Four Seasons Hotels Inc. reports first quarter 2003 results
TORONTO, Four Seasons Hotels Inc. (TSX Symbol "FSH"; NYSE Symbol "FS") today reported its results for the first quarter ended March 31, 2003. For the three months ended March 31, 2003, the net loss was $9.3 million ($0.27 basic and diluted loss per share), as compared to net earnings of $7.7 million ($0.22 basic earnings per share and $0.21 diluted earnings per share) for the first quarter of 2002.
"During the first quarter the travel industry faced many challenges, including a weak economic environment, military conflict in Iraq, heightened terrorist alerts and concerns regarding Severe Acute Respiratory Syndrome (SARS) in certain regions," commented Isadore Sharp, Chairman and Chief Executive Officer. "These challenges negatively affected our current results, but we remain confident about our short-term and our long-term plans and are firm in our commitment to expand the Four Seasons network. We continue to focus on our hallmark service and working with strong partners to create new Four Seasons properties in North America and around the world. Over the past 18 months, through the most difficult circumstances, this business strategy has been proven to be successful as we have maintained our industry leading room rates and improved market share in the majority of the locations in which we operate."
OPERATING ENVIRONMENT
Seasonality
Four Seasons hotels and resorts are affected by normally recurring seasonal patterns and, for most of the properties, demand is lower in December through March than during the remainder of the year. Typically, the fourth quarter is the strongest quarter for the majority of the properties, although this was not true in 2002 as a result of the difficult economic environment and geopolitical instability.
The Company's ownership operations are particularly affected by seasonal fluctuations, with lower revenue, operating profit and cash flow in the first quarter. As a result, ownership operations typically incur an operating loss in the first quarter of each year.
Management operations are also impacted by seasonal patterns, as fee revenues are affected by the seasonality of hotel and resort revenues and operating results. Urban hotels generally experience lower revenues and operating results in the first quarter. However, this negative impact on management revenues is offset, to some degree, by increased travel to the Company's resorts in the period.
Hotel Operating Results
Four Seasons customer base consists of business travellers, corporate groups and leisure travellers. Delayed recovery in the US and global economies, along with military action in Iraq and SARS, have negatively affected travel on a global basis. As a result, during the quarter ended March 31, 2003, hotels and resorts continued to experience lower demand than normal, particularly from business travellers. Leisure travel demand has shown more resilience, although this segment is also below historical demand levels. Both the resort and urban properties continued to experience booking patterns with very short lead times throughout the first quarter of 2003.
RevPAR(1), on a US dollar basis, for worldwide Core Hotels(2) decreased 1.1% during the first quarter of 2003, as compared to the same period in 2002. The RevPAR decline was attributable to lower occupancy levels related to travel disruption and lower demand. Four Seasons is continuing to perform at or above market occupancy rates in most locations. Maintaining the high level of product and services consistently provided to customers has allowed the Company to maintain its achieved room rates in the first quarter, thereby enhancing RevPAR. The Company currently expects its full year achieved room rates to be at, or near, the record levels set in 2000 and which were maintained in 2001 and 2002.
Gross operating margin(3) for worldwide Core Hotels declined 5.2 percentage points during the first quarter of 2003. The gross operating margin for worldwide Core Hotels was 24.5% in the first quarter of 2003, as compared to 29.7% for the same period in 2002. These declines were primarily attributable to reduced occupancy levels and significant increases in costs associated with health benefits, energy and insurance. In order to contain hotel operating costs, the Company continues to thoroughly review its operations with a view to achieving savings without negatively affecting the guest experience. For example, in respect of staffing costs, which are typically the highest component of hotel operating costs, savings may be found through attrition, holiday taking, voluntary leave, sabbaticals, job sharing, and in some instances, reducing staff, and in the Company's international hotels, expatriate costs reductions.
RevPAR, on a US dollar basis, in US Core Hotels decreased 1.9% in the first quarter of 2003, as compared to the same period in 2002. Although certain markets in the US, including most resort locations, experienced reasonable demand levels, the majority of US markets continued to experience weak demand. The US markets that experienced the greatest RevPAR declines during the first quarter of 2003 were New York, Boston, Washington and Houston. As a result of the Company's 100% leasehold interest in The Pierre, weak demand in New York in particular affects the Company's results. Hotels under management in Las Vegas, San Francisco and Hawaii performed well relative to the US hotel and resort group. The gross operating margin for US Core Hotels declined 5.2 percentage points in the first quarter of 2003 to 22.4%, as compared to 27.6% in the first quarter of 2002, as a result of the items noted above with respect to worldwide Core Hotels.
