Marcus Corp (MCS) 2004 Q1 法說會逐字稿

We're about to begin. Good day everyone and welcome to the Marcus corporation first quarter fiscal 2004 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. Please go ahead, sir.

Thank you, Jaime and welcome everybody to our first quarter conference call.

As usually I need to begin by stating that we plan on making a number of forward-looking statements on our call today. Our forward looking statements could include but not be limited to statements about our future revenue and earnings expectations, our future RevPAR, occupancy rates and room rates, expectations for both limited service lodging and hotels and resorts division; our expectations about the quality, quantity and audience appeal of film product expected to be made available to us in the future; our expectation about future trends in the business group, lease and travel industry and in our markets; our expectations and plans regarding growth and the number of the type of properties and facilities; and our expectations regard future capital expenditures. Of course, our actual results could differ material 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. We'll also post all Regulation G disclosure when applicable on our website atWWW.marcusCorp..com.

Before discussing each division's revenues and operating income I do want to touch a couple of global issues that impacted on our first quarter comparisons to last year. The first and most obvious that doesn't really require much explanation is the fact that our fiscal 2003 last year's first quarter included an additional gain from the sale our KFC restaurants.

Our focus of course, was on continuing operations and we're pleased to report a nearly 5% increase in earnings from continuing operations during the first quarter our reported net earnings were down slightly because of this KFC gain last year.

And while our focus on during the conference call will be on our operations, I do want to point out the changes in a couple of our below-the-line items.

Specifically, you'll note our interest expense was down over $750,000 due to both the lower rates on our variable rate debt and to the significantly reduced overall debt on our balance sheet.

In fact, our overall debt to capitalization ratio at the end of the quarter dropped below 40% for the first time in six years, thanks in part to the fact that summer has such a high cash period for our businesses. And while I don't necessarily expect this ratio to remain this low throughout the year our balance sheet remains in a absolutely great shape.

Conversely, comparison to last year's first quarter are negatively impacted by the fact that we had no capital gains this quarter compared to about $400,000 of gains recorded last year during the quarter.

Now, key point to note here is a reminder that we consistently sold real estate each year with the only difference usually being the timing of the sales from quarter to quarter. We are working on the sale of several pieces of non-revenue generating properties, and I would anticipate that additional real estate sales and potential gains would be likely in subsequent quarters of this year.

Now, our total capital expenditures during the fiscal 2004 first quarter totaled approximately $9 million versus $6 million last year. The breakdown was as follows: Limited service lodging $7 million of that 9; hotels, $1 million; and theaters, $1 million.

Now, the biggest project we have underway currently is the downtown Chicago Baymont development, which accounted for a portion of that limited service lodging expense that I just quoted. The remainder of the Baymont spending was primarily related to scheduled 6- and 12-year renovation projects.

And as noted in the press release, we have a four-screen theater addition and another UltraScreen project currently underway in our theater division.

We typically don't spend a lot of significant portion of on you hotel division capital budget during the busy summer months, but as noted in the release we did begin construction on the new spa at our Miramonte property during the quarter.

At this early stage of the fiscal year, I would continue to believe that it is likely that our capital expenditures for fiscal 2004 will be at least $50 million and could go slightly higher if additional growth opportunities would present themselves during the year. We will, of course, monitor this closely as we have in the past and we will adjust our plans as we feel necessary in response to current conditions.

Before Steve talks to you about the project of each division let me provide with you a few additional financial comments on each division.

Beginning with theaters, as you can see, box office revenues were up 2.6% and concession revenues were up 1.2% for the first quarter. Driven by particularly strong film performance at the beginning and the end of the summer.

And although film costs were up slightly due to the mix of films played this quarter and the fact that many of these films had shorter runs than we would have liked, we still managed to leverage the overall 4.2% increase in revenues into a 12% increase in operating income.

Total attendance actually decreased 2.7% for the first quarter. While our average admission price was up 5.6%. Now, besides the modest price increases, one of the dynamics that drove this particular result was the unusually high numbers of R-rated films released during the summer. These films, by definition, reach a smaller audience but do result in a higher average ticket price due to the lack of child pricing in the mix.

Now, our average concession revenues per person during this quarter were up 4.2%.

One last item of note for this division would be that our first quarter results do include revenue from an insurance settlement of approximately $400,000 related to a fire that we had several years ago at one of our Milwaukee area theaters.

