IES Holdings Inc (IESC) 2002 Q2 法說會逐字稿

Welcome to the ResortQuest International First Quarter 2002 Earnings Release Conference call. As a reminder, this call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. Charles Southworth. Mr. Southworth, please go ahead.

Good morning and welcome to ResortQuest International's First Quarter 2002 Conference Call. Before we begin, management has asked me to inform you that in keeping with the Securities and Exchange Commission's Safe Harbor guidelines, certain statements that might be made during today's conference call could be considered forward-looking and subject to certain risks that could cause actual results to differ materially from those projected. I refer you to the company's SEC filings for further clarifications. Additionally, if you have not received a copy of today's press release, please contact me, Charles Southworth, at (212)446-1892 and one will be forwarded to you immediately. David Levine, Chairman and CEO of ResortQuest, will begin today's call by providing an overview of the business. Mitch Collins, Chief Financial Officer, will then provide a detailed analysis of first quarter results, followed by Jim Owen, President and Chief Operating Officer, who will review the operational initiatives underway at ResortQuest. David will then discuss guidance and open-up the call for questions. Also, in attendance today are other members of senior management team. We have allotted one hour for today's conference call, including the question and answer session that follows. Should any of you have any additional questions after the call, please feel free to contact me, Charles Southworth, at [Phone] and Company at (212)446-1892. At this time I would like to turn the call over to David Levine. David.

Thanks. ResortQuest had a good quarter by exceeding the high end of EPS guidance by 25 percent and EBITDA by a healthy margin as well. We also have a strong balance sheet to boot. But more importantly, I'd like to discuss three different issues. The first thing; the apparent resiliency of our business and the industry in general. Secondly; the fact that we've returned to executing our primary long-term business plan and strategies, which includes one new major and successful initiative for the company. And the fact that we've cleaned-up some old business by successfully protecting the company in a litigation which you may have read about in our 10 Ks and Qs over the last couple of years, against the former owner of Astin Hotels and Resorts, where he was found to have breached his fiduciary duty to the company, and all of this counter-claims were denied and we were awarded, although minimal, certain attorney's fees. However, it was a real victory for the company. So let me rewind to our business and strategies.

We have learned and therefore, benefited from our experience in the turbulence and disruption of the last several months. We've learned how to operate more efficiently, without sacrificing quality, guest, or homeowner service levels and we've been harvesting the benefits of our last two years of integration, which have enabled us to manage our business better in difficult times. And in the first quarter we reduced our normal operating expenses, versus the first quarter of last year, by $1.7 million or 34 percent, bringing our costs to levels commensurate with our current levels of revenue. We learned the importance of and put systems in place to better monitor the changing market place in our business and therefore, we are able to react on a much more expeditious basis.

We've opened-up or exposed substantially more of our inventory to travel intermediaries and we will continue to do so. Because of the benefits we are experiencing, the current environment is favorable to negotiate better deals with distribution channels as well. Over the next couple of quarters we expect strong organic unit growth, especially in the winter fly-markets as a result of our many times undercapitalized competitors. We recently launched the newest version of ResortQuest.Com and we have received favorable comments in general, and in specific, for many of you on this call, relating to the improved speed and user-friendliness of the sight. At one location we're currently testing online unit availability and booking capabilities and we have under development online statements for our home owners, all of which will greatly enhance their loyalty to the company. And when it's complete, we will roll it out throughout our entire system. The new and unparalleled First Resort Software product, known as B-12, is in Beta testing today and poised for a July 1 roll-out. And it will certainly help us gain greater market share within the technology sphere of our business. Our new call center in Florida is moving along well. We expect to have a quarter of our inventory at the call center by mid summer. Which will include the northern Gulf Coast, plus eight resort locations, with almost 1,700 units in the State of Colorado. By year end, we'll have as much as 75 percent of our inventory handled from that central reservation office, with a $1 million savings, starting next year, which takes into consideration local operating company reservations back-up, so that there will always be people on-sight available with intimate knowledge of each destination location and sometimes the individual properties themselves.

