Choice Hotels International, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Inc. Q1 2023 earnings call. At this time, all lines are in a listen-only mode. 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 forward-looking statements, and you should consult the company's forms 10Q, 10K, 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 2023 earnings press release, which is posted on our website at choicehotels.com under the investor relations section. This morning, Pat Patience, our President and Chief Executive Officer, and Dom Dragozic, our Chief Financial Officer, will speak to our first quarter operating results and financial performance. Following Pat and Dom's remarks, we'll be glad to take your questions. And with that, I'll turn the call over to Pat.

Thank you, Ali, and good morning, everyone. We appreciate you taking the time to join us. It's been a rewarding and successful start to the year. We generated impressive earnings, exceeding the top end of our prior guidance, delivered strong REBPAR growth, and are ahead of plan integrating the Radisson Hotels Americas business unit. This robust performance has enabled us to invest in our business to drive long-term growth and return a meaningful amount of capital to our shareholders. Today I want to outline four business value drivers that we believe are propelling the future success of our company. First, we drove our adjusted EBITDA performance to record levels and we have carried our strong momentum into 2023. Second, we are executing a distinct strategy that is strengthening our competitive position. Third, we have positioned the company to capitalize on long-term consumer and travel trends that are favorable to our brands. And finally, we are excited to onboard the Radisson America's brands onto Choice Hotels' world-class business delivery platform, which we expect will further accelerate our transformative growth. Let me start with the momentum we have created in both our adjusted earnings and top-line performance growth. Building on our record 2022 earnings results, our distinct growth strategy and proven franchising business engine drove our first quarter 2023 adjusted EBITDA to over $106 million, which exceeded the top end of our previous guidance and was 10% higher than prior year. These impressive financial results were fueled by our ongoing RevPAR and effective royalty rate growth. Last year, our first quarter RevPAR increased 10.4% from the same quarter 2019. This year, we are building on that growth with our first quarter RevPAR increasing by an additional 5.9% year over year. And we drove this performance through both rate and occupancy gains. What's most impressive is that we also grew our first quarter effective royalty rate by six basis points year over year, a reflection of the strengthening value proposition we provide to our franchise owners. We expect to carry our momentum through the rest of 2023 as we grow our franchise business with hotels that generate higher royalties per unit, while leveraging the new capabilities we have built to improve the profitability of each franchise. As such, I'm pleased to report that we are raising our outlook for full year 2023 net income and adjusted EBITDA. Franchising has always been the cornerstone of our distinct strategy. And in the last five years we have launched or acquired a number of distinct incremental brand opportunities to expand the reach of our franchise business in more revenue intense segments. Most importantly, these additional franchise opportunities were in the extended stay upper mid scale and upscale segments which currently have the highest developer and guest demand. The new franchises in these segments are also more accretive to our earnings and a key driver of our future earnings algorithm. By expanding our scope, network of franchisee relationships, and customer reach, we have significantly increased our market opportunities and accelerated our growth. At the same time, we are improving our existing business, making our legacy portfolio stronger and more accretive to our earnings, with new hotels added within a brand generating higher royalty revenue than hotels leaving it. Clearly, we have transformed Choice Hotels into a company that is in a stronger competitive position and has significant long-term growth potential. Our selective unit growth strategy is delivering results and improving the attractiveness of our brands. In the first quarter, we grew the number of franchises across our more revenue intense segments by approximately 10% year over year and saw a material increase in royalties driven by this growth. Adding to our optimism is the 5% domestic unit and 11% domestic rooms pipeline growth we drove in the first quarter year over year. which we expect to fuel our revenue-intense unit growth for years to come. Importantly, the versatile business model we have built has historically delivered stable returns and provided diversified avenues of growth throughout both expanding and contracting economic cycles. A case in point is the significant REVPAR index gains versus local competition we achieved during the pandemic due to our established operational excellence and the strategic investments we have made. Additionally, during times when hotel supply growth is challenged, our diverse portfolio of brands allows us to lean on our core competency, a best-in-class hotel conversion capability that fuels our unit growth, attracting hoteliers looking to affiliate with brands that can deliver strong top-line revenues and profitability to their hotels. Our strategy is tailored to capitalize on the long-term fundamental trends impacting travel. We are confident that the changes we are observing in leisure and business travel behavior, which favor our brands, will enable us to maximize growth opportunities well into the future. As discussed on our prior calls, We've been highlighting consumer and industry trends that are driving a significant uptick in travel demand, and we've been making deliberate investments over the past several years to position our franchisees to reap the benefits from them. Specifically, we are capitalizing on rising wages, retirements, remote work, and the rebuilding of American manufacturing and infrastructure. Let me begin with rising wages. The middle class, which is a key customer segment for our franchise business, has received a significant pay raise over the last few years. In fact, the American median salary was 6.4% higher at the end of the first quarter than it was a year ago, while the cost of living adjustment for Social Security was up 8.7% last year, year over year. Retirement trends, which accelerated during the pandemic, are also reinforcing our optimism. Over three and a half million people are reaching retirement age every year in the US. These baby boomers, one of our core customer segments, are living longer, have more time and disposable income, to travel for leisure and seek brands like ours that provide value for their money. And the pool of these retired travelers is only expanding, with more than one in five Americans expected to be over age 65 by 2030. Remote work, which affords people of all ages greater flexibility as to when, where, and for how long they travel, will also continue to fuel the strong performance of our brands. Despite the historically softer first quarter for leisure travel, our guests are extending their trips into shoulder days of the weekend. In fact, in the first quarter, we drove nearly two percentage points of occupancy growth on Thursdays and Sundays compared to 2019. The trend of leisure travel demand spreading more evenly throughout the months of the year and