Steve Joyce – President and CEO Dave White – SVP and CFO

Felicia Hendricks – Barclays Shaun Kelly – Choice Hotels Tim Wengerd – Deutsche Bank

Thank you. Good morning and welcome to Choice Hotels first quarter 2012 earnings conference call.

With me this morning as always is Dave White, our Chief Financial Officer. As we noted last night in our Press Release we are extremely pleased with our quarterly results and the strong start for Choice Hotels in 2012.

We are particularly enthused by our strong franchising revenue growth which was driven by both global systems size expansion and significantly stronger-than-expected domestic RevPAR results. Our first-quarter RevPAR results and our more recent RevPAR experience in March and so far through April are encouraging and point to continuation of lodging cycle recovery.

We're equally excited by the franchise sales results of our development team which drove new domestic franchise sales contracts to a mid-teens percentage growth rate for the quarter. The positive momentum in RevPAR and franchise sales areas has continued since the quarter ended and we are optimistic that these positive trends will make for a very strong year.

Our EBITDA and diluted earnings per share for the first quarter exceeded our expectations due to higher than anticipated revenues driven by domestic RevPAR growth and higher than expected domestic conversion franchise sales results and relicensing transactions. The growth rate of our franchising revenues continued for the second consecutive quarter to accelerate as first-quarter revenues increased 11% over the prior year compared to a 10% increase in the fourth quarter of 2011.

Our franchising revenues were primarily impacted by an 8.6% increase in domestic RevPAR which was approximately a 100 basis points better than we were expecting and exceeded the RevPAR growth rate of the overall lodging industry. We believe this speaks well of the ongoing strength and appeal of our brands to consumers, our strong central reservation system for franchisees and the continued prowess of our franchisees in effectively managing their hotel assets.

Considering our first quarter RevPAR performance and our preliminary second quarter results, we are increasing our outlook for full-year RevPAR to a range of 5% to 7%. This represents approximately a 100 basis point increase from the outlook we shared with you in our earnings call last time.

The increase in our franchising revenues coupled with a disciplined cost management resulted in a 19% increase in our EBITDA in the first quarter of 2012. As a result of our first-quarter performance as well as our revised RevPAR outlook we are raising our full-year outlook for diluted earnings per share to a range of $2.03 to $2.08 per share.

As I mentioned earlier a significant highlight of the first quarter was our franchise sales results. For the quarter we executed 64 domestic hotel franchise contracts, an increase of 14% compared to the 56 deals we executed in the first quarter of 2011.

As the franchise sales environment for new construction remains challenging, the increase in our new domestic hotel franchise contracts was primarily driven by an increase in conversion deals. Since our net unit growth has historically been more heavily dependent on conversion hotels the building trend in conversion franchise sales is encouraging for our long-term growth prospects because in addition to that these are normally followed by an increase in new construction sales.

The improvement in our franchise sales results reflects adjustments we made in the fourth quarter of last year and the first quarter of 2012 to our sales organization structure, our sales strategy and strengthening the value proposition for the right conversion and new conversion hotel opportunities. Based on first-quarter results and the feedback we continue to receive from developers we believe that our strategies will provide a catalyst for a significant increase in franchise sales in 2012.

In addition to strengthening new contract sales environment we also saw a significant uptick in the number of relicensing and renewal contracts which indicates improvement in the hotel transaction and lodging environment. We believe this is another positive trend as an active transaction market is typically a leading indicator for growth and the pace of our conversion franchise sales.

We are also committed to increase our same-store sales by focusing on increasing the amount of business we deliver to our franchisees. We remain unrelentingly focused on innovating in the areas of business delivery, enhancing our brands in the minds of consumers and improving our central reservation systems.

Our proprietary central reservation channels meaning our choicehotels.com website and our call centers had a particularly strong quarter with revenue from the CRS increasing 15% percent year-to-date. Central bookings through our mobile apps continue to grow at a significant pace and we are seeing traffic volumes on our website that we do not normally see until the summer travel season.

