Marcus Corp (MCS) 2003 Q3 法說會逐字稿

Good day, everyone and welcome to the Marcus Corporation third quarter fiscal 2003 earnings conference call. This call is being recorded. With us today are the chairman and chief executive officer Mr. Stephen Marcus and chief financial officer Mr. Douglas Neis. At this time I'd like to turn the call over to Mr. Neis for opening remarks. Please go ahead, sir

Good afternoon everyone. Welcome to our fiscal 2003 third quarter conference call. Now 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 not be limited to statements about our future revenues and earnings expectations, our future RevPar, occupancy rates and room rate expectations for limited room lodging and resort divisions expectation for (ph) the quality quantity audience appeal film product available in the future. Our expectation for (ph) the future trends in the business, group and leisure travel industry and in our markets. Our expectations and plans regarding growth in the number and 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 units which could impact our expectations are included in the risk factor succession of the form shelf three registration statement dated August 15, 2001 and 10-K and 10-Q filings which can be obtained from the SEC or the company. With that behind us let me as usual make a few general comments about the quarter, particularly on the financial perspective. And then I'll turn the call over to Steve.

To begin with, before I discuss each of the divisions revenues and operating income specifically, I do want to touch on a couple of more global issues that impacted our third quarter comparisons to last year. First significant item to impact comparisons to last year was the capital gains, the gains and disposition of property and equipment, which totaled approximately $1.6 million higher than last year. While we sold several properties during the quarter, the majority of this came, of this gain came from one very successful redevelopment and sale of a former theater location in the Milwaukee area.

Year-to-date gains from dispositions of property and equipment are now running ahead of last year, which is something we had noted likely in our prior communications with you. Unfortunately, the gains this quarter were offset by a sizable investment loss that we recorded related primarily to one of our joint venture Baymont properties. This particular property which we manage and hold a 50 percent interest in was struggling prior to 9/11 and has continued to under-perform since then. Our partner has indicated to us that they are not likely to put additional capital into the project and we've determined we're not going to continue to fund any short falls in the future. As a result we have written down any loans and investment that we've made in this joint venture, down to a value that we believe reflects the likelihood that we're not going to collect on all of our investment.

Now, we don't like to get into adjusted net earnings business and you'll note that we didn't do that in our press release but I do want to note for you here that if not for this quote, unquote below the line investment loss, our net earnings per share for the third quarter would have been ten cents per share or four cents per share higher than what we reported. I also want to remind you we only have a handful of these fifty/fifty joint ventures and our exposure to this type of loss beyond this particular property that we're discussing is really negligible. And while our third quarter comparisons were not impacted significantly by last year's historic tax credits from our hotel Phillips project I do want to remind you on a year-to-date basis last year's net earnings were favorably impacted by approximately nine cents per share as a result of those credits.

Said another way, if not for last year's tax credits, our year-to-date earnings per share from continuing operations, even with the investment loss that I just talked about, would currently be four cents higher than last year and our net earnings per share would be eight cents higher. The numbers are what they are and we of course were more than happy to record those credits last year. But I think it is important to understand this as we compare current results to those of last year. One last item that impacted all the divisions of this quarter was increased energy cost. In total, our gas and electric costs were over $400,000 or about 15 percent higher than they were during last year's third quarter, really due to both a combination of weather and higher utility rates.

As you can see, the strength of our third quarter was the theaters and hotel and resorts divisions with both divisions reporting NIS (ph) increases in operating income for the quarter. As you'll hear in a moment even though our limited lodging operating loss was slightly higher are to the quarter we continued to have some very good things happening in that division as well. Our total cap ex in the third quarter for fiscal 2003 has totaled approximately 16 million versus 40 million the same time last year. Breakdown for the first three-quarters of this year is roughly seven million dollars on a limited service lodging division. Five million for hotels and resorts. Three million for theaters and the remaining million corporate and other.

