Marcus Corp (MCS) 2002 Q3 法說會逐字稿

Please stand by, we're about to begin. Good day, everyone, and welcome to the Marcus Corporation third quarter earnings conference call. This call is being recorded.

With us today we have Chairman and Chief Executive Officer, Mr. Stephen Marcus, and Chief Financial Officer, Mr. Douglas Neis. At this time, I would like to turn the call over to Mr. Neis for opening remarks. Please go ahead, sir.

Thank you very much, and welcome everybody to our third quarter conference call. As usual, I need to begin by stating that we plan on making a number of forward-looking statements in our call today.

Our forward-looking statements could include, but may not be limited to, statements about our future revenue and earnings expectations; our future rev-par; occupancy rates; and room rate expectations for our limited service lodging and hotels and resorts divisions; our expectations about the quality, quantity, and audience appeal of film products expected to be made available to us in the future; our expectations about the future trends in the business, group, and leisure travel industry, and in our markets; our expectations and plans regarding growth in the number of type of our properties and facilities; and our expectations regarding future capital expenditures.

Of course, our actual results could differ materially from those projected or suggested by our forward-looking statements. Factors, risks, and uncertainties which could impact our ability to achieve our expectations, are included in the Risk Factors section of our Form S-3 Shelf Registration Statement dated August 15, 2001, and 10-K and 10-Q filings, which can be obtained from the SEC or the company.

So with that behind us, I guess I'm going to start off as usual, follow the usual format. Before discussing each division's revenues and operating income, I do want to touch on just a couple of global issues that impacted our third quarter results and comparisons to last year. The first is a below-the-line item, and is referenced in the press release. That of course is the gain on insurance contracts of $1.5 million recognized last year during this quarter as a result of the death of our founder, Ben Marcus. This was a non-taxable gain, and thus was equal per share. Without this gain last year, we would have reported a five cent loss from continuing operations, and therefore, this year's results are actually -- or this quarter's results for this year, are actually 10 cents per share better than comparable earnings last year.

I also want to point out an improvement in two key cost areas that we did highlight for your attention last year during this quarter. Those of you in the Midwest remember the 50 inches of snow that we received a year ago in December that drove our corporate-wide snow removal costs up $500,000. We were fortunate not to have a repeat of those costs this year.

In addition, our gas and electric costs corporate wide were down approximately $1 million during the third quarter, compared to the prior year, due to reduced rates and conservation measures that we've taken.

Our total capital expenditure that's the fiscal 2002 three quarters totaled approximately $40 million versus $60 million last year. The break down was as follows: theaters, $1.5 million; service lodging, $8.5 million; and hotels, $30 million. The only significant capital projects the company currently has underway include the construction of a new parking structure at the Milwaukee Hilton, the early development stages of a new Baymont in downtown Chicago, the Grand Geneva Spa expansion, room renovations at our Grand Geneva and properties, and the continuation of our exterior re-imaging program for selected Baymonts. Depending upon the timing of at yearend, we still anticipate ending the fiscal year with total capital expenditures of approximately $50 million to $55 million.

I also want to expand briefly on a statement in our press release regarding the private placement in debt. We're very pleased to be moving ahead with an anticipated $75 million in senior notes, identical to previous issuances that we've had. I believe the fact that this money is available to us is a recognition on the part of the lenders that our theater chain has avoided all of the problems of our competitors, along with the testimony to the conservative way that we've managed our balance sheet.

With long-term assets making up the majority of our balance sheet, we believe it's important to have debt with longer maturities as well. And proceeds from this planned issuance will be used to pay down existing borrowings under our short-term bank facilities, providing us with much flexibility in the future. With rates at historical lows, we also believe that having the majority of our debt portfolio at fixed rates also is in our best long-term interest. The new notes, if closed on as expected on or about April 1st, will bear interest and a weighted average rate of approximately 7.7 percent, and will have maturities between seven and 10 years.

Before Steve talks to you about the progress of each of our businesses, I do want to provide a few additional financial comments on each division, starting with the limited service lobbying division.