We continue to execute strategies such as our multi-brand marketing investments and television, digital and search channels to drive business to our central channels which provide our franchisees business at the highest average daily rate and at the lowest cost. Looking forward while slower than any of us would prefer, we are seeing steady positive improvement in the broad U.S.

economy and we do not believe that the recent increases in gas prices at these levels will impact the summer travel season in any significant way. While consumer confidence is improving, unemployment remains stubbornly high and people are still cautious.

However we believe consumers will continue to increase their travel but getting a good value will top their list of priorities and certainly this is right in the sweet spot of our value-oriented brands. Looking ahead to the summer travel season, I am optimistic that we will see more people traveling, especially for leisure travel than we've seen in the last couple years which bodes very well for our franchisees and for Choice.

Thank you and I'll now turn it over to Dave White to give you little more detail on the financials. Dave?

Thanks Steve. As you read in last night's Press Release, we reported diluted earnings-per-share for this year's first quarter of $0.34 which represented a 21% increase over the adjusted diluted earnings-per-share of $0.28 we reported for the same period last year.

The increase in diluted earnings-per-share over the prior year reflect improvements in our EBITDA performance driven by both, topline revenue performance and cost management. Our franchising revenues increased by approximately 11% compared to the prior year, primarily on account of improvements in our domestic royalty revenues which increased by approximately 9%.

The increase in domestic royalty revenues was driven by 8.6% increase in RevPAR reflecting a combination of occupancy and average daily rate increases of 250 basis points and 2.5% respectively. This also compared favorably to our forecasted RevPAR increase for the first quarter which was approximately 8%.

We were pleased with the RevPAR performance as we saw strong gains across all of our domestic brands and the continued improvement in the occupancy rate was particularly pleasing because it suggested our franchisees will continue to have opportunities to increase their room rates going forward. As a reminder our RevPAR results for the first quarter reflect our franchisees gross room revenue performance for the month of December January and February.

Our effective royalty rate declined by 1 basis point to 4.34% for the quarter. The reduced effective royalty rate is attributable to an incentive program that was in place in 2010 through June of 2011 which provided the royalty rate discounts over a 12 to 18 month period for new franchisees.

While these discounts were greater in the early term of the franchise agreements than in prior years, these discounts are expected to burn off at a steeper rate and as a result we expect royalty rates to increase at a quicker pace than the latter half of this year. As a result the measures implemented in the fourth quarter of 2011 to increase productivity and streamline services, we were also able to improve our EBITDA margins through the cost side of the business.

If you exclude compensation expense related to fluctuations in the fair value of assets held in employer retirement plans, our SG&A cost would have declined by approximately 1% for the quarter. Two other key items below the line that impacted the comparison of our diluted earnings per share results for the first quarter of 2011 and 2012 and the first of those of the Company's effective income tax rate for the three months ended March 31, 2012 was 33.9% compared to 28.2% in 2011.

Adjusted diluted EPS for the first quarter of 2011 included discreet tax items representing approximately $0.02 of diluted earnings-per-share that didn't recur in this year. Secondly, our first quarter 2012 results reflected an increase in investment gains related to the fair value of investments in our employer retirement plans over the same period of the prior year.

The increase in these investment gains essentially offset the impact of the higher effective income tax rate during the first quarter of 2012. Our first quarter diluted earnings-per-share performance also exceeded our previously published outlook of at least $0.30 per share by $0.04.

Compared to our outlook, about half of the outperformance was a result of better-than-expected operating and EBITDA performance with the remainder of the outperformance relating to below the line gains on investments in employee retirement plan. On the supply front in spite of the continuing difficult development conditions we were able to grow the number of hotels operating in our global franchise system by nearly 1%.

In addition our first-quarter domestic franchise sales were encouraging. We executed 64 new domestic franchise sales contracts representing a 14% improvement compared to a year ago and a 33% increase over our plan of 48 new contracts.