RevPAR, on a US dollar basis, in Other Americas/Caribbean Core Hotels decreased 2.8% in the first quarter of 2003, as compared to the same period in 2002, primarily as a result of low business demand levels in the Company's Vancouver and Toronto properties. The Company's hotels under management in Canada and South America experienced very weak demand. RevPAR, on a local currency basis, in Other Americas/Caribbean Core Hotels improved 7.3% in the first quarter of 2003, as compared to the same period in 2002. The variance in RevPAR, on a local currency basis compared to US dollar basis, is primarily attributable to the relative weakness of the Mexican peso to the US dollar in the first quarter of 2003, as compared to the same period in 2002. The gross operating margin for Other Americas/Caribbean Core Hotels decreased 2.8 percentage points to 31% in the first quarter of 2003, as compared to 33.8% in the first quarter of 2002, as a result of a decline in occupancy and the cost increases noted above with respect to worldwide Core Hotels.
RevPAR, on a US dollar basis, in Europe/Middle East Core Hotels increased 5.8% in the first quarter of 2003, as compared to the same period in 2002. On a US dollar basis, achieved room rates increased 16.5% primarily as a result of the local currencies of the Europe/Middle East Core Hotels (and in particular the British Pound and Euro) strengthening relative to the US dollar. On a local currency basis, RevPAR in Europe/Middle East Core Hotels decreased by 9.0% in the first quarter of 2003, as compared to the first quarter of 2002. With the exception of the Company's two London hotels, which had modest declines in achieved room rate, each of the Europe/Middle East Core Hotels had achieved room rate increases on a local currency basis. The conflict in Iraq affected the majority of the Europe/Middle East Core Hotels as average occupancy was approximately 50% during the quarter, as compared to 55.2% for the same period in 2002. The gross operating margin for Europe/Middle East Core Hotels decreased 8 percentage points to 24% in the first quarter of 2003, as compared to 32% in the first quarter of 2002, primarily as a result of the cost increases noted above with respect to worldwide Core Hotels. As a result of operating cost differences, profitability of the hotels within the region varied significantly.
RevPAR, on a US dollar basis, in Asia/Pacific Core Hotels decreased 3.2% in the first quarter of 2003, as compared to the same period in 2002. On a local currency basis, the Asia/Pacific Core Hotels realized a RevPAR decrease of approximately 9.2%. Demand levels for the Company's resorts under management in Bali have not yet recovered from the terrorist attack on that island in October of last year. The gross operating margin for Asia/Pacific Core Hotels decreased 5.1 percentage points to 29.6% in the first quarter of 2003, as compared to 34.7% in the first quarter of 2002, primarily as a result of the cost increases noted above with respect to worldwide Core Hotels and lower occupancy levels.
The Company's worldwide resort portfolio included in the Core Hotels (the "Core Resorts") realized a US dollar RevPAR decline of 2.0% in the first quarter of 2003, as compared to the first quarter of 2002. The Core Resorts average occupancy declined by 4.4 occupancy points to 68.9% primarily as a result of large occupancy losses at the two resorts in Bali. Achieved room rates in the Core Resorts increased by 4.2% to approximately US$480 in the first quarter of 2003, as compared to the first quarter of 2002. The gross operating margin for the Core Resorts decreased 3.2 percentage points to 36.7% in the first quarter of 2003, as compared to 39.9% in the first quarter of 2002, primarily as a result of the cost increases noted above with respect to worldwide Core Hotels.
Severe Acute Respiratory Syndrome (SARS)
During the first quarter of 2003, the impact of SARS negatively affected the results of the Company's properties in Singapore, Shanghai and Toronto as a result of disrupted travel to those cities during the last two weeks of March. The impact of SARS on travel during the second quarter of 2003 is difficult to predict. While the Company's four properties in the destinations noted continue to be the most affected, SARS is disrupting travel generally throughout Asia/Pacific, with the exception of Sydney and the resort in the Maldives. Expected occupancy for worldwide Core Hotels for April of 2003 prior to concerns relating to SARS was in the 65% range; however, actual occupancy was in the 55% range with the majority of the decline coming from Asian hotels.
"Our management team and our hotel general managers are an extremely seasoned group who average more than sixteen years with the Company. They have learned from past economic cycles and global and regional disruptions how to carefully manage circumstances to control costs without compromising service. As importantly, we are continuing our sales efforts and maintaining strong relationships with our key customers. Experience has shown that maintaining our product and service standards in difficult economic conditions allows us to keep or enhance our market share and pricing integrity," said Wolf Hengst, President Worldwide Hotel Operations. "Our hotel general managers will adapt and modify their business plans and execution to meet the current pressures. We remain confident that we will be able to perform at RevPAR and profitability margins that meet or exceed the industry in these most challenging operating conditions."
MANAGEMENT OPERATIONS
Management fee revenues were $36.2 million in the first quarter of 2003, as compared to $36 million in the first quarter of 2002. Although there was an increase in base management and royalty fees in the first quarter of 2003, this increase was offset by a decline in profit-based incentive fees. This decline was the result of reduced profitability of the hotels under management caused, in part, by the increase in health care, energy and insurance costs noted above, and the decline in occupancy caused by the difficult operating environment.