We're executing a new and already highly successful growth strategy for the company, which is to pursue what we refer to as developer deals. And have announced four already, including Bahamas Bay in central Florida, with 500 units, Tide Water in Panama City, with 542 units, Waikoloa County Villas on the big island of Hawaii, with 168 units, and in Pensacola, the Portofino project, with 750 units. That aggregates to almost 2,000 units, representing well over $50 million annually in gross lodging revenues once the build-out is complete, in the next three to four years. Further, we will actively participate in the real estate sales at most of these locations. There is no significant overhead associated with these deals and these deals alone represent more revenue than all but four -- I'm sorry, all but our three largest operating companies to date. ResortQuest has for all good reasons has become the operator of choice for many developers looking for vendor credibility, because we know what they, the developers, the homeowners and the guests are looking for. As I stated, there's almost no cost of entry for us into this market. We can do these in diverse areas and diverse types of developments. It's a win-win-win for the lenders, the developers and ResortQuest. And most importantly, we have more of these deals in the pipeline, proving we can continue to grow under the current conditions. This is a great and very real new revenue stream for the company.

When looking at the general leisure travel environment and based on the most recent information published as of a week ago, we see that a third of leisure travelers plan to take more trips in the next year, which translates into a 6 percent increase in those trips. Only 5 percent of leisure travelers said air travel is now too much of a hassle, and just 4 percent believe it's unsafe to fly. When it comes to vacation preferences, the research reveals continued interest in destinations never visited before, at 81 percent, which all goes well for our cross-selling efforts. And two-thirds prefer the beach, which is the bulk of our inventory. The top four dream vacation locations include Florida at 40 percent, and Colorado and Hawaii, each at 19 percent, which also lands on our doorstep, because these three States comprise 67 percent of our inventory. After that, the trend toward multi-generational travel and the intention to vacation with children, up 4 percentage points, also bodes well for our product. Moreover, leisure travelers interested in staying at condo resorts is close to six in ten. Now you'll hear from Mitch, after which Jim will address you with some comments and then I'll talk about guidance and take your questions.