We also had a 250% increase in the number relicensing and renewal contracts which indicate improvement in the hotel transaction and lending environment. As Steve mentioned, improvement in the hotel transaction and lending environment has historically been a leading indicator of the pace of conversion franchise sale.

Furthermore relicensing revenues generated high operating margin for the company, so increases in these transactions are accretive to EBITDA and EPS growth. We are cautiously optimistic that these trends will continue throughout the remainder 2012.

Our balance sheet and liquidity position remains strong. We finished the quarter with approximately $90 million of cash on hand and total long-term debt of approximately $258 million which represents a net debt to EBITDA multiple of less than one times our expected 2012 EBITDA.

During the first quarter we repurchased approximately 300,000 shares of stock under our share repurchase program at an average price $36.81 per share. And since the end of the quarter, we have repurchased an additional 100,000 shares at an average price of $37.28 per share.

We currently have remaining authorization to purchase up to an additional 1.5 million shares of stock. Turning to our outlook for 2012, we currently expect second quarter diluted earnings per share of $0.51 and full year 2012 diluted earnings per share to range between $2.03 and $2.08 per share.

Our outlook for 2012 assumes that our outperformance in the first quarter against our previous guidance that carry through the remainder of the year. We expect full year 2012 EBITDA to range between 200 million and $203 million.

The figures assume our domestic system wide RevPAR increase to the second quarter as 7% and ranges between 5% and 7% for full year 2012. The figures assume a one basis point increase in the effective royalty rate for full year 2012 and an effective income tax rate of approximately 34.5% for second quarter and for full year 2012.

All figures assume the existing share count which was approximately 58 million shares as of April 26. So overall we are off to a strong start to 2012 and are excited about the opportunities to keep the momentum going throughout the year.

And now let me turn the call back over to Steve.

Thanks Dave. Overall we are off to a great start in 2012 and there are many signs that '12 will be another strong year for our industry.

The Choice Hotels in particular and for our franchises. I remain extremely enthusiastic about our long-term profitable growth prospects to our exceptionally talented and experienced management team; we will continue to drive excellent results for our company and for our shareholders.

So I am now going to open it up to any questions you may have.

Few questions. Steve, you provided a really upbeat view of your new contract growth and it was to see those numbers this quarter for sure.

And then you discussed the prospects for that. But you maintained the guidance for unit growth to be flat this year.

So the two points seemed contradictory to me. I was wondering if you could clarify that.

Sure. We had a very strong quarter.

It looks like that's carrying through. We did not lose the guidance up because we're balancing.

I think we've talked before about our desire to clean up the comfort brand and some of those hotels at the bottom of that. So what we've got is sort of a flexible termination budget that we are effectively managing through deciding how much and how fast we want to move which is in part the developed environment and in addition that, in a market by market analysis, we're looking at when those properties that we take out can potentially be replaced with new larger, more revenue intensive project.

So the balancing act of all that is, we'll look to see how much in addition we've got. We will determine whether or not and which markets we want to move in on those comfort hotels and how quickly it would make sense based on replacement availability.

And so you could see our guidance move but right now at this point given all that we are going to stay with a relatively flattish which may be a little positive, but we also think we may take advantage to move on some properties earlier.

Okay that makes sense. So it seems like one, your (inaudible) is offsetting the other for now.

Yes.

Okay, great. And then the SG&A in the quarter was higher than we expected.

We were expecting it actually it’s a decline year-over-year. what was the driver behind that and should we look at this as a run rate going forward or were there some things in your SG&A this quarter that were one time perhaps?

Yes in this quarter the primary thing that's causing that is the mark-to-market adjustment on the investment in our employee retirement plans which is causing us to have investment gains down below the line. There's an offsetting compensation expense increase tied to a portion of that.

So that's the biggest reason that you didn’t see a decline in the SG&A line during the quarter. As you think about the balance of the year and within our outlook, I think you can get back into this.

