Marcus Corp (MCS) 2003 Q4 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone. Welcome to the Marcus Corporation fourth quarter fiscal 2003 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 will turn the call over to Mr. Neis for opening remarks.

Thank you very much. I extend our welcome to all of you for our fiscal 2003 fourth quarter and year end conference call. I plan on making a number of forward-looking statements on our call today. Forward-looking statements could include but are not limited to statements about future revenue and earnings expectation; our future RevPAR occupation rates and room rates for both lodging and hotels and row sorts divisions; Expectations about the quantity, quality, and audience appeal of film product expected to be made available to us in the future; Expectations about the future trends in the business, group and leisure travel industry and in our markets; and Our expectations and plans regarding growth and the number of our type of properties and facilities and our expectations regarding future capital expenditures. Of course, our actual result could differ materially from those suggested or projected by our forward-looking statements. Factors risks and uncertainties which could impact our ability to achieve our expectation are including the in the risk factors section of our form S 3 shelf registration statement August 15 2001 and 10K or 10Q filings which can be on stained from the SCC or company. Also disclosure Gs where applicable at our Web site www Marcus Corp.com.

I do want to touch on a couple of global issues the impact on our fourth quarter and/or year-end comparison in last year. The first significant item compare to last year can be found on the income loss line of our earnings statement we recorded a significant investment loss during fiscal 2003 that was noted in our press release as being equal to approximately 5 cents per share. Now the vast joy of this loss was reported in our third quarter results and you may remember we discussed it in our last conference call. As a reminder, the loss represents a write-down of your loans to and investment in a couple of problem joint venture Baymont properties that we have. I also want to remind you that we only have a handful of these 50/50 joint ventures and our exposure to this type of loss beyond the particular circumstance in question here is negligible. While our fourth quarter comparisons were not impacted from last year's Phillips project, I do want to remind you once again that on a full year basis last year's net earnings were favorably impact by approximately 9 cents per share as a result of these credits. Said another way, if not for last year's tax credits our fiscal 2002 net earnings would have been reported as 67 cents per share not the 76 cents per share.

Now when you take into consideration the 5 cents per share of investment loss we reported this year, the numbers begin to make more sense when you consider that our overall operating income before the items ended up four % higher for the year. You won't find any performance numbers in our press release and to repeat what I actually said last quarter, the numbers are what they are, but I think it's important to understand the impact these two items had as current results are compared to last year. Now, one last item that impacted all divisions both this quarter and full year was increased energy costs. In total, our gas and electric costs were nearly $500,000 or 20% higher than they were during last year's fourth quarter. For the full year, our energy costs were $950,000 or 9% higher than they had been in fiscal 2002. That's a pretty significant increase that's put pressure on operating margins. Our total capital expenditures during fiscal 2003 totaled approximately $28 million versus $49 million last year.

The breakdown was as follow: Limited service lodging, $13 million; Hotels and resorts, $7 million; Theaters $5 million; and corporate other about $3 million. The biggest project we have under way currently is the downtown Chicago Baymont development. And although portion of that expected expenditure will fall into fiscal 2005. We approved several theater screen expansion projects and we are getting ready to move ahead with a significant spa expansion at the Miramonte resort. Beyond those known projects we will, of course, continue to spend the maintenance capital necessary to keep our properties in excellent condition. Based upon my most current review of the timing of our upcoming capital expenditures I think it's likely that our total capital expenditures for fiscal 2004 will be at least $50 million and could approach up to $65 to $75 million if additional growth opportunity was present themselves during the year. We will of course monitor this closely as we have in the past and adjust our plans as we feel necessary in response to current condition. Now before Steve talks to you about the progress of each of our divisions, let me provide you with a few financial comments.