As the press release indicated, Baymot RevPAR was down 6.7 percent in the third quarter compared to last year. Occupancy was down 1.5 points, and our average daily rate was down 3.5 percent. This compares favorably to the 12 percent RevPAR decline and drop of five points in occupancy seen during the second quarter, and the aftermath of September 11th and resulting economic downturn.

As the press release pointed out, February was our best month yet, with a -- from a comparison standpoint, with RevPAR down only 1.5 percent and occupancy flat. RevPAR for comparable units was down 11.8 percent during the quarter primarily as a result of a four-and-a-half point drop in occupancy. This larger drop is consistent with the industry, which has seen larger revenue decreases of higher priced properties. Also consistent, however, is the fact that the revenue drops are half of what they were in the second quarter.

The rev par decline improved actually into single digits in February for the . Last quarter I also pointed out that the majority of our decrease in operating income occurred in September and October and that cost controls and slight improvements in revenue resulted in only a small decrease in operating income in this division in November. As you can see by the numbers we reported today, the trend continued in the third quarter.

And in fact despite a 7 percent drop in revenues, our linen service lodging division operating loss for the quarter was reduced by $1.9 million. In addition to reduce utility costs and cost control measures implemented at both the in-level and corporate level, the divisional comparisons last year benefited from the fact that last year's results were negatively impacted by nearly $1 million in one-time costs associated with several brand initiatives, most notably at guest ovation's frequent stay program.

An additional approximately $700,000 of these one-time costs were recorded in the fourth quarter last year, which would also help comparisons. Moving on to our hotels and resorts, this division had overall hotel revenues that were up 12.8 percent due to the division's newest hotels, the Madison Hilton, the Motel Phillips and the Timber Ridge Lodge..

Comparable hotel properties saw a 10.4 percent decline in rev par during the quarter compared to a 27 percent decline reported during the second quarter. We've obviously seen steady improvement in this division as well and particular mix of hotels has outperformed the national averages that we've been seeing. As you can see in our segment data, very good cost controls in this division significantly minimized the impact of the comparable hotel revenue decline this quarter as our operating loss during the third quarter was only $300,000 off of last year's results.

As you know our hotel division historically has posted losses during the third quarter due to the seasonal nature of our predominantly Midwest locations. The biggest drag on earnings this quarter were the anticipated startup operating losses experienced at our new Hotel Phillips property in Kansas City, which had the unfortunate timing of opening on September 14th.

Moving on to theaters, I will begin by pointing out that -- pointing out once again that, while both this year and last year's third quarters have 13 weeks, you'll note by the ending date that there's a full week difference between the respective quarter end dates.

This is a result of the fact that our recently completed fiscal 2001 was a 53-week year. I highlighted the significance of this last quarter when I noted that differences can occur when comparing quarters with a particular holiday that can fall in a different quarter as a result of the -- of the -- various ending dates. In this case, the 2001 Thanksgiving Day weekend, which is traditionally a very big movie-going weekend, and which fell during the third quarter last year, was included in this year's second quarter results. I warned you during the conference call that our third quarter comparison this year could be hurt by the loss of that Thanksgiving Day weekend. Thus, when you look at the record results that we achieved again in our theater division this quarter, remember that this was accomplished despite essentially trading a Thanksgiving Day weekend for a weekend at the end of February.

As you can see, box office revenues were up just one percent, and concession revenues were up over five percent in the third quarter. Total attendance was actually down 3.7 percent for the quarter as a result of the loss of that Thanksgiving Day weekend. Average admission prices were up 4.7 percent for the quarter, and our average concessions revenues per person were up 9.3 percent. Our press release pointed out some of the strongest pictures during the quarter, and in general, the mix of movies once again contributed to better than average concession sales. The strong concession performance, combined with very good operational cost controls, and snow removal and utility savings alluded to earlier, contributed significantly to the record performance by the division.

So with that, I'll now turn the call over to Steve Marcus for some comments.

Thanks very much, Doug.