General and administrative expenses increased 10.4% in the first quarter of 2003, and include the 2002 cost of living payroll increase for corporate employees that was implemented in mid-2002, as well as the 2003 cost of living payroll increase for corporate employees which was implemented during the first quarter of 2003. In addition, there was a budgeted increase in sales, marketing and central reservation expenses, which are generally funded by the sales, marketing and reservation charges paid by each hotel.
As a result of the items described above, the Company's management earnings, before other operating items, for the first quarter of 2003 decreased 6.4% to $19.6 million, as compared to $20.9 million in the first quarter of 2002. The Company's management operations profit margin(4) was 54% in the first quarter of 2003, as compared to 58.1% in the first quarter of 2002.
OWNERSHIP OPERATIONS (5)
Ownership operations lost $13.2 million, before other operating items, in the first quarter of 2003, as compared to a loss of $8.1 million in the first quarter of 2002. The loss in both years is due to normal seasonality of demand levels in the Company's ownership assets compounded by continued weakness in the New York, Berlin and Vancouver markets.
The weaker economic conditions in New York continued to negatively affect the Company's ownership interest in The Pierre. The Pierre's RevPAR declined 11.7% in the first quarter of 2003, as compared to the first quarter of 2002. This RevPAR decline was partly the result of occupancy decreasing from 59.4% in the first quarter of 2002 to 55.6% in the first quarter of 2003. The Pierre's achieved room rates also declined by 5.6% primarily because of lower suite occupancy during the quarter. The first quarter 2003 operating loss at The Pierre increased by $2.7 million, as compared to the first quarter of 2002. Although there continues to be weak travel demand in New York, it is a market that is expected to recover reasonably quickly when there is a sustained improvement in the US economy. An improvement in demand in New York is expected to have an immediate positive impact on the results of The Pierre.
Four Seasons Hotel Vancouver also experienced weak operating conditions, with RevPAR declining 10.7% for the first quarter of 2003, as compared to the same period in 2002. The operating loss at Four Seasons Hotel Vancouver increased by $678,000 in the first quarter of 2003, as compared to the first quarter of 2002.
The loss from Four Seasons Hotel Berlin increased $951,000 in the first quarter of 2003, as compared to the first quarter of 2002, as a result of increased lease costs at that property and lower operating profits. The Company's obligation to fund any lease shortfalls at Four Seasons Hotel Berlin is limited to a maximum of approximately (euro) 11 million, of which the remaining balance is approximately (euro) 725,000 at March 31, 2003. The Company is not obligated to fund any additional lease shortfalls in excess of the (euro) 725,000. However, the landlord may terminate the lease if minimum rent is not paid.
The Company is beginning discussions with each of these landlords to determine what, if any, alternatives may be available to reduce Four Seasons financial exposure.
OTHER INCOME/EXPENSE
Other expense for the first quarter of 2003 were $12.9 million, as compared to $1.1 million for the same period in 2002. Included in the 2003 other expense is an $8.3 million foreign exchange loss, which is a non-cash, unrealized foreign exchange loss relating to the balance sheet, as compared to $1.1 million for the same period in 2002. The Company has, from time to time, hedged this foreign exchange exposure. Because of the volatility in various currencies (in particular the Canadian dollar), the cost of hedging the exposures was very high during the first quarter and, as a result, the Company chose not to incur a significant cash cost to protect the non-cash impact of the currency fluctuations.
Also included in other expense during the first quarter of 2003 are legal and other enforcement costs of $4.6 million in connection with the disputes with the owners of Four Seasons hotels in Caracas and Seattle, as compared to nil for the same period in 2002. These disputes are described in detail in the Company's 2002 Annual Report. The Company expects to incur approximately an additional $4.5 million in legal and other fees for the balance of 2003 in connection with these issues.
NET INTEREST EXPENSE/INCOME
During the first quarter of 2003, the Company had net interest income of $683,000, as compared to $2 million in the first quarter of 2002. Net interest is a combination of approximately $3.6 million interest income and approximately $2.9 million interest expense in the first quarter of 2003, as compared to $5.1 million and $3.1 million, respectively, for the same period in 2002. The reduction in interest income is attributable to lower cash reserves and lower interest earned on loans to certain properties.
INCOME TAX EXPENSE
The non-cash, unrealized foreign exchange loss of $8.3 million included in the first quarter of 2003 financial results is not tax effected since it will never be realized for tax purposes. As a result, the Company's effective tax rate in the first quarter of 2003 was approximately 3%, as compared to the effective tax rate of 24% in the first quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $154.2 million as at March 31, 2003, as compared to $165 million as at December 31, 2002.