An instigation with the theaters, as you can see box office revenues were down 11% and concession revenues were down nearly 16% for the fourth quarter. Yet the same revenue lines still ended up 2.4% and 0.6% ahead of last year compared to the prior year, for -- on a full year basis. Now we knew and told you we would have very different comparisons this quarter particularly in may going up against spider man and star wars. Interestingly enough how our may results could not match last year despite pretty strong performance from X men 2 and matrix reloaded, March and April were the weaker months. Couldn't compare to last year's ice age. The fact that Easter was late this year, effectively shortening the spring window and likely impact of the television coverage of Iraq war all contributed to the first down quarter this division has had in two years.

Having said all that, I think it's important to note that the $7.7 million dollars operating profits contributed by the theater division during the fourth fourth quarter this year was sill still the second best fourth quarter for this division doubling the next best fourth quarter we've had since we began reporting our quarters on an equal 13 week basis. That might help put into perspective for you how good our fourth quarter was last year. Now total attendance decreased 15.7 % for the fourth quarter and as a result we ended up down 1.3 % in attendance for the full year. Taking into consideration that we have less screens this year compared to last, our calculations of same theater attendance show a final decrease of 0.3 % for the year I now average admission price was up 5.2 % for the quarter and 3.8 % for the year and our average concession revenues per person were up 0.4 % for the quarter and 1.9 % for the year. Now concession pricing certainly has an impact on these numbers, the mission and down graphic passenger appeal of the various movies that play has a big role on concession per person. Films that appeal to families and teenagers are higher than adult oriented films for example.

Moving over to the hotels and resorts, in our hotel resort division our overall hotel revenues were up 0.3 % during the quarter and 3.1 % for the full year. If you dig into the fourth quarter numbers just a little bit further however and exclude time share revenues, which were unusually high during the quarter as we recognize sales previously deferred while we were under construction of our new building, you will find the total hotel revenues were down 4.6 % for the quarter with our group business oriented properties really down the most. Our overall RevPAR was down 6.8 % during the quarter, yet ended up down only 0.5 % for the year which was pretty consistent with the national averages we're seeing for the upper up scale segment of the industry.

You should note that comparisons to last year were also aided by the fact that last year's results included $1.1 million of pre opening expenses. Lumping, as you see the segment data, our fourth quarter revenue once 0.2 % and our fiscal 2003 revenues ended up 0.7 % higher than last year. Baymont's RevPAR was up 3.1 % for the quarter and 2.6 % for the year. With occupation increase driving the improvement in both time periods. The mid price of our food and beverage segment reported RevPAR decline of 0.2 % during our quarter so in fact, or actually during the fiscal year 2003. So in fact, we did once again outperform the industry in this key measurement and in fact did that for each of our fourth quarters of fiscal 2003 gaining market share during what continues to be a challenging time in our industry. Whit wood field suites ended the year down 4.5 % in RevPAR. Now converting this small increase in revenues to increase in operating income prove to be a significant challenge given several mitigating factors. Reduced operating income from our woodfield suites and Baymont franchising operations contributed to the overall decline in operating for the division.

In addition, increases in our advertising, utility costs which I referred to early and insurance costs continue to put pressure on operating margin. The fact that our revenue creases were the result of increased occupation rather than rate also contributed to our lower operating margins as payroll costs necessarily to service the additional occupation also increased. Lastly, as mentioned last quarter, it's hard to believe one single property could make a difference for our division, but the fact that our salt lake city contributed an additional $300,000 to our bottom line during fiscal 2002 during the winter Olympics certainly had an impact on our year end comparisons. With those, kind of additional financial climates I'll now turn the call over to Stephen Marcus who can talk further about our results and our plans.

Thanks very much, Doug. I'll begin my comments with our largest and most profitable division, Marcus theaters. For all the reasons that Doug explained, our string of seven straight record quarters was broken as we expected. While we were disappointed to give back some of the increase that we recognized through the first three quarters of the year at the end of the day, it's hard to complain about another record year from this division. We continue to see our return on the significant investment we made in this division grow. Our annual operating cash flow from the theater division is now approaching $50 million. Once again, we successfully leveraged growth and box office revenues into even stronger growth in operating income, improving from 23 1/2 % last year to 24 % this year.