Thanks, David. We were very pleased with the results of the first quarter as highlighted by our ability to exceed our anticipated revenues, EBITDA and EPS. Our marketing programs were very successful and our cost-containment programs helped our margins. During the quarter, the company recorded a pre-tax charge of 500,000 in unusual items and other charges, and an 8.1 million non-cash charge, related to the cumulative effect of a change in accounting principle as discussed with you at our year end conference call. All of the following calculations are for the quarter and exclude the impact of these unusual items. Slightly ahead of previous guidance, the company experienced a 10 percent decrease in total gross lodging revenues, while our same-store gross lodging revenues were down 11 percent. Excluding the impact of Hawaii, same-store revenues were down only 9 percent, primarily due to a slow-down in our fly-to markets, as compared to prior year. Total revenues decreased 4.9 million to 40.5 million. Same-store total revenues declined 5.5 million to 39.5 million. EBITDA for the first quarter decreased 30 percent, or 3.2 million, from 10.8 million in 2001 to 7.5 million in the first quarter of 2002. And same-store EBITDA decreased 3 million, from 11.8 million to 8.8 million. The company also experienced a $300,000 increase in depreciation expense as anticipated, that was primarily driven by our centralized accounting and payroll system implemented during 2001 and other IT and web related projects. Interest expense increased $700,000, primarily due to a higher debt balance brought on by 2001 acquisitions and 2001 capital expenditures related to FirstResort Software and our new accounting and payroll systems. These combined items contributed to the $1.4 million decrease in net income over prior year, or 8 cents in diluted EPS. And hence, EPS for the quarter was 15 cents, compared to 23 cents in 2001. As previously discussed, due to the company adopting FASBs numbers 141 and 142 in January 2002, we no longer record goodwill amortization. If we look at the first quarter of 2001 on a cash EPS basis, EPS declined from 30 cents in 2001 to 15 cents in 2002. Now, let me breakdown our revenues and EBITDA on a regional basis. Again, each comparison that I give you now is for the first quarter only. The beach resorts showed an decrease in total revenues of 8 percent to 15.4 million. Same-store total revenues decreased 9 percent to 14.8 million. EBITDA for the beach resorts declined 69 percent to 365,000, primarily due to the seasonal impact of a 2001 acquisition. And same-store EBITDA declined 23 percent primarily due to our fly-to beach destinations in southwest Florida, from 2.3 million in 2001, to 1.7 million in 2002. Same-store gross lodging revenues decreased 11 percent to 33 million, primarily due to a 3-point decrease in occupancy. Our Hawaii resorts, actual and same-store total revenues decreased 23 percent, from 8.2 million to 6.3 million for the first quarter of 2002. Actual and same-store EBITDA for Hawaii decreased from 4.1 million in 2001 to 2.5 million in 2002. Same-store gross lodging revenues decreased 16 percent, to 37.1 million, driven mainly by a 9.2 percent decrease in ADR. The mountain resorts total revenue declined 1.4 million, to 16.7 million for the first quarter of 2002, representing an 8 percent decrease over 2001. Same-store total revenues were 16.3 million as compared to 18 million in 2001. EBITDA declined 8 percent during the quarter from 7.9 million in 2001, to 7.3 million in 2002. And same-store EBITDA decreased 700,000 or 9 percent, to 7.2 million in 2002. Same-store gross loading revenues decreased 5 percent, to 31.8 million, driven mainly by 1.6 point decrease in occupancy. Actual and same-store total revenues for our desert resorts decreased 22 percent, from 1.7 million to 1.3 million. Actual and same-store EBITDA decreased 35 percent, from 1 million to 650,000 in the first quarter of 2002. Let me move quickly to the balance sheet. At March 31, we had 27.6 million in total cash, which includes 24.4 million of cash held in trust and 3.2 million of operating cash. Our total outstanding debt was 78 million, against a borrowing capacity of 90 million. Our debt to total capitalization ratio remained a healthy 37 percent at quarter end. As previously discussed, during the fourth quarter 2001, the company did amend its long-term debt facilities to allow for more flexibility with our financial covenants throughout 2002. These amendments require the company to pay maximum increase of 100 basis points, or 1 percent in increased interest expense that is tiered based on our quarterly leverage ratios. For the first quarter, we experienced a 25 basis point increase in our interest rate. Based on our first quarter results and additional guidance, we expect an additional 50 to 75 basis point increase in interest expense that will be applicable for the second and third quarters of 2002. Our total assets were over 300 million, up 15 million, or 5 percent from that of a year ago. At quarter end, our customer deposits and deferred revenue line items decreased 2.7 million, or 5 percent, to 56.7 million. Our total shareholder equity approximated 134 million at quarter end and included diluted shares of 19.4 million. In closing, let me review the $8.1 million charge due to a change in accounting principle. As previously announced, effective January 1 of this year, ResortQuest adopted FASBs numbers 141 and 142 and we are no longer required to amortize goodwill and for diluted EPS, we will resort to what is commonly referred to as cash EPS. Under this new methodology, we analyze the anticipated recovery of our existing goodwill based on our individual operating reports and our software company, First Resort Software. Based upon the new measurement principles, we have recorded a one-time, non-cash charge to reduce our goodwill by 8.1 million. This goodwill adjustment relates to several acquisitions completed during 1999, related to our desert resorts. Now, I'm going to turn the call over to Jim Olin.