Long-term obligations decreased from $129.1 million as at December 31, 2002 to $ 124.6 million as at March 31, 2003, primarily due to foreign currency translation which was partially offset by accreted interest on the Company's convertible debt. The Company's debt position consists primarily of its zero coupon convertible debt that matures in 2029 and that is redeemable by the Company at any time after September 2004. The convertible debt can be put to the Company by the holders at three different times beginning in September 2004. In all cases, the Company can satisfy its obligations in respect of this debt on the exercise of the put or call right by the payment of cash or the issuance of Limited Voting Shares.
The Company recently increased availability under its committed bank credit facilities by US$12.5 million, and now has facilities of US$212.5 million, of which US$112.5 million expires in April 2004 and US$100.0 million expires in July 2004. No amounts have been borrowed under these facilities to date; however, US$35.2 million in letters of credit were issued but undrawn as at March 31, 2003. The Company believes that cash on hand, internally generated cash flow and funds available under the bank credit facilities are more than adequate to finance all of its normal operating needs and commitments to new investments related to current growth objectives.
During the first quarter of 2003, Moody's Investors Service assigned an investment grade rating with a stable outlook to the Company. The Company's ratings from Standard & Poor's and Dominion Bond Rating Service remain at investment grade. However, as a result of macro events, it is possible that the rating agencies may downgrade the rating or outlook for many of the lodging companies.
CASH FLOW AND CAPITAL EXPENDITURES
During the first quarter of 2003, the Company generated $21.8 million from operations, as compared to $7.7 million for the same period in 2002. While the contribution from the Company's management and ownership operations declined, there was a $17.7 million change in non-cash working capital and a $4.4 million decrease in income tax installments paid resulting in a $14.1 million increase in cash from operations. These increases were partially offset by a $5.1 million increase in cash used in ownership operations, a $1.6 million increase in legal and other enforcement costs paid in connection with the Company's investments in the Four Seasons hotels in Caracas and Seattle and a $1.3 million decrease in interest received.
A part of the Company's business strategy is to invest a portion of available cash to obtain new management agreements or enhance existing management arrangements. These loans or investments will only be made where the overall economic return to Four Seasons is expected to justify the investment.
During the quarter, the Company funded $13.7 million in new management opportunities, including amounts advanced as loans receivable and investments in hotel partnerships such as Costa Rica and Residence Club projects. This level of investment was consistent with the Company's business plan, with the investments made to secure new long-term management agreements or to enhance existing management agreements. The Company did not fund any significant investments during the first quarter of 2002.
COMMITMENTS
As discussed in the Company's 2002 Annual Report, the Company has certain pension, lease and other commitments. There has been no material change to these commitments through the first quarter of 2003, and the Company does not anticipate any material change in respect of these commitments over the remainder of this fiscal year, other than the elimination of a commitment in respect of the lease for Four Seasons Hotel Berlin.
STOCK OPTION EXPENSE
The Company is continuing to apply its existing accounting policy, under which no compensation expense is recorded on the grant of stock options to employees. Consideration paid by employees on the exercise of stock options or the purchase of shares is recorded as capital stock. The Company recognizes that the granting of options to employees represents a cost, but believes that it is prudent to wait for the anticipated releases from the various accounting bodies regarding the required accounting treatment of stock based compensation prior to changing its method of accounting. For the quarter ended March 31, 2003, if the Company were to have adopted the fair value based method, the impact would have been an increased compensation expense of $885,000 (2002 - $7,000) and an increase in basic and diluted loss per share of $0.02 (2002 - nil).
UNIT GROWTH
During the first quarter of 2003, the Company opened Four Seasons Hotel Riyadh. Late in the second quarter of 2003, the Company expects to reopen Four Seasons Hotel Prague, which has been closed for repairs after sustaining flood damage in August of 2002. The Regent Hotel Jakarta, which has also been closed as a result of flood damage, is under repair and should reopen later this year. During the last half of the year, the Company expects to open new hotels and resorts in Exuma, Budapest, Hampshire, Jackson Hole and Miami.
"The current environment has not changed the quality of our pipeline. Our capital partners are still eager to invest in high-quality projects. A good example is the recently announced acquisition by HRH Prince Alwaleed of the Hotel des Bergues in Geneva, which Four Seasons will manage once the hotel is reopened after a proposed renovation," commented Kathleen Taylor, President Worldwide Business Operations. "We continue to be excited about the new Four Seasons destinations that we are expecting to add this year and in the years ahead."
Four Seasons Hotels and Resorts is the world's largest operator of luxury hotels. The Company currently manages 58 hotels and resorts and two Residence Clubs in 27 countries. The Company currently has 22 new Four Seasons projects under construction or in advanced stages of development. Of the 20 new hotels and resorts, 11 are expected to include a residential component within the project, in addition to the announced Four Seasons Residence Club Punta Mita and Four Seasons Private Residences Whistler. Please see the schedule attached listing the properties under construction or in advanced stages of development and anticipated opening dates for these properties.