Contributing to the improved fiscal 2003 operating margin was reduced concession and advertising costs and reduced fixed occupancy costs as a percentage of revenues partially offset by slightly higher film rental costs. Increases in other revenue, which include managerial fees& free show advertising also contributed to our improved operating margin. I talked about these ancillary revenues last quarter and we only expect this revenue source to increase in the future providing additional opportunities for margin expansion as these revenues essentially drop right to the bottom line. And our bottom line is that we continue to report operating margins and cash flow margins among the very, very best in the movie theater industry. Summer box office has been pretty good, although, it's been a little bit of a roller coaster.

We got off to a great start in the first two weeks of June only to hit a three-week low when films such as the hulk and Hollywood homicide underperformed expectation. The last three weeks have kept pace with last year, so our overall box office results are running slightly ahead of last year so far this quarter. The several films scheduled tour release in the upcoming weeks that could perform very well, we're certainly hopeful that we're looking at another good summer. Overall, I would have to characterize the summer films as being too Reliant on the sequels and give be the second week drops for many of these films I think the average movie gore would agree with me, I also think we've had too many R rated pictures on the slate this summer.

Film product at the end of the calendar year looks good on paper with the fall looking solid and the holiday season looking particularly strong. Given Hollywood's experience this summer with sequels I'm pleased to note quite a few additional pictures in the fall and holiday lineup. The bottom line for the theater division is that while we have been and will always be dependent on the release of quality movies, our theater continues to perform at a very high level and we look forward to their continued strong performance in the months and years ahead. As you know, our position in our markets a very strong and the plans forum the coming year focus on retaining and further strength ng that position, we're under construction fourth street addition to our falls theater.

And will begin construction in our Elgin, Illinois location just outside Chicago. In addition, the division is developing plans to add up to 20 additional screens at presently existing locations. As all, the timing of these plans can and probably will change as we proceed through the development process. With that, let's move on to our hotels answer resorts division. As you can see, despite a difficult fourth quarter, likely impacted by concerns over the war in Iraq our biggest improvement during the year occurred in this division, thanks primarily to continued improvement at our newest properties, the Hilton Madson, the hotel Phillips and timber ridge lodge in a decision to much improved year at our two Milwaukee properties. In general, our hotel properties perform better than our two resort properties which generally tend to rely more heavily on group business, a segment of the customer base that continues to underperform in the aftermath of September 11th.

A continued strong showing from the leisure segment of our business has certainly helped soften the blow for these properties, but there's no substitute for good group business that not only fills our rooms, but that drives so many of our ancillary revenue sources at the property level. The fourth quarter results clearly show that we continue to operate in a very difficult environment for upscale hotels. As businesses are taking a very cautious approach to their meeting and travel budgets. Uncertainty surrounding terrorism, the economy and more recently the war in Iraq have certainly had a negative impact on our industry for some time now. Having said that, I think that our improved overall results demonstrate that we still have significant potential for improvement in the future given the major investments we've made in this division.

We're pleased to tell you that we saw some improvement in our results from this division in June. July so far has had its ups and downs with some properties performing very well, others still looking for that consistent flow of room demand that we haven't seen in a while now. I will tell that you while the trend of having shorter lead times on our advanced bookings continues, we are encouraged by what we see in advanced bookings so far for the remainder of this summer and heading into the fall. I think it's fair to say that we've seen conditions stabilize and we're hopeful that as the economic environment in general and in the airline industry in particular fully recovers, we'll start seeing some meaningful improvement in the results of all of our properties, not just the newest ones.