Moving on to hotels and resorts, our overall hotel revenues were up 0.5% during the quarter; however, if you think the first quarter numbers a little further and exclude time-share revenues which were a little unusually low due to several reasons, a couple of them being some transition challenges associated with new Wisconsin no call rules and also a vacancy in a key director of marketing position that we had, you'll find that total hotel revenues were up 3.5% for the quarter, again exclude than time-share, with the majority of our own properties reporting an increase.

As noted in our press release, our overall RevPAR was up 0.8% during the first quarter, which was slightly higher than the national averages that we're seeing for the upper upscale segment of the industry.

Increased food and beverage revenues accounted for the majority of the difference between the RevPAR increase I just referenced and the larger overall division revenue increases.

Now, as we noted in the release, division operating income would have been up nearly 4% if not for the challenging time sharing this quarter and those numbers are despite the fact that this year's first quarter also included $100,000 of pre-opening expenses associated with our new chop house restaurant at our Madison Hilton property.

Moving over to limited service lodging, as you see in the segment data our first quarter revenues were down on 1.9% and our operating income was down approximately 10%. The overall decline in division revenues can be primarily explained by noting that we had one less company-owned Baymont opened during the quarter and Woodfield suites experienced 7.3% decline this RevPAR which was pretty comparable to other properties in that particular segment of the industry.

Baymont Inns & Suites on the other hand reported RevPAR increase of 0 .8% for the quarter with occupancy increase again driving the improvement.

According to data we received from Smith travel research, we again outperformed specific competitive set in this key measurement gaining market share during what continues to be a chalking time for our industry.

The overall decline in operating income is really entirely attributable to the difficult revenue environment. Reduced operating income from our Woodfield Suites and Baymont franchise operations, lower telephone revenues, and increased utility supply and insurance costs have all contributed to the overall decline in operating income.

The fact that our RevPAR increases in our Baymont were the results of increased occupancy rather than rates also contributed to our lower operating margins as payroll costs necessary to service the additional occupancy increased.

Having said all of that, it was encouraging to note that the majority of the decrease in operating income this quarter occurred early in the quarter. Our August performance, both in revenues and costs was stronger and hopefully an indication of a trend.

With those additional financial details, let me now turn the call over to Steve.

Thanks very much, Doug, and good afternoon, everybody.

I'll begin my comments where Douglas left off with the limited service lodging division.

You see the numbers and heard additional detail from Doug. And clearly we continue to operate in a challenging environment. My report here really is a repeat of what you heard from me just eight weeks ago on our last call.

We continue to be encouraged by the market share gains that we have made in the last five quarters, but we also continue to be concerned about the challenging environment we're operating in making it very difficult to achieve increases in operating income.

The industry as a whole will continue to face challenges until business travel returns to prior more normal levels, and without that increased demand, we'll continue to operate in an environment where it's very difficult to increase our average rate.

But as Doug pointed out, the very good news for us is that we continue to outperform our competitive set and to increase our occupancy.

We advertised on cable TV during the first two months of the summer and our drive revived public relations campaign to combat drowsy driving was in full force. And as a result we continue to see increases in our brand awareness scores which for a relatively new brand like ourselves could and should benefit us in the long-term.

We're confident that as these guest experiences are outstanding services, amenities and excellent value, many of them are going to become loyal customers for years to come.

The fact that our room revenues from our frequent guest program members accounted for 24% of our total room revenues during the first quarter compared to 19% during that same time last year is a very good sign. We also saw another increase in our reservation center contribution to revenues during the quarter.

Perhaps the biggest change in our revenue mix compared to the first quarter last year is a result of our continued emphasis on effectively utilizing the various E Channel reservation port always available to us. We would expect to continue to see growth in this source of room reservations for our Baymont Inns and suite as we move into the future.

Overall, we'll continue to focus on increasing our market share and controlling costs as we look forward to what appears to be an improving economy and an improving travel picture.

From a development standpoint, there is very little activity right now. In fact, that applies to the entire industry.

According to lodging economy oh metrics, in their -- in the September issue of lodging magazine, the current industry development pipeline is that an all-time cyclical low, it's 53% below the record high that that was in the third quarter of 1998.

While that's bad news for our franchising business in the near term, it's also good news for our existing company-owned locations and also for our current franchisees as well.

We had two franchise locations open during our first quarter and another one under construction. We, of course, continue construction on our downtown Chicago location and, as noted in the release, our first California property will open in just a couple of weeks.