The biggest project we had underway currently is the downtown Chicago Baymont development with the majority of expected expenditures for that project likely to fall into fiscal 2004. We have approved several theater expansion products that will begin this spring. We're continuing with exterior reimaging program in Baymont and we're evaluating a significant spa and meeting expansion at the Miramonte we'll spend the necessary capital to keep our properties in excellent condition. Based upon the most current review of the timing of the upcoming capital expenditures it's very likely our total cap ex for fiscal 2003 might end up closer to 30 FLD versus the 50,000 we planned on spending.

Before Steve talks to you about the progress of each of our divisions let me provide a few comments on each division beginning with theaters. So you see box office revenues were up six percent and concession revenues were up over five percent for the third quarter. With all of the increase occurring over the five week period encompassing the Thanksgiving day to near years holiday time period. Since then box office has been relatively flat. Total attendance increased 2.2 percent for the third quarter, and a total of 3.6 percent for the first three-quarters of the year, and taking into consideration the fact that we have less screens this year compared to last, our calculation of same theater attendance show increase of 4.8 percent year-to-date.

Our average admission price was up 3.6 percent for the quarter and average concession revenues per person were up 1.9 percent. Year-to-date those same numbers, the average admissions and average concessions per person are up 3.3 percent and 2.8 percent respectively. In our hotels and resorts division, overall hotel revenues were up 0.6 percent during the quarter but if you exclude timeshare revenues, which, as I discussed in our last conference call, currently being counted for under the percentage of completion method while we're completing construction of our next 32 units, you'll find the total hotel revenues excluding the timesharing revenues were up 4.4 percent for the quarter.

Now, we're carrying approximately $2.3 million of timeshare sales deferred on our balance sheet while we await completion of the construction. As of today, we still expect to finish the building in May and record the remaining revenues in the fourth quarter. As noted in the press release, RevPar was up 0.8 percent for the quarter, which was pretty consistent with the national averages that we're seeing for the upper up scale segment of the industry. As it relates to limited service lodging, as you see in this segment data, our third quarter revenues were up 5.5 percent and also as noted in the press release Baymont's RevPar was up eight percent for the quarter, with occupancy increases really driving the improvement. The mid price without food and beverage segment of the lodging industry basically experienced flat or zero RevPar growth during this same time period.

Woodfield suites RevPar was flat basically around zero during the entire third quarter. Although we would have expected to recognize a modest increase in division operating income as a result of the RevPar increases, several mitigating factors contributed to the slight decrease in operating income, or actually a slightly higher operating loss for the quarter. The single biggest factor was mentioned in the press release. And that's the fact that one single property, Salt Lake City, contributed over $300,000 of incremental profit to our results last year due to the winter Olympics. You add to that the increased energy cost that I mentioned earlier, costs associated with a system wide manager's meeting that we held this year during the quarter that we did not hold last year, given post 9/11 difficulties. And also slightly reduced profits from our Woodfield suites and whoa report a slight decline for the property as a division as a whole. With the background in numbers I'd like to turn the call now over to Steve

Thanks very much, Doug, I appreciate that wrap up on overall financial situation for the company. Now let's talk about remarks with the theater division. As you now see in our press release, we were able to report our seventh straight record quarter for this division, despite the fact that we were again comparing our results to a very, very strong quarter last year. And as Doug pointed out the quarter was front loaded with the closing weeks of calendar 2002 wrapping up a record year at the U.S. box office in spectacular fashion. The press release highlighted the specific movies that performed so well and Doug shared the specific attendance numbers with you.

Once again, we successfully converted strong growth in box office revenues into even stronger growth in operating income. Pulling down our operating income increases slightly during the quarter was a smaller increase in concession revenues in relation to box office revenues, primarily as a result of our different mix of pictures compared to the same quarter last year. In addition, we continued to fight the never ending battle to hold the line on film costs which can be a challenge when movies perform as well as they have, often in this particular situation garnering the majority of the box office of the opening weeks of the run. At the end of the day, we continue to report operating margin and cash flow margins though that are among the very best in the theater industry.

