                         22,664    21,552     22,664   21,552
  Avg. Daily Rate               $72.24    $71.30     $70.57   $70.45
  Occupancy %                     53.4%     49.7%      47.4%    44.9%
  RevPAR                        $38.55    $35.45     $33.44   $31.66
 

SLEEP
  Hotels                           310       305        310      305
  Rooms                         23,745    23,379     23,745   23,379
  Avg. Daily Rate               $59.18    $57.84     $57.28   $56.49
  Occupancy %                     61.6%     58.7%      55.1%    52.4%
  RevPAR                        $36.48    $33.97     $31.59   $29.58
 

MAINSTAY
  Hotels                            26        23         26       23
  Rooms                          2,063     1,759      2,063    1,759
  Avg. Daily Rate               $59.79    $62.14     $58.59   $61.33
  Occupancy %                     62.2%     65.9%      57.6%    60.3%
  RevPAR                        $37.22    $40.98     $33.73   $37.00
 

ECONO LODGE
  Hotels                           744       721        744      721
  Rooms                         45,722    44,868     45,722   44,868
  Avg. Daily Rate               $47.52    $46.67     $46.02   $45.10
  Occupancy %                     48.5%     47.1%      43.9%    42.9%
  RevPAR                        $23.02    $21.99     $20.20   $19.34
 

RODEWAY
  Hotels                           163       132        163      132
  Rooms                         10,942     8,974     10,942    8,974
  Avg. Daily Rate               $51.37    $47.75     $49.55   $46.34
  Occupancy %                     47.6%     43.3%      43.0%    40.2%
  RevPAR                        $24.43    $20.66     $21.32   $18.62
 

TOTAL CHOICE - DOMESTIC
  Hotels                         3,723     3,562      3,723    3,562
  Rooms                        301,182   289,701    301,182  289,701
  Avg. Daily Rate               $62.72    $61.78     $61.03   $60.34
  Occupancy %                     57.6%     54.7%      51.8%    49.5%
  RevPAR                        $36.10    $33.81     $31.62   $29.89
  Effective Royalty Rate          4.04%     4.00%      4.03%    3.98%
 
 
 

                    CHOICE HOTELS INTERNATIONAL, INC.        Exhibit 5
                       SUPPLEMENTAL INFORMATION
      CALCULATION OF FRANCHISING REVENUES AND FRANCHISING MARGINS
                              (UNAUDITED)
 

(dollar amounts in thousands)    Three Months Ended  Six Months Ended
                                 June 30, June 30,  June 30, June 30,
                                   2004     2003      2004     2003
                                 ------------------ ------------------
Franchising Revenues:

Total Revenues                   $107,175 $103,497  $194,410 $185,083
Adjustments:
     Marketing and reservation
      revenues                    (54,418) (53,557) (103,729)(100,910)
     Hotel Operations                (931)    (947)   (1,744)  (1,784)
                                 ------------------ ------------------
Franchising Revenues             $ 51,826 $ 48,993  $ 88,937 $ 82,389
                                 ------------------ ------------------
 
 

Franchising Margins:

Operating Margin:

Total Revenues                   $107,175 $103,497  $194,410 $185,083
Operating Income                 $ 32,136 $ 28,667  $ 51,035 $ 45,899
                                 ------------------ ------------------
     Operating Margin                30.0%    27.7%     26.3%    24.8%
                                 ------------------ ------------------

Franchising Margin:

Franchising Revenues             $ 51,826 $ 48,993  $ 88,937 $ 82,389

Operating Income                 $ 32,136 $ 28,667  $ 51,035 $ 45,899
Less: Hotel Operations                249      220       372      331
                                 ------------------ ------------------
                                 $ 31,887 $ 28,447  $ 50,663 $ 45,568
                                 ------------------ ------------------

                                 ------------------ ------------------
     Franchising Margins             61.5%    58.1%     57.0%    55.3%
                                 ------------------ ------------------

 

Choice Hotels International franchises more than 4,800 hotels open, representing approximately 400,000 rooms, in the United States and 41 other countries and territories. As of June 30, 2004, 395 hotels are under development in the United States, representing 30,841 rooms, and an additional 80 hotels, representing 7,156 rooms, are under development in 17 countries and territories. Its Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn and MainStay Suites brands serve guests worldwide.

Certain matters discussed in this press release may constitute forward-looking statements within the meaning of the federal securities law. 

 

 
Contact:

Choice Hotels International, Inc.
John Hawkins
     Vice President, Corporate Communications
Tel: (301) 592-5075
Fax: (301) 592-6177
[email protected]
www.choicehotels.com
Also See: Choice Hotels, With 4,810 Franchised Hotels, Reports 2003 Net Income of $71.9 million, Compared to Prior Year Net Income of $ 60.8 million / Hotel Operating Statistics / February 2004
Choice Hotels Adds 41,000 Franchise Rooms in 2003; Reports 342 Conversions and 128 New Construction Contracts / January 2004

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