I'll begin my comments where Doug left off, and that's with our theater division. You know, it's a little difficult to come up with something new to say about this division after just completing its third straight record quarter. It seems that Hollywood has found the right formula for movies again, and our locations continue to be the theater of choice in their respective markets. And our management team continues to profitably manage our theaters better than any other chain in the country. To report a 23 percent increase in operating income on essentially flat box office revenues, is really a remarkable achievement. The investments we've made in this division over the last few years, both in growing the chain, and in making it the most state-of-the-art chain in the country, are definitely starting to pay off.

As you know, we have slowed our capital spending in our theater division considerably. And while we've identified opportunities for selected screen growth at a few existing locations, I anticipate that our capital spending will remain lower in the near term, barring any currently unforeseen acquisition opportunities that might present themselves. I'm pleased to tell you that the outlook for movies in the near term remains very good. "Ice Age" opened this past weekend to nearly $50 million nationally, exceeding everybody's expectations. Universal will be re-releasing "E.T." this coming weekend with a lot of fanfare. And we're all looking forward to the anticipated blockbuster hits "Spiderman" and "Star Wars II," which will be released on May 3rd and May 16th respectively.

While we'll be going up against the fourth quarter last year that had an extra week -- not only for this division, but for our lodging divisions as well -- this slate of movies has the potential to offset the loss of that week in this division. The summer lineup, which will include hits -- which will include pictures such as Tom Cruise and Steven Spielberg's "Minority Report," Tom Hanks' "Road to ," and much anticipated sequels to "Men in Black," "Stuart Little" and "Austin Powers" looks very promising. We even have the second installments of "Harry Potter" and "Lord of the Rings" to look forward to in November and December. Needless to say, we're very pleased with the results of our theater division and look forward to continuing strong performance in the future.

Moving on to the lodging businesses, I want to start with our hotel and resort division. As Doug shared with you, our operating results improved quite a bit from the very difficult second quarter. And we're only down slightly from last year's reported results.

Doug also reported that our hotels have outperformed the industry averages during this time period. To be specific, has been reporting weekly industry performance since September 11th. And the upper, upscale segment saw RevPAR declines during the weeks in our comparable quarter, generally in the high teens to the low 20 percent range. As you heard, our comparable hotels were only down about 10 percent during this quarter.

We think there are several reasons for that. First, our locations depend on our airline travel, nor are they located in the most impacted cities -- cities like New York, Washington D.C., Orlando and San Francisco. In fact, properties like Grand Geneva, which draws its customer base primarily from the nearby Chicago and Milwaukee markets, is possibly even benefiting from people staying closer to home and going to resorts, taking their recreation at locations they can reach by automobile as opposed to flying.

A second reason for our better-than-average performance would likely come from our variety and types of hotels. While the number of transient business travelers still haven't -- hasn't returned to pre-economic downturn levels impacting our Pfister Hotel and Hotel Phillips the most, the leisure guest and group customer has rebounded quite nicely, providing a list of properties like the Grand Geneva and Timber Ridge Lodge. Grand Geneva, for example, actually reported increases in revenues and operating income for the quarter compared to last year. I think it's also important to remember that it was this time last year that the lodging industry had seen the beginning of what was later labeled a recession.

Other positive developments during the quarter included the opening of the second half of the rooms at our newest managed property, the Timber Ridge Lodge, which resulted in first profitable quarter there and very positive guest response to that property as well now that it's finished. Our time share operation also appears to have turned the corner and its improved bottom line performance has contributed to the division's operating results during both the quarter and the year-to-date.

We've also completed our redevelopment of our food and beverage operation at the Milwaukee Hilton culminating with a very successful opening this quarter of our new restaurant, the Milwaukee Chop House in the remodeled first floor of the hotel. And throughout this entire challenging period for lodging, our management has kept a tight lid on costs contributing to more stable operating performance despite overall declines in same hotel revenues.

Now, looking ahead I'm sure that we'll still face challenges ahead of us and certainly will take longer than originally planned to get the Hotel Phillips stabilized given its difficult -- the difficult -- timing of its opening. But all in all, business is looking better. While in general the lead time on advanced bookings has shortened somewhat, we're equally encouraged by the amount of business already booked for our fourth quarter and the overall projections being made that suggest a rapidly recovering economy.