With that, let's move on to our hotels and resorts division. As you heard from Doug, our hotels excluding our time-share business reported increased operating income during the quarter.

And as reported in our press release, our second quarter has gotten off to a good start, thank in part to the added business from the Harley-Davidson 100th anniversary event held in Milwaukee over the Labor Day weekend. In fact, there were several encouraging developments in this division during the first quarter.

The leisure customer segment has continued to perform well for us and we're seeing some signs that our corporate group business is, in fact, beginning to improve.

The group bookings continue to be made within a relatively short lead time, and the groups in general continue to spend less on ancillary items, such as bank woods and golf outings, but we are encouraged by the booking activity that we are seeing.

We're also pleased by the continued improvement in operating results from two of our newest projects, the hotel Phillips in Kansas City and the Timber Ridge Lodge, Lake Geneva. Timber Ridge improvement can be attributed to increased consumer awareness, while the Kansas City market continues to be soft, our continued improvement is a very positive sign. Once again, customers in that market are getting to know us.

Our sister hotel in Madison Hilton continue to be the market leaders in Milwaukee and Madison although the sister had a difficult comparison this quarter because it was the host hotel for major league baseball's all-star game last year during the quarter.

The Madison Hilton had to absorb the pre-opening costs associated with the introduction of its new restaurant, the Capel chop house as Doug indicated but we're very pleased with the restaurant’s early performance compared to our product concept.

And we are excited about the new spa that's under development at the Miramonte. It's scheduled to open in January in time for the peak season in the desert, and we believe that this is a very special spa will have a positive impact on that property.

Looking ahead, I'm very encouraged by our current forecasts for the second quarter for this division. While we continue to operate in a very difficult environment for upscale hotels, as businesses are taking a cautious approach to their meeting and travel budgets, the short-term outlook does look better.

With the short lead times on our advanced bookings, it remains difficult to look much beyond the upcoming quarter but at least the pace of the long-term bookings looks pretty good.

Right now, with air travel being as inexpensive as it is, it's probably the cheapest time in the last ten years for companies to put people on the road, and our feeling is that they're beginning to reassess what have previously been zero budgets or froze budgets for travel and beginning to understand that it's important to be out there face to face with customers and they're taking advantage of the historically low cost of travel.

As I noted in my Baymont comments, the pace of development opportunities is quite small at this time, so most hotel operators are looking for opportunities to acquire existence hotels. We're out there looking as well, and while we have several financial partners ready to work with us, the fact is that a number of quality, that the number of quality hotels available for sale remains quite small.

We're pursuing several projects, and are very hopeful that we'll have the opportunity to expand our management business in the near future.

Last but certainly not least is our largest and most profitable division, Marcus theaters.

While eight weeks ago I reported to you that our string of seven straight record quarters in this division was broken in our fiscal 2003 fourth quarter, I'm happy to be with you once again reporting another record quarter and hopefully the start of another string.

Once again, we successfully leveraged growth in box office revenues into even stronger growth in operating income, improving our operating margin from 25.6% last year to 27.5% this year.

Contributing to the improved first quarter operating margin was reduced concession costs and reduced fixed occupancy costs as a percentage of revenues partially offset by slightly higher film rental costs. Increases in other revenues which include manager fees and pre-show advertising income also contributed to our improved margins.

As we explained in the press release, it was an unusual summer at the box office.

Given the overall weakness of some of the mid-summer releases which, in my opinion, were far too rely on sequels and R-rated films and the second weak drops in box office revenues for many of these films, we were quite pleased to end the summer where we did.

Our managers in particular did an outstanding job of adjusting their payrolls and their operating hours during the summer to account for the unusual film pattern as reflected by the outstanding margin that we're reporting today.

September, which is historically our slowest month of the year, is off to a good start, slightly outpacing last year's box office results. And based upon our review of the upcoming movies for the rest of the second quarter, several of which were mentioned in the press release, we currently believe that October and November should compare very favorably to last year as well. And while we be going up against record holiday film season last year, it certainly look like Hollywood has several very promising pictures lined up for that time period as well.

Of course, there are always films that look good on paper that for some reason or other don't connect with the movie going public and there is inevitably a movie or two that seems to come out of nowhere and surprise everyone such as Pirates of the Caribbean this summer, so time will tell how all these pictures perform.

We obviously feel very good about our ability to leverage good film product into significant profits for our company in the months and years ahead.

After two years of very little growth capital spent in this division, we are now once again focusing on opportunities to further strengthen our already-strong market position.