Thank you, Mitch. While David and Mitch have given you some general comments about our operational efforts, I'd like to spend a few moments giving you some more detailed information about our present and future initiatives. First however, I'd like to give you a perspective on each of our resort regions. As I stated last quarter, we are quite pleased that Hawaii is rebounding a little quicker than expected. While ADRs are still down, the occupancies are beginning to increase in our major areas of Waikiki and Maui. Overall, occupancies for the quarter were still down 4.2 percentage points compared to prior year, but this is significantly less than what we expected. We continue to aggressively market these resort destinations which both online and offline sales and marketing initiatives, such as our "We love travel agents" campaign and our focus on family travel to Hawaii, Travel Trade Education Program. The mountains are beginning their off season and we are aggressively managing expenses and payroll, while aggressively marketing the ever-growing summer market for the outdoor activities and adventurers. So far, our pace reports show the mountains ahead of prior year for summer bookings. While these are small numbers, it still bodes well for continuing our efforts to grow the mountain region's off-season into a more year-round resort area. In addition, we're beginning to see a little light shining on the high-end real estate market in the mountain regions, which as all of you know, has been dormant since last fall. The beach booking patterns thus far have made us quite optimistic that we are in store for a very good summer season. Our enhanced focus on sales and marketing efforts, coupled with the fact that most of our summer markets are drive destinations, have set the stage for what we believe will be a summer season that will either match or exceed prior year. This is very good news given the fact of both the economy and travel in general have not returned to prior year form as of yet. The desert area is still feeling the pain of a reduction in corporate, group and relocation business. And although not a large part of our overall operations, we continue to explore ways to enhance our desert locations through our new real estate sales endeavors and through our creation of golf and spa packages. I've mentioned several times, very generally, about our marketing initiatives, but now I'd like to specifically outline several that are underway. As all of you know, our national TV commercial is in full swing, running on all major cable channels, like CNN and Headline News. This brand building commercial has also had an added benefit of making the phone ring and increasing the number of unique visitors to our website. With an average of 450 to 700 calls made to our call center after the commercial's air, and a 20 percent increase of unique visitors to our website over first quarter prior year. While many of these are brochure or information request inquiries, they are the first step in generating new guests. And an added benefit of this marketing program is that half of the expenses were paid in trade instead of cash. Our new distribution relationships with the retail travel marketing consortia of Vacation.Com and Travel Savers, has already generated new business in only the first ten weeks. Of these consortia agency members, 45 percent booked business into one of our resorts that they had not previously booked. And for 28 percent, it was the first time they'd ever booked with us. There were also 18 percent that had not book with us in all of 2001, but now are re-booking again. All this translates to a 14.3 percent increase in revenue from these two sources, over first quarter prior year. Since the beginning of the year, we have launched 38 separate direct-mail and email campaigns to 138 target feeder markets, opening the doors to 3 million potential new and returning guests. Our database marketing campaigns have proven to be a very successful way of generating bookings in the leisure travel business and we continue to work closely with partners like American Express, Samsonite, Hertz, major airlines and other leisure travel retailers and wholesalers, to generate these leads and increase our distribution.

As David has also mentioned, we are very pleased with the upswing in new developer deals we have been able to secure and are excited that our expertise and knowledge will match perfectly with many new additional resort developments that we see on the horizon. This is a great way to increase unit count with very little capital infusion. On the technology front, as has been mentioned, we unveiled our newly launched website, bringing with it a faster and simpler process by which to preview and book reservations online. The new site also makes it easier for our travel distribution partners to utilize our site for online bookings and for us to gain further marketing data and information on our visitors. We are also anxiously anticipating the rollout of the new version of our First Resort Software, commonly referred to as B12. Already, First Resort Software holds the largest single market share in the resort management software business, more than twice their competition, and the new product will only enhance this dominant position. The product is currently [inaudible] completing Beta testing. A full market rollout is planned for July. Lastly, we feel very good about the trends we are seeing in all of our regions. A telltale sign of our optimism that a rebound is occurring, is the positive movement of many of our operational statistics from fourth quarter 2001, to first quarter 2002. Key examples; REVPOW for the mountain region went from 20.7 percent behind prior year in fourth quarter, to only 2.3 behind in first quarter. The beach followed this pattern, going from 13.5 percent behind in fourth quarter, to only 5.1 percent behind in first quarter. Hawaii also had a positive swing in REVPOW, from 22.4 percent behind in fourth quarter, to 13.9 percent behind in fourth quarter. Even the desert region exhibited a positive trend, with the region going from 6.4 percent behind prior year in fourth quarter, to only 1.1 percent behind in first quarter.

In all four regions, our REVPOW improved significantly, versus prior year, going from 21. 8 percent behind prior year fourth quarter 2001, to 7 percent behind in first quarter 2002. This is an excellent sign. Overall, as you can see, business operations are not only returning to normal, but are moving along at an aggressive and efficient fashion. As the travelling public begins to return to full levels, we are both ready and excited for the new business. I will now turn it over to Dave.