LOOKING AHEAD
The Company's business plan for 2003 continues to focus on those aspects of the business that it believes provide the greatest potential contribution to long-term cash flow, and which have proven to be successful over the past 18 months, including continued opening of new Four Seasons properties, maintaining and enhancing market share, and maintaining room rates. In addition, we are focused on increasing the RevPAR and profitability of the new and recently opened Four Seasons properties.
Four Seasons expects to open five new managed properties in the balance of 2003 or the early part of 2004. The average term of the management contracts for these properties is almost 70 years and these management contracts are expected to provide the Company with significant long-term fee income.
During 2003, the gross operating margins at the hotels and resorts under management are expected to decline due to cost increases for expenses such as employee benefits and energy, which affect all hospitality businesses. Given geopolitical and global economic concerns, as well as the concern regarding SARS, it is extremely difficult to forecast with any accuracy occupancy levels for 2003. If occupancy levels continue to decline in 2003, as compared to 2002, the hotel gross operating margins are likely to contract further.
Total capital spending is expected to be approximately US$45 million to US$55 million in 2003, including investments funded or planned for Costa Rica, Whistler, Hampshire and Jackson Hole. When paid, this amount will releases letters of credit totalling $20.2 million securing the commitment of the Company to invest in two of these projects as disclosed under "Other Commitments" in the Company's 2002 Annual Report.
As a result of the high levels of uncertainty in the macroeconomic and political environment, the Company is declining to give a specific forecast for earnings per share for 2003 or any quarter thereof at this time. The Company expects its full year achieved room rates to be at, or near, the record levels set in 2000 and which were maintained in 2001 and 2002, and in general, consistent with past experience, the Company expects its business model to perform at or above industry levels.
CONCLUSION
"Macro factors continue to negatively affect our current earnings, and the business environment is extraordinarily difficult at this time. However, we believe our business model is stable. Our management business generates cash which we use to expand our network by investing in new opportunities. This managed growth, coupled with our strong balance sheet, is expected to allow us to work through these difficult times, positioning us well for the expected recovery in travel demand," commented Douglas L. Ludwig, Chief Financial Officer and Executive Vice President.
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All dollar amounts referred to in this press release are Canadian dollars
unless otherwise noted. The financial statements are prepared in
accordance with Canadian generally accepted accounting principles.
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This press release contains "forward-looking statements" within the
meaning of federal securities laws, including RevPAR, profit margin and
earning trends; statements concerning the number of lodging properties
expected to be added in future years; expected investment spending; and
similar statements concerning anticipated future events and expectations
that are not historical facts. These statements are not guarantees of
future performance and are subject to numerous risks and uncertainties,
including the duration and severity of the current economic slowdown and
the pace of the lodging industry's recovery from the terrorist attacks of
September 11, 2001, SARS and the military conflict in Iraq; supply and
demand changes for hotel rooms and residential properties; competitive
conditions in the lodging industry; relationships with clients and
property owners; and the availability of capital to finance growth, any
of which could cause actual results to differ materially from those
expressed in or implied by the statements herein. These statements are
made as of the date of this press release, and the Company undertakes no
obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise.
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The Company will hold a conference call today at 10:00 a.m. (Eastern
Daylight Time) to discuss the first quarter financial results. The
details are:
To access the call dial: 1 (800) 396-0424 (U.S.A. and Canada)
1 (416) 641-6655 (outside U.S.A. and Canada)
To access a replay of the call, which will be available for one week
after the call, dial: 1 (800) 558-5253, Reservation Number 21140461.
A live web cast will also be available by visiting
fourseasons.com
(1) RevPAR is defined as average room revenue per available room.
RevPAR is a commonly used indicator of market performance for
hotels and resorts and represents the combination of the average
daily room rate and the average occupancy rate achieved during the
period. RevPAR does not include food and beverage or other
ancillary revenues generated by a hotel or resort. The Company
reports RevPAR as it is the most commonly used measure in the
lodging industry to measure the period-over-period performance of
comparable properties.
(2) The term "Core Hotels" means hotels and resorts under management
for the full year of both 2003 and 2002. Changes from the
2002/2001 Core Hotels are the additions of Four Seasons Hotel San
Francisco, Four Seasons Hotel Dublin, Four Seasons Hotel Buenos
Aires and Four Seasons Resort Carmelo.
(3) Gross operating margin represents gross operating profit as a
percent of gross operating revenue.
(4) The management operations profit margin represents management
operations earnings, before other operating items, as a percent of
management operations revenue.
(5) Included in ownership operations are the consolidated revenues and
expenses from the Company's 100% leasehold interests in The Pierre
in New York, Four Seasons Hotel Vancouver and Four Seasons Hotel
Berlin, distributions from other ownership interests in properties
that Four Seasons manages and corporate overhead expenses.
FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS
As at As at
(Unaudited) March 31, December 31,
(In thousands of dollars) 2003 2002
ASSETS
Current assets:
Cash and cash equivalents $ 154,200 $ 165,036
Receivables 78,310 85,594
Inventory 2,684 2,609
Prepaid expenses 7,855 4,718
243,049 257,957
Long-term receivables 201,894 207,106
Investments in hotel partnerships
and corporations 151,903 146,362
Fixed assets 73,778 74,593
Investment in management contracts 212,852 222,835
Investment in trademarks and trade names 6,213 6,329
Future income tax assets 15,529 17,460
Other assets 38,649 37,982
$ 943,867 $ 970,624
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 49,397 $ 40,362
Long-term obligations due within one year 2,562 2,668
51,959 43,030
Long-term obligations (note 2) 122,072 126,386
Shareholders' equity (note 3):
Capital stock 321,732 321,601
Convertible notes 178,543 178,543
Contributed surplus 4,636 4,636
Retained earnings 254,743 264,016
Equity adjustment from foreign
currency translation 10,182 32,412
769,836 801,208
$ 943,867 $ 970,624
See accompanying notes to consolidated financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
(Unaudited) March 31,
(In thousands of dollars except per share amounts) 2003 2002
Consolidated revenues (note 4) $ 61,014 $ 64,581
MANAGEMENT OPERATIONS
Revenues (note 5) $ 36,230 $ 35,992
General and administrative expenses (16,655) (15,084)
19,575 20,908
OWNERSHIP OPERATIONS
Revenues 25,778 29,590
Distributions from hotel investments - 106
Expenses:
Cost of sales and expenses (37,973) (36,695)
Fees to Management Operations (994) (1,107)
(13,189) (8,106)
Earnings before other operating items 6,386 12,802
Depreciation and amortization (3,710) (3,505)
Other expense (note 6) (12,908) (1,141)
Earnings (loss) from operations (10,232) 8,156
Interest income, net 683 2,010
Earnings (loss) before income taxes (9,549) 10,166
Income tax recovery (expense):
Current 2,374 (1,380)
Future (2,098) (1,060)
276 (2,440)
Net earnings (loss) $ (9,273) $ 7,726
Basic earnings (loss) per share $ (0.27) $ 0.22
Diluted earnings (loss) per share $ (0.27) $ 0.21
See accompanying notes to consolidated financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH PROVIDED BY OPERATIONS
Three months ended
(Unaudited) March 31,
(In thousands of dollars) 2003 2002
Cash provided by (used in) operations:
MANAGEMENT OPERATIONS
Earnings before other operating items $ 19,575 $ 20,908
Items not requiring an outlay of funds 403 370
Working capital provided by
Management Operations 19,978 21,278
OWNERSHIP OPERATIONS
Loss before other operating items (13,189) (8,106)
6,789 13,172
Interest received, net 3,896 5,118
Current income tax paid - (4,446)
Change in non-cash working capital 12,743 (4,993)
Other (1,610) (1,164)
Cash provided by operations $ 21,818 $ 7,687
See accompanying notes to consolidated financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
(Unaudited) March 31,
(In thousands of dollars) 2003 2002
Cash provided by (used in):
Operations $ 21,818 $ 7,687
Financing:
Long-term obligations,
including current portion 42 (640)
Issuance of shares 131 4,163
Dividends paid (1,809) (1,815)
Cash provided by (used in) financing (1,636) 1,708
Capital investments:
Long-term receivables (5,806) (608)
Hotel investments (8,368) (582)
Purchase of fixed assets (3,881) (2,990)
Investment in trademarks, trade names and
management contracts (216) (390)
Other assets (2,601) (3,686)
Cash used in capital investments (20,872) (8,256)
Increase (decrease) in cash and cash equivalents (690) 1,139
Increase (decrease) in cash and cash equivalents
due to unrealized foreign exchange gain (loss) (10,146) 166
Cash and cash equivalents, beginning of period 165,036 210,421
Cash and cash equivalents, end of period $ 154,200 $ 211,726
See accompanying notes to consolidated financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three months ended
(Unaudited) March 31,
(In thousands of dollars) 2003 2002
Retained earnings, beginning of period $ 264,016 $ 259,253
Net earnings (loss) (9,273) 7,726
Retained earnings, end of period $ 254,743 $ 266,979
See accompanying notes to consolidated financial statements.
FOUR SEASONS HOTELS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of dollars except per share amounts)
These interim consolidated financial statements do not include all
disclosures required by Canadian generally accepted accounting principles for
annual financial statements and should be read in conjunction with the
Company's annual consolidated financial statements for the year ended December
31, 2002.
1. Significant accounting policies:
The significant accounting policies used in preparing these interim
consolidated financial statements are consistent with those used in
preparing the Company's annual consolidated financial statements for the
year ended December 31, 2002.