into weekend shoulder days benefits our brands and allows us to attract and capture an even larger share of an expanding leisure demand segment. And finally, we expect business travel in our key industry verticals, such as transportation, logistics, and construction, to increase driven by the significant reshoring of American manufacturing and infrastructure investments across the country. Industry experts estimate that these investments will generate between 50 and 100 million room nights over the next decade. And that's great news for our brands, and in particular, our extended stay segments. Likewise, we anticipate additional tailwinds from business travelers in sectors such as healthcare and financial and professional services, especially in the context of the Radisson America's acquisition. In fact, in the first quarter, we have already driven a 9% increase year over year in business travel bookings across Radisson America's brands. As consumers prioritize travel, We believe our business will experience outsized benefits from additional travel demand to our segments and locations. We see all these trends as strong tailwinds for our company's long-term growth. The strong franchise relationships we've established over the years have been a key differentiator for Choice Hotels. And this unwavering commitment to enhancing our value proposition by maximizing our franchisees' return on investment is what truly energizes our Radisson America's franchisees. In fact, just two weeks ago, I had a chance to speak with our Radisson America's hotel franchise owners and general managers at our 67th annual convention. Radisson America's franchisees have shared with me their enthusiasm for becoming part of the Choice family. Specifically, the opportunity to leverage our proprietary cutting edge technologies and world-class franchisee success system designed to drive owner performance and reduce their cost of hotel ownership. Our franchisees left the event energized by how we are growing and evolving our family of brands and by the new promising opportunities for investment with the addition of our newest Radisson Americas franchising business. The excitement generated by our new business unit is further underlined by Radisson America's brand's great start to the year. In the first quarter, the Radisson America's portfolio-wide rev par increased 11.2% year over year. Specifically, the Radisson upscale brand itself grew nearly 27% year over year, outperforming the upscale segment by over six percentage points. And once all Radisson America's hotels are fully integrated with Choice Hotels systems and employing our tools, we expect to help drive their top line performance and profitability to the next level. Thanks to the expertise of our integration team, we are ahead of plan and expect to complete full integration by the end of the year. In fact, we are on pace to complete the onboarding of Radisson America's properties onto our business platform and merge our two award-winning loyalty programs by the end of the third quarter. At the same time, we remain ahead of plan in delivering Radisson America's adjusted EBITDA of over $60 million in 2023, growing to over $80 million EBITDA in 2024. Another way we are enhancing our value proposition is through our new co-branded credit card program launched last month under a multi-year agreement with Wells Fargo and MasterCard. The program is intended to further grow our Choice Privileges membership and deepen member engagement and loyalty. Just in time for the busy summer travel season, the new card portfolio will add value for our guests through enhanced rewards and benefits, as well as faster and easier ways to earn even more points beyond hotel stays. We expect this partnership to drive incremental revenue significantly above our prior arrangement and provide an additional tailwind for our platform business segment in 2023 and beyond. Our impressive results demonstrate that the deliberate decisions and strategic investments we've made in our value proposition and franchisee tools, brand portfolio, and platform capabilities are paying off across our segments. First, we strengthened our upscale franchise business. In first quarter 2023, our domestic upscale units grew by 29% year over year. At the same time, we increased the number of domestic upscale franchise agreements awarded by 13% year over year, and expanded our upscale domestic pipeline to over 120 hotels, a 16% increase year over year. We expect that the Radisson Americas acquisition will enable us to build on our momentum in the upscale segment, accelerating the growth of our cambria and ascend brands while also broadening the radisson portfolio next we further invested in the extended stay franchise business and expanded our domestic pipeline for our extended stay brands to 475 hotels a 28 increase year over year we remain very optimistic about our extended stay franchise business growth and expect the number of our extended stay units to increase at an average annual growth rate of more than 15% over the next five years. At the same time, we reinforced our core portfolio of brands by growing our upper mid-scale franchise business by 24% year over year, reaching approximately 2,300 domestic hotels in the first quarter. Finally, by strengthening the value proposition we deliver to our franchise owners in the economy transient franchise business, we grew our effective royalty rate for that segment by 11 basis points in the first quarter year over year. I also want to recognize the efforts we are making to increase our sustainability and diversity commitments. For the first time, we reported our scope one and scope two greenhouse gas emissions We are also making progress implementing a system-wide energy collection and measurement program that will make it easier for our franchise hotels to identify opportunities for energy, water, and waste conservation. And we are strengthening our longstanding commitment to diversity, equity, and belonging with new goals for fostering diverse representation amongst our associates. Further details regarding key measures being undertaken by CHOICE to reduce franchisees' operating costs while benefiting the environment, as well as integrating new standards and principles into our long-term decision-making, are outlined in our recently published annual ESG report. The results we achieved in the first quarter of 2023 confirm the effectiveness of our thoughtful, deliberate approach of growing our franchise business with hotels that generate higher royalties per unit and reinforce our confidence in our ability to drive exceptional results in the coming years. We look forward to completing the integration of Radisson Americas with the Choice Franchisee Success System this year and to accelerating the growth of these brands by leveraging choices scale, network of owner and franchisee relationships, and best in class digital platforms. We believe that we are well positioned to build on the success achieved this quarter and that our increased earnings power will enable us to further capitalize on growth opportunities in 2023 and beyond. In closing, I would like to take a moment to thank our associates who work day in and day out to drive our company's success. Just two weeks ago, we gathered with over 5,000 of our franchise owners and general managers at our annual convention. We celebrated their success, examined the trends ahead, and revealed our plans to keep the momentum going. The level of enthusiasm was remarkable, and it is due in large part to the deep relationships our associates have built with them over the years. With that, I'll hand it over to our CFO. Dom?