We still remain committed to what we talked about in our last call in terms of an overall cost reduction exercise for the course of the year. You'll see that unfold more in the second half of the year as compared to the first half given the timing of how our SG&A rolls out.

But given how it came out in the first quarter, would we expect the full year to decline or should we just think about it on a quarter-by-quarter basis.

We’re still expecting a full year decline in SG&A as we had talked about on the last quarter's call.

Perfect and then just one last housekeeping question. David you usually talk about the international royalties and if you did, I missed it.

But if you didn’t, can you just tell us what that was?

I'll come back to that later on the call. I don't have it right in front of me, but I'll get that for you in just a second.

Good morning. This is actually (inaudible) covering for Robin.

You raised the RevPAR guidance range, obviously for the full year. But looks like EBITDA, high end of the range was not great.

Could you walk us through the flow through your EBITDA line and what you are thinking there? Thank you.

Yes, so if you think about the assumptions in our outlook really the one that we changed was the one you put it out our full year RevPAR outlook taken the range of the RevPAR lookup slightly. So if you think about the model, 1% move in RevPAR translates to about $2.5 million of EBITDA.

So when you put that into context of our previous range was 199 million to 203 million. We actually took up the bottom end of the range slightly and in that prior point I made about SG&A including the mark-to-market impact on the retirement plan asset, we don't contemplate those mark-to-market adjustments in our initial EBITDA outlook.

So that's the other piece that's working on the cost side against this. So it’s a combination of the level of precision in our range is $2 or $3 million spread combined with that SG&A adjustment we saw in the first quarter of those retirement plan assets.

Thanks and then a follow up question on comfort and how many rooms are actually as of today out of the system because I think you talked about end of year about 10 expectations, about 10% out of the systems, rooms that do not actually meet the standard. Could you update us on that?

Sure. Year-to-date between comfort and comfort suites compared to last year, there's been about a net 2,700 rooms have left the system, that's net of addition and that 10% figure just to be clear, that's not all expected to take place within the current year.

That's more of a longer term type approach. And then Felicia to answer your question just to go back the international royalties for the first quarter of '12, for $5.5 million compared to $5.1 million for the first quarter of 2011.

Hi good morning. I don't think I work at Choice Hotels, but good morning guys.

I think in the prepared remarks you had asked about do you mentioned these initial franchise and re-licensing fees and something regarding the conversions but I didn’t fully catch it. Can you just give us a sense of what you are seeing in that line item?

Are you seeing a pickup in interest on the conversion side or anything new in terms of new signings for actual new construction?

Let's break that down in a couple of things. First of all we are seeing and signing more converters than we have previously and the rate of that is that pick up is we think noticeable and meaningful and what we've been saying over the calls on literally the last two to three years is normally as you come out of the cycle, what you see is a pickup in your re-licensings and renewals because that tends to indicate the transaction markets are starting to pick up.

When the transaction market starts to pick up then typically that's followed by us by a pickup in conversions which in the follow-up to cycles then is followed by pick up in new construction. So what we are hoping is the beginning of that recovery and we are seeing a sustained and build upon movement in the level of conversions.

So we are expecting our conversions to be up relatively significantly over the last year and while the new construction activity is something muted, what we are hearing on the initial developer response is a much higher level of interest than previously. So they like our new comfort prototype lot.

There is a lot of dialogue going around that and so we are assuming that that will even then begin to show it in terms of applications. So the big thing that we've been talking about that we're starting to see is more transactions in the market that clearly is going to be to our benefit and then that follows with more conversion activity from existing brands who are moving those hotels out as well as independent hotels looking to our brand and then that typically moves us back into a more common scenario of the relative level of volume that we'd expect and what we are seeing at least through the first quarter looks like the start of that.

That's important still. Appreciate that.

And second follow up to that would be obviously you are in dialogue with your franchises regularly and what are they seeing and or seeing on kind of the bank financing front. Is it getting easier?