2. Bank credit facilities:
The Company recently increased availability under its committed bank
credit facilities by US$12.5 million, and now has facilities of
US$212.5 million, of which US$112.5 million expires in April 2004 and
US$100.0 million expires in July 2004. No amounts have been borrowed
under these facilities to date; however, US$35.2 million in letters of
credit were issued but undrawn as at March 31, 2003.
3. Shareholders' equity:
As at March 31, 2003, the Company has outstanding Variable Multiple
Voting and Limited Voting Shares of 34,885,732 and outstanding stock
options of 5,864,037 (weighted average exercise price of $52.25).
4. Consolidated revenues:
Consolidated revenues for Four Seasons Hotels Inc. comprise revenues from
Management Operations, revenues from Ownership Operations and
distributions from hotel investments, less fees from Ownership Operations
to Management Operations.
5. Revenues under management:
Total revenues under management were $659,248 for the three months ended
March 31, 2003 ($685,938 for the three months ended March 31, 2002).
Total revenues under management consist of rooms, food and beverage,
telephone and other revenues of all the hotels and resorts which the
Company manages. Approximately 69% of the fee revenues earned by the
Company were calculated as a percentage of the total revenues under
management of all hotels and resorts.
6. Other expense:
Included in other expense for the three months ended March 31, 2003 is a
net foreign exchange loss of $8,267 (2002 - $1,141) related to the
foreign currency translation gains and losses on unhedged net asset and
liability positions, primarily in US dollars, euros, pounds sterling and
Australian dollars, and foreign exchange gains and losses incurred by the
Company's foreign self-sustaining subsidiaries.
Also included in other expense for the three months ended March 31, 2003
are legal and other enforcement costs of $4,641 (2002 - nil) in
connection with the disputes with the owners of Four Seasons hotels in
Caracas and Seattle. These disputes are described in detail in the
Company's 2002 Annual Report.
7. Stock-based compensation and other stock-based payments
Section 3870, issued by The Canadian Institute of Chartered Accountants,
requires the use of a fair value based method to account for stock-based
payments to non-employees, and for employee awards that are direct awards
of stock, cash or other assets, or are stock appreciation rights that
call for settlement by the issuance of equity instruments, granted on or
after January 1, 2002.
As permitted under Canadian generally accepted accounting principles, the
Company does not record compensation expense on the grant of stock
options to employees to purchase Limited Voting Shares. Consideration
paid by employees on the exercise of stock options or the purchase of
shares is recorded as capital stock.
For the three months ended March 31, 2003, had compensation expense for
the Company's stock-based compensation plan been determined based on the
fair value at the grant dates for stock options issued under the plan,
pro forma net loss would have been $10,158 (2002 - pro forma net earnings
of $7,719), pro forma basic loss per share would have been $0.29 (2002
pro forma basic earnings per share of $0.22), and pro forma diluted loss
per share would have been $0.29 (2002 - pro forma diluted earnings per
share of $0.21). In accordance with Canadian generally accepted
accounting principles, in calculating the pro forma disclosures, only
stock options granted after December 31, 2001 were included in the fair
value-based accounting method.
The compensation element of stock options issued by the Company during
the three months ended March 31, 2003 and 2002, based on the fair value
of the options on the date of grant, has been estimated using a
Black-Scholes option pricing model with the following assumptions:
risk-free interest rates in 2003 ranging from 4.80% to 5.02% (2002
4.29%); semi-annual dividend per Limited Voting Share of $0.055 for both
periods; volatility factors of the expected market price of the Company's
Limited Voting Shares in 2003 ranging from 45% to 46% (2002 - 50%); and
expected lives of the options ranging between four and seven years,
depending on the level of the employee who was granted stock options. For
the options granted during the three months ended March 31, 2003 and
2002, the weighted average fair value of options at the grant date was
$23.68 and $30.50, respectively. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to compensation
expense over the option's vesting period, which ranges from one to five
years.
8. Guarantees:
In January 2003, the Canadian Institute of Chartered Accountants issued
Accounting Guideline No. 14, "Disclosure of Guarantees" ("AcG-14"), that
requires a company to disclose certain "guarantees" as defined in AcG-14.
Other than the commitments and contingencies discussed in the Company's
annual consolidated financial statements for the year ended December 31,
2002 (please refer to note 14 thereof), the Company is not aware of any
other "guarantees" pursuant to which it may be required to fund any
material amounts, and accordingly no amounts have been recorded in the
financial statements in respect thereof. The Company's assessment of its
potential liability could change in the future as a result of currently
unforseen circumstances.
9. Seasonality:
The Company's hotels and resorts are affected by normally recurring
seasonal patterns and, for most of the properties, demand is lower in
December through March than during the remainder of the year. Typically,
the fourth quarter is the strongest quarter for the majority of the
properties, although this was not true in 2002 as a result of the
difficult economic environment and geopolitical instability.