We also are looking forward to the projected May or June opening of our next managed hotel, the Hilton Garden Inn in Houston, Texas. As Doug reported to you, our hotel division has received a bulk of our capital dollars this year as we concluded the Hotel Phillips and developed a new parking garage at the Hilton Milwaukee. I think it's very likely that you'll see slightly reduced capital spending in this area next year as we focus our attention on growing primarily through management contracts to some sliver equity investments possible.

This division in particular has been very opportunistic in the past and we're exploring multiple strategies that might provide us with ways to grow our management company without major capital investments on our part consistent with what we've said in the past. Now moving on to our limited service lodging division. I certainly was very pleased with our significant year-over-year improvement in the third quarter operating loss as we navigate our new mid-price change through these turbulent waters.

Our rev par decline was half of what it was last quarter and continued to track national averages. As Doug shared with you, the improvements we made during the quarter can be attributed primarily to cost controls and the fact that we've now gotten past many of the one-time costs and investments that are necessary to implement the essential elements of the Baymont Inns and suites brand strategy as we see it.

For example last year at this time, we incurred significant costs associated with introducing our new frequent stay program known as guest ovations. Today those costs are behind us, and we've attracted almost 100,000 members to the program who are accounting for approximately 16 percent of our revenues at company-owned Baymont. Our goal in this regard is to double the number of guest Ovations numbers, and also double the contribution rate over the next two years.

Our challenge remains to increase our brand awareness, so it's not surprising we're below that of our major competitors in the mid-priced segment. In order to continue to increase brand awareness and improve our market share, we believe it's imperative that we differentiate ourselves from our competitors.

And so, this month we introduced our new Ovations Rooms, featuring amenities not seen before in the mid-priced, limited service segment. These rooms, which include several previously-announced amenities, including the best sleep experience in the segment, will be offered as a free upgrade through our guest Ovations numbers.

And for non-members, the room cost will be about $5 more than a standard room. Some of you may have seen our new television commercials on ESPN and The Weather Channel, which marks our return to television for the first time in three years. Our efforts to build the brand and enhance our guest experience have earned national recognition for Baymont. We're all very proud that, in addition to having received the Best Hotel Value Award from "Entrepreneur" magazine, we just recently received a first place ranking from "Business Travel & News" for our segment.

I also want to report back to you on the progress of a strategy that I told you we implemented last quarter. As you may recall, we decided to outsource our reservations operations last fall, and I believe the early returns are very encouraging. This move enabled us to significantly improve our technology and guest service, with no additional investment from the company, or our franchisees, while at the same time reducing our transaction costs significantly. I'm pleased to tell you that our bookings from the new system have been up 20 to 25 percent in each of the past few months, compared to the same period a year ago.

Looking ahead, we recognize that we'll be comparing 13 weeks this year to 14 weeks last year during the fourth quarter, and that business travel still hasn't returned to stabilized levels yet. But we're encouraged by the trends. We still have many challenges ahead of us, before we can say that Baymont has reached its competitive set in our new higher-priced segment, and we still have company-owned properties currently providing a drag on earnings that we've identified for possible sale. We'll also have to be patient regarding our growth, as the franchising market remains soft, due primarily to the tightening of the credit markets. Having said all of that, we believe we've got our costs under control, and we're poised to continue to see improved operating results, if the economy continues to improve, as predicted.

And while I mentioned the soft franchising market as a negative, it's also a sign of a much larger positive for existing owners of hotels like us. That is, reduced supply growth. In fact, current projections of only one to two percent supply growth over the next couple of years would be the lowest supply growth in a long, long time -- many years -- giving the industry a chance to absorb all the overbuilding that plagued the industry in recent years.

So summarizing, we're pleased that we've weathered one of the most challenging six months in the history of our lodging business, thanks to the advantages of our diversification and the record performance of our peers. Our focus during the remainder of fiscal 2002 and beyond will be to continue to control costs, to maximize the returns on our current investments, continue to make the investments necessary in our businesses to ensure that we keep our company's position for the long term, and continue to maintain a strong balance sheet.