Okay. In terms of guidance for the second quarter we're looking at revenue in the 38 to $40 million range with EBITDA in the $5.5 to $6 million range and EPS of 9 to 10 cents. For the third quarter we see revenues in the $48 to $51 million range, EBITDA 14.5 to 16 million and EPS of 36 to 40 cents, which will represent a record quarter for the company. We also use the following assumptions in providing this guidance. We see the last phase of booking momentum for Hawaii forecast to return toward the end of the second quarter. The State of Hawaii historically lags six to nine months behind the mainland's recovery. We're projecting that some pre-construction certificates of occupancy and therefore, real estate sales in Florida, will slip into the third quarter. As anticipated, Easter fell into the first quarter this year, as opposed to the second quarter; shifting those revenues and earnings. We also had the effect of the additional interest that we're paying, based on the new ratios projected through year-end, totaling about $2 million, however we're hopeful that those ratios will snap-back at the end of this year to the original levels. And an additional depreciation related to our new technology platform of about $1.2 million by year end. The bottom line is really the bottom line when you look at the third quarter. With EBITDA moving from 12.4 million last year to 4.5 -- I'm sorry, 14.5, to 16 million, which represents a 20 -- I'm sorry, a 10 to 20 percent increase. Cash EPS last year of 33 cents in the third quarter, moving up to 36 to 40, which will represent a 14 to 26 percent increase.

So, while we see a very strong third quarter and that's all coming through organic growth, it's still too early to forecast the fourth quarter relating to a booking window for that period that really doesn't open until late September, especially for the mountain region. I'll provide guidance for that period and future periods just as soon as I'm comfortable with our booking trends. Rachelle, at this time, we'd like to open he call up for questions.

Our first question comes from Bryan Maher, with Credit Lyonnais.

Good morning guys.

Good morning.

Can you give us a little bit more color on the high-end real estate sales coming out of Aspen and Nantucket with respect to the gap narrowing between the bid and the ask and, you know, more specifically, how your book of business looks now as compared to last summer when we first kind of ran into trouble with this area?

Bryan, this is Jim. I just returned from a trip to Aspen and met with the brokers there. They're seeing more buyers coming in the door. The gap between the bid and the ask is narrowing, and we have more under contract there right now than we've had in the last 12 months. So, that's the key thing we're looking at right now, is that we're getting some two-sided contracts, as they call them. And they're starting to slowly close. So, Nantucket is coming back a little bit slower. That's why I said a little light's shining, but Aspen is definitely moving in that direction. And so, we're feeling a little bit better about it.

Is it more a matter of the seller's prices coming down or that the buyer is being a little bit more aggressive in bidding?

I think you're seeing -- what I see is a rekindling of some of the buyers coming to town. Obviously, there's been some reduction in pricing because of the fact that there was somewhat of a glut of listings. But it is come down significantly. Also, some of the high-end stuff in Florida is starting to close as well. But, predominantly, what we're seeing is Aspen is slowly returning. It's not fast. Those kinds of things don't return fast. But, we're quite happy with what we see so far.

Bryan, you're getting, kind of, two ends of the spectrum in terms of the sellers. A certain group of them are continuing to hold to their price and a group that may be potentially as large, is saying get me an offer. They're very motivated sellers. Many of those coming from the Pacific Northwest, for obvious reasons.

And just, you know, kind of following on that a little bit, how big would you say your book of business has grown, you know, your number of listings has grown since last year? Is it a factor of two, is it 50 percent more, I mean, what level of listings, you know, do you have higher now than before?

The volume is about 20 percent more -- 20 to 25 percent more in listing volume than we had a year ago when this all started.

Okay. Thank you.

Thank you, Bryan.

Hey guys.

Hi David.

Just to follow-up on Brian's question. Could you remind us, in a normal year, what are real estate commissions as a percent of EBITDA? And then of that, what portion is high-end real estate?

Bryan -- I mean, excuse me, David, this is Mitch.

Sure. What percentage of EBITDA comes from the real estate sales?

Well, we can't really give you that number and let me tell you why. We've got combined offices, we've got combined staffing, etcetera, from our real estate and our property management. I can give you some revenue statistics and then you'll just have to model it in your own -- under your own methodology. So, basically, what we did, we did about $17 million in real estate in 2000; net commissions to the house. We did 15 and some change in '02 -- or, excuse me, '01. And, you know, for all intent purposes, in real estate we saw a little bit of a softening when we came through this year in the first quarter and second quarter and now, third quarter numbers. But from an EBITDA standpoint, I can't get you that number because of the combined operations.

Would you say that the core management business is higher margin than the real estate business?