The largest single project in our capital plan for this coming fiscal year is the spa expansion at the Miramonte that Doug referred to earlier. We believe this investment is successful to the future of this resort and expect to have the new spa open for the high season starting next January. In addition to this project, we have other smaller projects planned for several of our properties that will continue to keep these hotels and resorts operating at the top of their respective markets. We've also set aside a small portion of our budget for potential equity investments in new hotel acquisitions. As we've described in the past, our primary growth goal will be to expand our management contract business and we believe that one way of doing that will be to pursue the acquisition of existing hotels p in conjunction with third party equity with Marcus hotels contributing a small piece of the equity and maintaining the management contract. The market for acquisitions of this type, however, has been very quiet and we're just now starting to see some deals getting done. That brings me to our limited service lodging division. My report here really is a repeat of what you heard in the past. We continue to be encouraged by the market share gains that we've made in the past year but we also continue to be concerned about the challenging environment that we're operating in, making it very difficult to achieve increases in operating income. Doug previously highlighted for you the various items that contributed to our overall decline some operating income for the year. I think that circumstance that makes any cost increase a challenge right now is the general inability for us or others in our industry for that matter to increase our average rate. Our average rate during fiscal 2003 was down compared to previous years.

The fact is that room demand is just not strong enough yet and the resulting price purchases are challenging everyone's operating margins right now. But please don't take those comments, which are just a reality of the environment we're operating in right now, a sign that all is doom and gloom. The fact is that despite she is difficult climate, we're been able to achieve occupancy increases when others have not. For a new brand with lower customer awareness such as other selves that would be a very good thing. That will benefit us in the long-term. As our press release noted we're confident that as these guests experience our outstanding service and amenities and excellent value, many will become loyal customers for years to come. Continued improved contribution from our frequent guest program appears to be a good indicator that that's exactly what's happening.

The fact that our room night reservation booked through 25% ahead of last year also indicates we're reaching a new customer. With our state-of-the-art two way reservation upgrade put in place at the vast majority of our properties, we would certainly hope to continue to see improvement in this key statistic. The biggest item in our fiscal 2004 capital plan by far is the development of our first you are ban Baymont inn and downtown Chicago. After getting through several permitting delays on this project construction is now fully under way and we look forward to opening the property some time early in fiscal 2005. Our capital plan will, of course also include dollars to ensure that all our ends are continually renovated on a set schedule(Ph) in keeping with our policy to always keep these assets in outstanding condition. I'd summarize my comments on this division the same way I did for hotels.

I think the overall environment is probably stabilized. But until business travel fully rebound we are going to continue to face some challenges ahead. We continue to focus on increasing our market share and controlling costs but we still have a lot of work ahead of us before we can say we have Baymont producing the kinds of returns we should all expect from our investment. To wrap up my comments, I want to once again briefly turn the focus away from our earnings statement and turn the attention to you're balance sheet. As you've seen and heard, we've greatly reduced our capital expenditures over the last two years and in the process significantly strengthened the balance sheet.

Our debt to capitalization ratio is now under 43%. Which puts us in a very solid position to not only deal with difficult times, but also to give us the flexibility to give to take advantage of opportunities if and were we find them. Be assured that maintaining a balance sheet is imperative during this climate and we are committed to keeping it that way. (inaudible)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 to come. At this time, Doug and I would be happy to entertain tan any questions you might have.

Thank you Mr. Marcus. If you would like to ask a question at this time you ask a question by pressing star key followed by digit one on your telephone .The question is from David Cumberland of Robert W.Baird

Good afternoon.

Good afternoon, David.

On the Baymont side, could you comment on the sales and marketing for fiscal '04 and how that is likely to compare to fiscal '03?

Well, when you say comment on -- let me just say this. The way we're handling that marketing plan now is actually on a calendar year basis because it's a national advertising fund that we share with our franchisees. We both contribute to it and since it was more convenient for the franchisees who are mostly on calendar years, we run it on a Calendar year basis. Basically within the last year or association there's been an increased emphasis on direct marketing. We've got a significantly increased field sales force out there, both on a local level, also on a national level, we have seven national sales represent Ives working large national accounts. If there's an area where that is continually -- it's continually evolving and capturing a larger portion of our budget, it's marketing over the internet. As I think you've all read, that's a significantly growing area, I guess, channel for business, and so we're working in attracting more business over the channels. One of the things we're also trying to do where we're faced with providing, let's call it, steep discounts into that channel, the strategy is to attract new customers and then convert them over to using our more traditional channels either direct voice to our reservations center or using our own proprietary web site to come in and make reservations, which is a much less expensive reservation for us to handle and doesn't involve those deep discounts.

