Full Transcript of Cendant's 3Q05 Conference Call — Prepared Remarks (CD)

Here’s the entire text of the prepared remarks from Cendant’s (ticker: CD) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Sam Levenson, SVP Corporate and IR
Henry Silverman, Chairman and CEO
Ron Nelson, President and CFO

Analysts:

Jeffrey Kessler, Lehman Brothers, Analyst
Paul Keung, CIBC World Markets, Analyst
Steve Kent, Goldman Sachs, Analyst
Justin Post, Merrill Lynch, Analyst
Michael Millman, Soleil Securities, Analyst

Presentation

Operator

Good morning and welcome to the Cendant Corporation conference call. Today's conference is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Sam Levenson, Senior Vice President of Corporate and Investor Relations. Please go ahead, sir.

Sam Levenson, SVP Corporate and IR

Thank you, Adrian. Good morning everyone, and thank you all for joining us. On the call with me today are our Chairman and CEO, Henry Silverman, our President and Chief Financial Officer, Ron Nelson, and our Group Vice President of Investor Relations, Hank Diamond.

Before we discuss the results of the quarter, I would like to remind everyone of four things. First, the rebroadcast, reproduction and retransmission of this conference call and webcast without the express written consent of Cendant Corporation are strictly prohibited.

Second, if you did not receive a copy of our press release, it is available on our website at www.Cendant.com or on the First Call system.

Third, the Company will be making statements about its future results during this call. Statements about future results made during the call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and their current economic environment. Forward-looking statements and projections are inherently subject to significant economic, competitive, and other uncertainties and contingencies, which are beyond the control of management. The Company cautions that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements.

Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are specified in the Company's form 10-Q for the period ended June 30, 2005 and in our earnings release issued last night and filed on form 8-K.

Finally, during the Company will be using certain non-GAAP financial measures as defined under SEC rules. Where required, we have provided a reconciliation of those measures to the most directly comparable GAAP measures in the tables in the press release and on our website.

Before I turn the call over to our Chairman, let me briefly review the headlines of yesterday's press release

Revenue for the quarter increased 12% to $5 billion.

The Company reported third-quarter earnings per share from continuing operations of $0.44, which reflects an estimated $0.03 impact from the disruptions in the global travel environment, primarily the hurricanes in the Gulf Coast. - Free cash flow for the quarter increased 23% to $665 million and for the year-to-date was approximately $1.6 billion.

As Ron will discuss in more detail during the call, we are reducing our fourth-quarter 2005 EPS estimate by $0.03 to $0.04 per share, to a range a $0.23 to $0.26. This projection does not include any potential charges associated with a contemplated separation of the Company into four separately traded public companies announced yesterday.

Now, I would like to turn the call over to Cendant's Chairman and CEO, Henry Silverman.

Henry Silverman, Chairman and CEO

Thank you, Sam. Given the volume of shares traded yesterday and a decline in our share price, I would like to start by addressing some of the questions and concerns that have arisen following our split-up and earnings announcements yesterday. We understand that it was a lot of information to absorb in one day.

Most importantly, I urge you to first take our releases at face value. Our Board has adopted the four way split-up plan to unlock the value of our operating businesses, since it is clear to us that our stock has suffered from a conglomerate discount that is both persistent and consistent. This fundamental strategic efficient to separate Cendant into four independent companies is about longer-term value creation, and was not prompted by, or impacted by, third-quarter results or near-term operating trends.

Furthermore, we have told you what we know. Despite some recent weakness, due in part to exogenous events, we are seeing strong demand for the services our businesses provide. And, we have no secret plan to disadvantage Cendant's unsecured bondholders.

Let's take a moment to examine the facts together. While the reported earnings per share for the third quarter came in at the bottom of our lowered guidance range and was down versus a year ago, EPS was actually up if you adjust for the spinoff of the mortgage business to our shareholders and the impact from Mother Nature.

In addition, the underlying health of our core businesses can also be seen in the details provided in our earnings release. I would like to refer you to Table 4 of the earnings release where we disclose the operating drivers in our businesses. There you will see double-digit increases in average transaction prices in real estate, lodging RevPAR growth superior to our segment, a solid rise in subscribers at RCI, double-digit turn growth at Timeshare, a double-digit increase in rental days in vehicle rental, and online transaction growth in excess of 25%. From an operations standpoint, the third quarter was quite strong.

As we told you several weeks ago, the biggest challenge were the year-over-year earnings per share growth, particularly for this quarter, it is apples to oranges comparisons, including the onetime items we disclosed to you last year, the spinoff of the mortgage business and the charges associated with the hurricanes.

As we complete the fourth quarter and, more importantly, look forward to next year, I would like to remind everyone that our tempered growth assumptions are primarily related to increased financing costs for the vehicle rental company, assuming higher interest rates on our fleet debt as the forward curve suggests, shifting patterns in online bookings domestically and the continuation of the weak economic environment in Europe, which will impact both online and off-line leisure travel, which over time will pass.

These are not insurmountable challenges, nor are they differ from the issues we and every other company you own face every day. In the meantime, this is a $20 billion company that we expect to be growing revenue and EBITDA by double-digits next year, despite the challenges that we have highlighted in the release. By any standard, that is a significant accomplishment. Absent the split-up, our current forecast indicates that we will grow EPS in 2006, just not as much as previously anticipated.