One particular area that's helping drive these outstanding margins is the much talked about opportunity for ancillary revenues, primarily in the form of pre-show advertising revenues. While the total ancillary revenues we're talking about pale compare to box office and concession revenues it's a growing revenue source that's contributed over $800,000 of additional revenue year-to-date and it's the majority of that drop straight to the bottom line. We expect that we're going to continue to see increases in these ancillary revenues in the months and the years ahead.

Looking ahead to the fourth quarter, surely are some promising upcoming films as noted in the press release, but frankly it's going to be very difficult to report an eighth straight record quarter. Giving the record-setting May results that we saw last year with spider man and star wars. As Doug noted, calendar 2003 box office results to date have been fairly even with last year and our most optimistic prognosis for the fourth quarter is that we'll come to matching box office totals based upon a potentially strong April. Of course the start of the war last night adds more uncertainty to the mix. History tells us that we might expect box office to be impacted in the opening days of the war as people stay close to the televisions to keep up with current developments over there.

Over time, however, movies have historically always provided a welcome escape from the harsh realities of what's going on around on the outside world. The bottom line for this division is that while we have been and will always be dependent on the release of quality movies, our theaters continue to perform at a very high level and we look forward to continued strong performance in the years ahead. With that, let's move on to our hotels and resorts division, our full service lodging division. As you can see, our biggest improvement during the quarter occurred in this division. Thanks primarily to continued improvement at our newest properties. The Hilton Madison, the hotel Phillips, and the Timber Ridge Lodge, in addition to a much improved quarter at our Hilton Milwaukee property.

In general, our hotel properties are performing better than our two resort properties, which generally tend to rely more heavily on group business. A segment of the customer base that is continuing to under-perform throughout the country. Leisure business has held up pretty well. When you look at the grand Geneva and timber ridge properties on a combined basis, you see that we have successfully brought more people on to our lake Geneva campus despite the current economic climate. We might be just slightly over built at the moment but that's just a matter of timing of market absorption. As you might know, we've always reported a loss in this division during the historically slow third quarter.

With that in mind, we're certainly pleased by the improvement we showed this quarter and note that these reported results are the best for this division since fiscal 2000. While we celebrate the improvement, we recognize that we still have significant potential for improvement in the future, given the nature of investments we've made in the full service hotel division. We continue to operate in a very difficult environment for up scale hotels, as businesses are taking a very cautious approach to their meeting and travel budget. We're even doing the same. The uncertainty surrounding the economy and a potential war have certainly had a negative effect on our industry for some time now.

With the war now underway, we now will have to deal with the uncertainty of its duration and the fears surrounding around additional terrorist attacks if the couple days of this week are any indication we could see a reduction in reservation in near term as the world evaluates the current situation. Already operating on a focus on controlling costs we've immediately implemented additional measures to ensure that we're prepared or potentially further reduced occupancies for the days and weeks ahead should that come to pass. Having said that, we continue to perform at levels at or exceeding those of others in our industry segment. Optimistically we would hope that we would continue to show modest but steady improvement in this division. Pessimistically we realize we might see a short decline in our businesses as a result of the war and the troubles in the airline industry.

Regardless, we would continue to expect better than average improvement at our newest properties. And the summer looks particularly strong for our Milwaukee hotels. Long-term as the uncertainties that overhang this market begin to clear up we continue to be positioned well and take advantage of opportunities as our markets improve. That brings me to our limited service lodging division. My report here really is a continuation of what I had to say when we were together last quarter. During what continues to be a very challenging environment, our Baymont Inn and suites chain continues to gain market share and outperform the industry.

While I'm disappointed that the continued inroads we made in this quarter didn't translate into operating income, Doug did a good job of identifying the specific reasons why that is so. So let me focus on some of the things we're seeing that indicate to us that we're making progress. As the press release noted we reported an overall eight percent increase in RevPar during our third quarter. To put that in perspective, during the same three months, Smith travel reports that the price of food and beverage of lodging industry was essentially flat. As a result, we've seen our overall RevPar index which measures our share of revenues in each of our respective markets continue to climb from the mid to upper 80s to the low 90s during these recent months.