In addition to screen additions and new UltraScreen development plan for the coming year, including those projects noted in our press release, we're once again reviewing several opportunities to develop new locations in and around our existing markets. As always, the actual timing of these plans can and will change as we proceed through the development and site selection process.

To wrap up by comments, I would just say that I continue to be very proud of our management team as we negotiate the Marcus Corporation through what I would call these very unique times. The last couple of years have been very difficult in the both the lodging industry in the wake of September 11th and the dip in the economy and reduced travel and also in the movie theater industry with the many bankruptcies of virtually all of the major chains.

And yet today here we are reporting increased earning from continuing operations and, just as importantly, a balance sheet that is the envy of our competitors.

Do we have continued challenges ahead of us? Of course, we do.

But I'm confident that we'll pick the steps necessary in the months and years ahead to, as our recently issued annual report indicates on its cover, maximize the long-term shareholder value for the Marcus corporation.

With that, at this time Doug and I would be happy to entertain any questions that you may have.

Today's question and answer session will be conducted electron think colloquialism if you'd like to ask a question please shall by press 10 star key followed by the digit 1 with our ever your touch tone telephone. We will take as many questions as time permits. If you are using a speakerphone, please make sure that your mute function is turned off to make sure your shall reaches our equipment. Once again that is star 1 to ask a question.

We'll pause for just a moment to give everyone a chance to signal.

Our first question from Greg Nikosko (ph) with Lord Abbot.

Yes, hi, thank you.

Well, I wondered if we might talk a little bit about the limited service. Could you talk more in general terms about how you're dealing with the hotels.com and some of the other groups that sell such limited service rooms across the country.

And I know that you've increased the loyalty from 19 to 24%, which is a good thing, but can that percentage continuing to crease over time?

And what are some of the -- give us some color on how you are able to protect kind of your RevPAR with regard to the -- that situation.

Well, I think that's a very long, complicated subject. The fact of the matter is that you have to look at those channels as additional sources of revenue, figuring that we have a relatively low cost of servicing an additional room.

And so to the extent that there is incremental revenue available to you, even though it may depress your margins, those are not necessarily bad sales to make. Now, nobody likes to do discounting, but in the environment we're in, you know, you make a decision that you're going to do some in order to gain the incremental cash flow.

There's also secondary advantage to us. These channels get us listings and get us in front of customers right alongside brands that otherwise are much bigger than we are. The Holiday Inns and the Hampton Inns and Hiltons, they're all, you know, they're all listed right along with us. And so it gives us a great opportunity to sort of get on an even footing with all of them.

So that's the reason for participating. Now, it's important to modulate that, however. We watch it very closely. We have two people that that's almost all they do, is watch the allocations and the pricing that are going out through those channels so that it doesn't get to be too many and so that we see it as primarily additive to our business.

We certainly don't want it to cannibalize our business, and, of course, this is what our hope is and what we try to do, is we have a program we call channel conversion so that when somebody comes to us through one of these alternate E channels, we want to make them a part of our guest innovations club and offer them incentives to then begin to make future reservations at Baymont Inns by coming directly through our, either through our reservation center, whether it's electronically or by voice.

And so channel conversion is a very important program.

Do you --

Hopefully when they come through it, they gain some benefits that they don't get by being -- by coming through the E Channel, and we convert them, you know, to our regular guest innovations customer.

Do you measure the percent of revenue that come through those channels versus year-over-year? Do you tract that?

Yes, we do track it very carefully, and I think Doug knows the exact numbers. I don't think I know the precise numbers.

I think this past quarter we were in the area of around 7% of our revenues, slightly higher percentage of our room nights because, again, it's somewhat of a discounted rate from our perspective, not necessarily what the consumer is paying, so this past quarter was about 7%.

Last year at this time it's not even necessarily a measurable number for me for the first quarter because we really got into it, started trying to use these channels more effectively during this past year.

Incidentally, I think these are not necessarily all heavily discounted rooms.

Some of those are what they call QOTCs which are what they're called qualified online travel companies, like travel agents, and they basically get, they just get commissions.

So when I quoted that number, that's not just hotels.com. That's these channels.

Okay. Good.

And then the other question I wondered about was Woodfield Suites.

We have seen a tough RevPAR number there, and I guess you're suggesting that it's competitive with other limited service in their area?

Well.

Yeah.

The Smith travel numbers that we saw for the quarter show that that -- that segment, that particular competitive set was down about 7%, 7.5%, which is right where we were.