Some of us have also voiced concern that we might take our eye off the ball in 2006, since the separation is expected to happen mid-year. This could not be further from the truth. As we hosted Town Hall meetings yesterday for our 85,000 employees worldwide, one of the most important messages we delivered was the need to remain exclusively focused on Cendant as one company. Throughout the organization, we take our commitment to earnings growth and creating shareholder value very seriously, andRon, Richard, Steve, Sam Katz and I are determined that our focus on these objectives will intensify, not dissipate, beginning today and continuing through the spinoff date.

In calculating the sum of the parts analysis for Cendant, our Board and our advisors looked at multiples of 2006's results as the spins will not occur until the third quarter. So we recognize how important it is to continue to grow all of our metrics.

So, for the reasons that I have expressed, I firmly believe that we have sound financial health and excellent prospects for continued earnings growth. We continue to have strong BBB credit ratings from all three credit rating agencies. Anyone who has been a shareholder or bondholder of Cendant for any period of time knows how seriously we take our credit ratings and the open lines of the communication that we maintain with the rating agencies. Obviously they have had the benefit of being briefed by us on the separation plan under confidentiality agreements, and understand the financial health of Cendant.

In a moment Ron will elaborate on our recent results as well as our earnings outlook. He will also walk you through the revisions to our 2006 forecast and will again address our plans with respect to share repurchase, which, obviously, we did not communicate clearly on our call yesterday.

However, before he does so I would like to offer an apology to those of you who are disappointed by our decision to postpone until today answering questions about our quarterly results, which had not yet been released in detail on our call yesterday. As I believe most of you know, we take disclosure very seriously. We believe that few if any companies provide more disclosure than we do, and we as a matter of course endeavor to give you the information you need to make informed investment decisions.

One last point. As many of you know, I have a tranche of in-the-money options that are expiring in 75 days. That said, I want all of you to know that I will receive 100% of the after-tax value in additional Cendant stock.

With that I will turn the call over to Ron.

Ron Nelson, President and CFO

Thank you, Henry. Before we discuss the third-quarter results, I would like to reinforce one point that may not have been stressed enough on yesterday's call. For the next nine months, we are mindful of how critical it is that we remain focused on delivering the earnings that are going to launch the four new companies into the public world. To that end, we have established a separate team of executives whose principle responsibility over the next nine months is to plan, organize and implement the series of transition services and other agreements that are going to be necessary to support the individual companies in the early months. They will have no other operating responsibilities other than managing the transition.

Having accomplished several complicated acquisitions, where transition and integration were critical to success, we understand fully how challenging the other side of the process can be, and want to assure you that we set this process up so that our operating executives can remain focused on running their business and delivering on profitability.

That said, let me now move to the third-quarter results, and more to what I assume is everyone's primary interest, how the trends we discern in September have impacted fourth-quarter and full year guidance. First a little perspective to set the stage; third quarter EBITDA from our core operating segments increased 9% notionally and 4% organically. If you factor out only the hurricane related losses that were booked to the P&L in the quarter, those numbers would have increased to 12% notionally and 6% organic, driven by even higher revenue growth. From this you should draw two simple but important observations. One, the businesses are healthy and growing, and two, there would appear to have been some cost challenges during the quarter that squeezed margins. In fact, as Henry mentioned, almost half of the cost challenges were really comparison challenges, brought on by non-recurring benefits in last year's P&L. In addition, our recorded EPS comparisons are impacted by the lack of discontinued operations and treatment for mortgage. And at the risk of asking you to focus on the negative I would also draw your attention to the organic growth in EBITDA in TDS, down 5% in the quarter but then compare it to the notional growth, up 30%. I draw your attention to this to emphasize that the Orbitz, ebookers and Gulliver's acquisitions added both 5 points to Cendant's overall revenue growth rate and substantial incremental profits. It is also clear that the transition from off-line to online travel is negatively affecting the GDS industry and without investment in online travel we had a challenging model in our Travel Distribution business. We continue to believe that all of our 2004 and 2005 acquisitions will by year-end 2006 generate run rate returns well above our cost of capital.

So with all this goodness and wisdom in TDS, why do we fall short of our target for the third quarter, and why did we take guidance down? Let's start with the third quarter; I will spare you the obvious. Hurricanes, higher fuel prices and terrorism including the London bombings have taken their toll in varying degrees on our consumer travel businesses. Whether it is simply declining consumer confidence or an actual slowdown in the travel economy, it is too soon to tell. But the impact is the same, slower growth across our segments of the markets and a lower baseline from which to project 2006 growth. The details are as follows.

The majority of the issues that impacted income were in the online consumer world, even though GDS volumes in certain international territories also fell short of our growth targets. In the GDS business we were able to offset the majority of the revenue shortfalls with cost containment by taking very aggressive and timely management actions. But in online there were two very distinct issues separated by geography. Domestically it has been challenging for us and our competitors to meet hotel transaction growth and merchant mix objectives as the large chains continue to aggregate their own demand and allocate fewer rooms on a merchant basis to the online travel agencies.

We were also impacted by slower than expected implementation of Orbitz new contracts for merchant hotel inventory with the former TravelWeb owners. This caused our gross bookings to fall short of our forecast targets even though we still grew our domestic business 15% during the quarter on a pro forma basis. Internationally it is a different issue. The European economy, particularly in certain regions, remain soft. With the London bombings and ebookers concentration in the UK market, bookings during the course of the summer months have been a challenge. The largest shortfall from budget that we have experienced has been in this unit, and it has been exacerbated by a static conversion rate at ebookers that we had forecast to increase. Even though it has started to tick up in recent weeks.

In order to increase our conversion or “look to book