I think one of the big issues in the slow conversion part of the cycle and ultimately the construction cycle is the availability of financing for some of these franchises. So in your conversation is that market, I guess the discussions are always regional banks, are things getting easier for them?

Is that something that you picked up at all?

Yes its improving for our strongest franchises and the lending is beginning to loosen slightly. So before the banks would say, we're open for lending and we'll lend you 50% loan to value or loan to cost.

And typically for most investment scenarios, that kind of leverage is not going to provide the returns of the equities we're looking for. Those leverages have moved up into more of a 60-40 scenario for the common developer and then for the developers with strong relationships with their lenders, typically based on the long history of success and track record, they are seeing much better types of underwriting from the banks.

It's still not enough for us to say; hey we think new construction is coming back. But we are seeing improvement and what we are hoping is that while we are not counting on it for this year that that financing market sometime next year may open up some more.

In a hypothetical environment where unit growth is flat for the next couple of years and where you're replacing some of the comfort franchisees. How would you expect the effective royalty rate to change?

Well essentially we've got a pretty good track record of gradual improvement in the effective royalty rate. We would generally expect that to continue over the medium term.

The year-in, year-our timing of it is going to be impacted by the types of incentive programs we're running. So right now we believe we are on track for one basis point increase in the effective royalty rate for 2012 which is a little bit lower than the effective royalty gross rate we have in the past years but that's on account of a more approach on the franchise (inaudible).

So going forward, if things keep going the way they are currently, we believe there will be an opportunity to use less incentives frankly which should improve that trend as we move forward.

Yes, not to argue with your hypothetical question but we don't give future guidance for future years but our expectation is not flat growth for several years.

Okay, that's helpful. If you back out all of the incentive fees impact on the effective royalty rate.

Like how big of an impact is that?

Well I think the way to think about that is, our effective royalty rate increase for the full year is one basis point. And traditionally it's been more in the range anywhere between about 4 and 7 basis points per year.

Every one basis point change in the effective royalty rate translates to about $0.5 million of royalty revenue and EBITDA. So I don't if that gives you a perspective.

And then back to the SG&A line. How much of the $2 million in the other income line was directly related to SG&A?

The other revenue line?

Yes.

Would have been about half of it.

Okay, is that a good proxy I guess going forward?

It’s a relatively volatile metric. It's just tied to that other revenue lines.

It's tied to predominantly termination awards related to franchises. So that numbers can kind of (inaudible) depending upon activity.

So it's tough to predict but from a materiality perspective, that's probably good place to start.

Just trying to get some sense of how many of the 64 contracts you executed in 1Q? How many of those were related to your franchises switching from one of your brands into one of your other brands?

I think it was about 15% compared which would be actually kind of above what it was last year as a percentage.

Got it. So the remaining 85% were all new franchises to the system?

That's right.

Okay, that's pretty good. The other thing I wanted just get some color on was you hinted about the transaction market opening up.

What are you seeing? Are there specific geographies or specific types of brands that are seeing more transactions than others?

Well actually I can't comment on the geographies, because I haven't seemed them. But what you are seeing is like you saw the lift last year in the number of transactions primarily in the upscale and upscale space, you are now starting to see that transaction growth move down into the moderate tier which is sort of where we play and so there is several forecasts out there that aren't ours but about the level of transactions and they go from some pretty robust numbers that some of the brokers are putting out there to mid-teens growth in the transaction base.

In any scenario we think we are going to see more transactions and that typically benefits us from a conversion standpoint.

All right. Well we appreciate everyone's attendance.

We are obviously based on our conversation pretty enthusiastic about where the quarter ended and sort of where we see it continuing for the year. we think we're well positioned for significant upticks in unique contribution from our existing hotels and we think that's going to last for several years given the supply demand balance scenario that we are looking at.

And at the same time we think on the development side we're finally starting to see signs of life which we think is extraordinarily encouraging since we've been waiting so long. And so we can't wait to talk to you again second quarter and hopefully tell you things are continuing.

Thanks have a great day.