In fact, our occupancy only index was consistently over 100 percent during the entire quarter. Our focus has been on increasing occupancy and as indicated in these numbers, we've been very successful in doing that in recent months. We believe our sales and our marketing efforts, including our growing frequent stay program have contributed to more new trial of the repeat business which is essential as we've tried to improve the public's awareness of the Baymont brand and distinct amenities. To give you an idea of the (inaudible) frequent stay program, our membership which is now over 220,000 contributed 29 percent of our revenues during the third quarter compared to just 13 percent during the same quarter last year.

You should note also that after a successful television campaign last quarter, we were essentially off the air during the majority of the third quarter, only just now returning to cable television with our ads, although those are being, are in hiatus with the start of the war. I'm also pleased to note that our improvement has been broad based. Including both company and franchise properties. Reservations booked through our reservation center are running almost 30 percent ahead of last year, indicating that we're reaching a new customer. With only about 50 percent of our properties using our new state of the art two-way reservation system, we would hope to see this pace continue as the rest of the Inns roll out that two-way system.

With all of this good news, I would be remiss if I didn't sound a cautionary note for this division as well. Although our relative lack of depend denies on air travel or lower price point put this division in a relatively better position to weather continued potentially difficult times ahead, it's still a fact that the business traveler is our bread and butter and we will continue to face a challenging demand climate until the economy improves. We still have a lot of work ahead of us before we can say we have Baymont producing the kinds of returns you should expect from your investment. But we believe we're on the right track. To wrap up my comments, I want to briefly turn the focus away from our earnings statement and turn the attention to our balance sheet.

As you've seen and heard, we have greatly reduced our capital expenditures during the last two years. And in the process significantly strengthened our balance sheet. Our debt to capitalization ratio is now under 43 percent, putting us on a very solid position to not only navigate through these choppy economic waters but also give us the flex interest to take advantage of opportunities if and when they may arise. We certainly intend to be cautious in the coming months as we evaluate potential capital expenditure opportunities. After limited spending over the last two years in the theater division, I'd expect that we'll be adding selected new screens to existing locations over the coming years, including the possibility for additional ultra screens, which have proven to be very successful for us. And also I think that we could consider additional new locations over the course of the next couple of years.

On the lodging side, we continue to watch debt marketplace very carefully. Great opportunities would present themselves in the hotel sector, we want to be in a position to take advantage of them. And any action on our part would likely occur in the form of a joint venture where we might commit a small portion of the equity and retain a management contract. We've been active in pursuing third party money for such a venture and we're confident we could act quickly if need be.

Other than the downtown Chicago Baymont I also see future company sponsored unit growth in Baymont coming primarily through selective joint ventures in key strategic markets. Be assured that we believe that maintaining a strong balance sheet is imperative during the current climate and we're committed to keeping it that way. We firmly believe that the investments we've made in recent years in our lodging businesses provide much opportunity for further earnings improvement in the years ahead. Now at this time Doug and I would be happy to entertain any questions that you may have.

Thank you our question and answer session is conducted electronically. If would you like to signal to ask a question it's star 1 on your touch-tone telephone. Again, star 1 if you would like to signal to ask a question. If you're using a speaker phone please make sure you're not muted, that will block your signal. So again star 1 if you would like to ask a question. We'll pause for a moment to give everyone a chance to signal. Gentlemen we do have a question. It comes from Greg McCostco (ph) at Lord Abbott.

Maybe we could talk just a little bit about the gains there that the, I mean excuse me the losses, the almost 1.6 million, the loss. Did you have that last year in the limited service as well or not.

No.

And that's reflected completely in that operating loss there, the quarter of - the point ...

That's correct. In fact, normally we have not a huge number, we usually have a positive investment income dealing with interest income and things like that that we might have. Timeshare, receivables, things like that. So no, this was really one of a kind kind of thing.