In that regard, I also want to compliment Doug for the fine job that he did in negotiating the new lending agreements that -- that he spoke of in his segment of this report. I think it continues our -- our policy of keeping our balance sheet in very good shape, and enables us to plan with much more confidence as we move forward.

At this time, Doug and I would be happy to entertain any questions you might have.

Thank you.

Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one, on your touch-tone telephone. We will proceed in the order that you signal us, and we'll take as many questions as time permits.

Once again, please press star, one, on your touch-tone telephone to ask a question.

Our first question is from with Robert W. Baird.

Good afternoon and congratulations on the improved results.

Thank you, .

Could you please elaborate on acquisition opportunities in the theater division? What is your strategy there at this stage?

Well, , as far as acquisition opportunities are concerned, it seems that and AMC have acquired the entire theater world recently. And -- but my -- our sense is that we will probably grow in three ways. One will be that we will add screens at, you know, discreet locations, where it appears to us that there are growing market opportunities. I'm talking about where we have current locations.

Secondly, my sense is that there will be opportunities where markets will emerge for new complexes to be built, and we will take advantage of those. We have not identified. I think we maybe have one or two that we are in the process of identifying at this time and the third will be perhaps some of these newly assembled chains that have resulted from consolidations, begin to analyze their market positions.

We've got some theaters that the fit their set up strategically, but may fit ours better that we'll be an acquirer of those. There are number of those in our -- where they have single theaters, not single screen, but one theater complex in the middle of where we may have two or three and they may not be interested in having their capital deployed that way and it works out better for us to be a possible owner of it.

Thanks. In the Baymont business are new ovations rooms available now at all Baymonts?

Yes.

And are you planning an increase over time in the number of ovations rooms per Baymont Hotel?

Well we're in the process of monitoring, you know the sales and revenues from those right now. Let me back up, they're available in virtually all locations. I believe there are a few franchise locations that don't have it as yet, but they will in the next few weeks, but all of the company-owned hotels and most of the franchises have the guest ovations rooms or the ovations rooms.

And we're monitoring the results of those and if they are as successful as we expect they will, then we will move on and all of the rooms in every property will have those amenities. The guest response so far has been terrific, particularly with respect to the beds.

With the softer franchise market could you quantify perhaps how that has affected your unit growth plans in the Baymont business?

Difficult David. I mean what I will tell is that we went into this year and the years ahead looking to be signing up 25 to 35, and actually seeing that number increase, of locations -- franchised agreements per year. We're not on that kind of a pace right now and I would -- it really is going to come down to again when is the credit market, when is that going to turn.

And when that -- when that -- situation improves, when -- as business improves itself, we would be talking those kind of numbers again, I just -- the difficult part is saying exactly when that point's to be?

The other unknown out there, but something that is beginning to loom, is the possibility that there will be some consolidations of brands throughout the lodging industry. If nothing else, it has -- the industry has been over-branded in recent years, and there will be some of the very small regional chains that will start looking for new places to go.

One more question. On your private placement, Doug, you gave the potential interest rate. How does that compare to the weighted average rate of the short term debt that this debt will be replacing?

I would say that it's -- if you took a snapshot, , it probably is a good four and-a-half points more. We've probably been -- you know, weighted average short term, you know that we've been borrowing in the two and-a-half to three percent range, probably a little closer to three. All indications are that taking a look at that snapshot wouldn't be accurate, based on the feeling that short term rates are probably on their way up. And this yield curve will probably start to flatten a little bit. But if you took a single snapshot, that's where we are right now.

Good point. Thank you very much.

Just a reminder: If you would like to ask a question today, depress star one on your touch-tone phone. It appears there are no further questions at this time. Mr. Neis, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you very much.

We once again would like to thank you for joining us today on our conference call. We appreciate your continued interest in the Marcus Corporation, and we look forward to speaking to you in July, when we report our fiscal 2002 year-end results.

Again, thank you.

That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

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