Also, on the LSL side, of the factors that have pressured margin, which do you expect to continue in '04, fiscal '04?

Well, insurance is always an issue. Whether that will continue into '04, I'm not -- I just don't know. Perhaps Doug can comment on that a little bit better in just a second. Labor is always an issue, although I see that perhaps abating to some degree. There is labor is more abundant now than it has been in a long time, while we obviously are not going to you know, cut people's wages, I believe that what will happen is the higher year rates will probably be lower and as we turn positions over there will be less pressure there.

And then, I would add that, first of all, backing up on the insurance, certainly that's been a challenge for everybody and multiple industries. We again saw increases in insurance rates this year. Probably not quite as significant as this past year, but certainly we've continued to see above inflation level increases in insurance, health insurance remains an issue that everyone is dealing with these days. Utilities are certainly an area of concern. Know, that was pretty significant numbers I shared with you earlier. That's a hard one to project but certainly there's a general sense that an overall shortage of natural gas could result in an overall increase in that area this year.

On the flip side, advertising, Steve indicated we're on a calendar year basis for that plan and I think we previously indicated to you and everyone else that we had spent some extra money in calendar 2002 but in calendar 2003 we have not spent quote, in quote, extra dollars over the standard percentage sales amount so that could be somewhat favorable from a margin perspective. And I would conclude by, again, pointing to rates and saying, looking, there's no question that what puts pressure on margins right now is the pricing pressures that are out there and you know, as that, as demand pix up, that's a natural pixuer of that, if you will and as the pricing pressures go down a little bit, the market get better.

David Cumberland Again, on Baymont, where do you stand currently on the exterior reemerging program?

We're down to just a handful, I don't have a number in front of me, David. I can follow up on that one. But we just completed another half dozen or so.

There's 15 left.

OK, 15 sounds about right. I thought it was in that neck of the woods. And we have dollars in our overall budget to try to tackle the rest of those. I can't address timing on that yet, we don't typically handle those at this time of year. So we have some luxury of kind of waiting a little bit, because this is such a peak season for us, that we just don't tackle those for the most part. There's about 15 to go and we have dollars in our budget to continue to address those.

Great. And on the Chicago downtown Baymont, what is the approximate capital budget for that?

The additional amount that we probably are looking at is in the neighborhood of $25 million spread over the next couple of years.

A few more questions. The balance sheet now shows $72 million in crematureties(ph) of debt. Could you please discuss.

Douglas Neis I appreciate you bringing that up, I probably should have addressed that. So thank you for the question. What that really deals with and is the fact that our resolve involving credit agreement five year revolving credit agreement which has been on very favorable terms expires next April and we have about $38 million of borrowings on commercial paper tend of the year which are backed up by that line and we have a $16 million term note that is tied to that line as well. So both of those are currently being shown as current because the underlying line expires in April. We will reclassify those to long-term upon executing our new deal.

We see, we anticipate no problems in executing a new deal at continued favorable terms given our strong balance sheet and results.

Great. And then just a couple of house keeping questions. If you have the depreciation and amortization for fiscal '03?

$$45 1/2 million, yeah, $45.4 million is depreciation and amortization for fiscal '03.

And then a projected tax rate for fiscal '04?

I, I'm expecting it to be in the 39 1/2% 39.5%to 40 % range. We're analyzing that as we speak but it will be in that range.

Great. Thank you very much.

You're welcome.

I'm showing no further questions at this time. I'll turn the call back over to our speakers.

Thank you very much. We would like to thank you once again for joining us today. I invite all of you to listen to our upcoming web cast we'll be making at Robert W. Baird's 2003 small cap conference on Tuesday August 5th in New York. Details on this presentation and how to listen to the web cast will be available on our investor information web site at www.Marcuscorp.com. We'll also be back in September when we release our first quarter results along with seeing some of you at our shareholders meeting at the grand Geneva in October. Thank you for joining us today.

Thank you your participation in today's conference. You may disconnect at this time.