Okay.

And are you taking a similar approaches with Woodfield that you've done with the Baymont group as well?

Yes, we are, but those properties start out as much more heavily business travel oriented types of properties, and so the impact on them as the business environment is difficult gets to be more problematic as well.

And is this a group that makes long-term sense from the standpoint of the whole corporation?

Well, I think so, but whether it makes long-term sense with a -- with that brand on them I'm not sure.

we haven't quite come to addressing that issue as yet.

It's a well-regarded brand pretty well in the market that it's in and as Doug indicated, we're holding our own from a RevPAR standpoint, but it doesn't make us very happy to see the revenue, you know, to see the RevPAR go down.

Okay.

And then with regard to the theater, theater certainly had a nice quarter, quite strong and, as you say, was primarily, a lot of it was mixed because of the R-rated.

Was there on an absolute basis, was there any increase in price, admission price that's charged overall?

There was, and we tend to try to take those in small bites. We don't -- we will rarely raise our prices across the board.

We might raise, you know, the Saturday night prices in some of the theaters at one time. We may raise them, you know, in other theaters at another time. We may raise the seniors and children's prices at a separate time.

We try not to do them all at one time. So there was a small incremental increase. I believe probably in the 3 to 4% range.

That's about right. Yeah.

Okay. All right. Thanks very much.

We'll take our next question from David Taratino (ph) with Robert W. Baird.

Good afternoon.

For the limited service business, you mentioned that August was stronger than in previous months. Do you think that pickup was driven by business travel or consumer activity?

I'd have to confess that we don't have the analysis done yet. We think that there is a slight pickup in business travel going on, but it's just a little too soon for us to have the analysis.

Okay. Thanks.

Could you provide some detail on recent pricing trends that you're seeing at Baymont, maybe compared to the industry?

What we're seeing is that our pricing is beginning to firm up now. We're making a conscious attempt to raise the pricing.

And, hopefully we don't lose the occupancy to it, but the model will work a little better if we can elevate the average rate margin Neal and then even though it may cost us some occupied rooms.

Okay. Great.

And last question, for Baymont, are you expecting any incremental marketing expenses related to the opening of the Los Angeles property?

When you say incremental marketing expenses, I don't think, I don't think that there will be anything extraordinary that we'll see.

No.

And keep in mind that that property as well is a joint venture, and so it's a 50/50 joint venture and would the not be fully consolidated in first place.

Thank you very much.

Once again, if you'd like to ask a question, please press star 1 on your touch tone telephone at this time. We'll pause for just a moment.

Gentlemen, there appear to be no, no further questions,

We do have a follow question from Greg Nikosko with Lord Abbot.

Yes.

Could you talk a little bit about the real estate? You said that there -- are there any particular areas of properties that are kind of for sale or that you're considering at this point?

I know that it's sometimes (inaudible). But could you give us a little back frowned on that?

Well, the real estate that we're mainly selling at this time is -- tends to be vacant land. And so that's mainly what we're marketing.

The market for hotels, for lodging products is really not very receptive at the moment, and so we really haven't been marketing, haven't been doing anything with it.

So that some of the Baymonts that you may own, in other words, you're saying that the market for that is not good, but longer-term that could make sense, but given the market, it's not the time for that.

Yes, that's correct.

Yes.

You remember, if you -- we even talked about at one point in time there being 15 to 20 properties that we saw as potential sales to franchisees.

That program really is on hold right now.

Okay.

And then with regard to theater, you mentioned that the CapEx in theater will be picking up going forward or there will be more spending in the theater area.

And you talked about new openings. Is there -- are there any acquisitions of possibility out there? Are there discussions at all?

There really are -- there are no specific discussions right at this time.

There may be some -- you know, one or two theater things where Bruce Olson who runs the division is talking to somebody else who owns a theater that may be interested in doing an and it, but we don't have anything specific and nothing has been presented just yet.

Okay. All right. Thanks very much.

That does conclude our question and answer session.

At this time I'd like to turn the call back over to you gentlemen for any additional or closing comments.

Thank you very much and we do want to thank you once again or joining us on our call.

We look forward to see some of you on October 8th at our annul shareholders’ meeting at the Grand Geneva Resort and Spa.

We'll also be back with you in December when we release our second quarter results.

With that, thank you once again for joining us and we'll talk to you soon.

That does conclude today' conference and thank you for your participation. You may disconnect at this time.