I would say the real estate has a higher EBITDA contribution, but overall, I mean clearly we're a management company and you've only got about 11 percent of your revenues, I believe, are coming from real estate.

Right. Okay, thanks guys.

Sure.

Our next question will come from Cliff Greenberg in Baron Capital.

Hi, Cliff.

Hi guys, how are you? A couple of questions. Could you give us a little more detailed understanding of the developer deals? When do these come on? And in these types of things, David, you just naturally assume the -- you're naturally the agent for these properties and what kind of rates and dot...? And the second question. My understanding is a lot of small competitors in the management business are doing very poorly now or struggling. What is your ability either to take away units from them or to assume their businesses or do something to, again, increase the units that we're managing without actually having to purchase them?

Okay. Well, I'll address the developer part of the question. And the first product that really comes on-line for us, is at the end of this year, maybe straddling the beginning of next year, which is 150-room tower -- the first 150-room tower in Pensacola at the Pornafito project. And that's been topped-out already and we anticipate that those closings will happen in December and January of this year, which will, obviously, fall into our summer season of 2003. The other projects are coming in kind of sporadically throughout the three to four-year period that we're discussing. Some of them are just coming out of the ground. Some of them have just received their financing and are getting ready to break ground. So, with the $15 million, and actually, I think it's about $55 million we anticipate, based on 70 percent of the units coming into the rental program, which is normal when we have on-sight exclusivity of the management program. So, that's a very conservative number that we're using in that regard. The real estate sales -- we will participate in all of them, but we have the exclusivity at one of the projects today in Florida. From the competitor's standpoint, in terms of organic growth, was that the question?

Yeah. Or at least give us the understanding as far as what's happening competitively now.

Okay.

Cliff, this is Jim. Let me tack on a little on the developer thing and then I'll answer the competition. One of the big benefits of the developer deals is that first of all, the product is all new coming on line, so it really gives us an opportunity to get in on the ground floor, with brand new products, which obviously the travelling public likes a lot. But also, to be able to help to steer the development and manage some of the things that will make us more efficient and better guest services after the development is completed. We're not inheriting a development that may -- it sounds crazy, but it's as simple as where trash shoots are and laundry shoots and how maintenance is set up and so forth. So we can, you know, our expertise is in managing those properties, so it gives us a real opportunity there to get in on the ground floor and get some brand new units and the design correctly. And we can provide a lot of expertise to the developers that they don't have in these situations. With regard to competition, what we're doing right now, and obviously, we see it in all of our market areas, that some of the smaller management companies are having trouble weathering the storm. That we are aggressively going out with our relations people, our rental management people, going out securing new units. We have unveiled basically, some internal incentive programs in all of our locations to help to secure additional units. We're being very selective in those units. We only want to bring on units that are of certain quality and so forth, so that we can manage guest expectations. But, definitely, we have made that a high priority for organic growth. So, it fits perfectly with the developer deals as well as going out and going after these units that need some management.

: CLIFF GREENBERG: Just to follow-up on that if I may. Have you, can you report that you've actually added, on an organic basis, X amount of units so far? Or, what are your goals this year? And are there any circumstances where you would, as opposed to cherry pick units, want to take over the -- or assume the position of some of these management companies in total and therefore take-on bigger blocks of business?

It's one of those -- first of all, Cliff, we know that at least 500 additional units from some of these things we're working on right now. And that's very conservative. I think we will continue -- if you combine the two you're talking about, be well north of that. When you assume a management company, as the acquisitions guy will tell you, well, you assume some things you don't maybe want. Which is policies, procedures and also some liabilities. This is kind of a nice situation we're in, because we can grab the unit, show them what we can do for them and put them into our system right away and not have to basically, inherit some of the things that may come with some of these management companies that have been working very hard to just keep afloat. So, actually, we're looking at some. We've talked to some. But, the cherry picking works very well in a high volume type situation, which we may be in.

Thanks.

Okay. Rachelle, if there's no other calls coming in, I anticipate it's because a lot of people are recording this call as usual. So, if you have nothing else, we'll closeout the call.

There are no further questions.

Thank you. And we appreciate everybody dialing-in today. Thank you.

Thank you, everyone for your participation. That concludes today's conference call.