So that reflects pretty favorably on the margins. I know that last quarter you had something on the order of, what, 6.7 percent RevPar. And you said you drove that with marketing. Was the marketing this time I guess not as much?

Well, we said sales and marketing. There's all elements of that. Certainly last quarter we had the advertising that Steve alluded going on, Greg and we did not have it during this quarter. But we have had a very active, as we've talked about before, a very active sales process that's been occurring. We've also referred to the fact that we've been, we're doing a much better job of using all of the new distribution channels that are available to us. And so there's really a focused effort on that as well. So that puts it in the whole category of sales and marketing.

But with regard to the limited service, we don't look at this quarter just completed as sort of one time-ish in terms of maybe we had lower marketing expenses this time around?

No. And actually when you're looking at the marketing expenditures themselves in that advertising line, Greg, that is not necessarily always reflective of when the ad's running and when it's not. We charge our franchises and our properties basically two percent of our revenues throughout the entire year, for national advertising and the such. And so the advertising expense number you're seeing is pretty much based on that, not necessarily when the ad is running.

Okay. So basically what we're saying then is, if I may sum up, things look fairly positive in that limited service area, just in terms of how we're controlling costs and continuing to see that eight percent RevPar. I mean that's pretty favorable.

We're very pleased with what's happening. Again, over 100 percent occupancy index now. So we're getting more than our fair share of occupancy. And we're not there with rates yet, but again our RevPar, overall RevPar index is now easily into the low 90s and that's a lot of progress.

Okay.

Let me just jump in here for a minute. One of the things, we spent the last two or three years sort of rebuilding Baymont, adding a lot of new features, pillow top mattresses on the beds, bottled water in the rooms. The breakfast program. Fitness centers in a lot of the properties. And we're at a point now where we want to make sure that we're showing that off to lots of new customers. And so part of the focus right now has been to be driving more customers as opposed to a focus on average rate right at the time. So we're very pleased that we're seeing a positive response to that.

And then with regard to the theater, the one and a half million gain that we saw for that, I guess real estate sale, that would all fall under the theater profit?

Well, no. When you're looking at the theater segment information ...

Right.

That's just the operating income. The gain is below that line.

Okay.

And it's not in there.

Okay. So that would be separate from that. Okay.

Totally separate. And that gain -- the majority of gain, Greg, it was a former theater location that we actually, it was really a pretty interesting project where we got involved in redeveloping it ourselves and then ultimately selling it for a significant gain. And it's now university of Phoenix property. So it's a college. School for maybe for night school type things. And it's really an interesting project.

But again the gain on the joint venture would not be below the line in the case of limited service?

Yes, that's also below. The loss on that joint venture is also below the line. Both of them are below, when I say the line I mean the operating income line.

On the release. So, okay.

Yes.

All right.

When we disclose segment information, we're talking about numbers that are for operating income and loss and gain, neither one of those numbers is in those segment numbers.

Just want to be sure I understand that. Separately, I think that corporate expense was 1.8, almost 1.9. Is that a run rate that we expect to see? It's up a bit from last year.

No it's not. In fact, if you really dissect that number, what you find out is that a certain amount of that, a good deal of that increase occurred in our Baymont division, which was it was one or more reasons why the Baymont profit was not what it needed to be a decent amount of that money increase is manager's meeting and things along those lines that we held for Baymont. But also are some little higher legal costs and a variety of things I would characterize more as one time and not -- I would not suggest that would be a run rate.

Okay. Good. Thank you.

And once again that is star 1 if you would like to signal to ask a question. Star 1. Again we'll pause again, give everyone an opportunity to signal. Gentlemen, we have no other questions at this time. I'll turn it back to you for any closing comments.

Thank you very much. We'd like to once again thank you for joining us today. We appreciate your continued interest in the Marcus Corporation and we look forward to speaking to you in July when we report our fiscal 2003 year-end results. Thank you very much.

Thank you that does conclude our conference call we appreciate your participation. At this time you may disconnect.