The Company's ownership operations are particularly affected by seasonal
fluctuations, with lower revenue, operating profit and cash flow in the
first quarter. As a result, ownership operations typically incur an
operating loss in the first quarter of each year.
Management operations are also impacted by seasonal patterns, as fee
revenues are affected by the seasonality of hotel and resort revenues and
operating results. Urban hotels generally experience lower revenues and
operating results in the first quarter. However, this negative impact on
management revenues generally is offset, to some degree, by increased
travel to resorts in the period.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - CORE HOTELS(1)
Three months ended
March 31,
(Unaudited) 2003 2002 Variance
Worldwide
No. of Properties 49 49
No. of Rooms 13,320 13,320
Occupancy(2) 60.8% 62.7% (1.9%)
ADR(3) - in US dollars $298 $292 2.0%
- in equivalent Canadian dollars $450 $465 (3.2%)
RevPAR(4) - in US dollars $181 $183 (1.1%)
- in equivalent Canadian dollars $273 $291 (6.1%)
Gross operating margin(5) 24.5% 29.7% (5.2%)
United States
No. of Properties 23 23
No. of Rooms 7,248 7,248
Occupancy(2) 64.2% 64.9% (0.7%)
ADR(3) - in US dollars $325 $328 (0.8%)
- in equivalent Canadian dollars $491 $522 (5.8%)
RevPAR(4) - in US dollars $209 $213 (1.9%)
- in equivalent Canadian dollars $315 $339 (6.9%)
Gross operating margin(5) 22.4% 27.6% (5.2%)
Other Americas/Caribbean
No. of Properties 7 7
No. of Rooms 1,550 1,550
Occupancy(2) 53.8% 55.5% (1.7%)
ADR(3) - in US dollars $318 $317 0.2%
- in equivalent Canadian dollars $480 $504 (4.9%)
RevPAR(4) - in US dollars $171 $176 (2.8%)
- in equivalent Canadian dollars $258 $280 (7.7%)
Gross operating margin(5) 31.0% 33.8% (2.8%)
Europe/Middle East
No. of Properties 9 9
No. of Rooms 1,807 1,807
Occupancy(2) 50.1% 55.2% (5.1%)
ADR(3) - in US dollars $392 $336 16.5%
- in equivalent Canadian dollars $591 $534 10.6%
RevPAR(4) - in US dollars $196 $186 5.8%
- in equivalent Canadian dollars $296 $295 0.5%
Gross operating margin(5) 24.0% 32.0% (8.0%)
Asia/Pacific
No. of Properties 10 10
No. of Rooms 2,715 2,715
Occupancy(2) 62.7% 65.8% (3.1%)
ADR(3) - in US dollars $164 $162 1.5%
- in equivalent Canadian dollars $248 $257 (3.6%)
RevPAR(4) - in US dollars $103 $106 (3.2%)
- in equivalent Canadian dollars $156 $169 (8.1%)
Gross operating margin(5) 29.6% 34.7% (5.1%)
(1) The term "Core Hotels" means hotels and resorts under management for
the full year of both 2003 and 2002. Changes from the 2002/2001 Core
Hotels are the additions of Four Seasons Hotel San Francisco, Four
Seasons Hotel Dublin, Four Seasons Hotel Buenos Aires and Four
Seasons Resort Carmelo.
(2) Occupancy percentage is defined as the total number of rooms occupied
divided by the total number of rooms available.
(3) ADR is defined as average daily room rate per room occupied.
(4) RevPAR is defined as average room revenue per available room. RevPAR
is a commonly used indicator of market performance for hotels and
resorts and represents the combination of the average daily room rate
and the average occupancy rate achieved during the period. RevPAR
does not include food and beverage or other ancillary revenues
generated by a hotel or resort. The Company reports RevPAR as it is
the most commonly used measure in the lodging industry to measure the
period-over-period performance of comparable properties.
(5) Gross operating margin represents gross operating profit as a percent
of gross operating revenue.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - ALL MANAGED HOTELS
As at
March 31,
(Unaudited) 2003 2002 Variance
Worldwide
No. of Properties 58 54 4
No. of Rooms 15,682 15,041 641
United States
No. of Properties 23 23
No. of Rooms 7,248 7,248
Other Americas/Caribbean
No. of Properties 8 8
No. of Rooms 1,762 1,762
Europe/Middle East
No. of Properties 13 10 3
No. of Rooms 2,553 1,969 584
Asia/Pacific
No. of Properties 14 13 1
No. of Rooms 4,119 4,062 57
FOUR SEASONS HOTELS INC.
SCHEDULED OPENING OF PROPERTIES UNDER CONSTRUCTION OR
IN ADVANCED STAGES OF DEVELOPMENT
Hotel/Resort/Residence Club and Location(1,2)
Approximate
Number Scheduled
of Rooms Opening
Four Seasons Hotel Alexandria, Egypt(x) 120 2005
Four Seasons Hotel Beirut, Lebanon 234 2006
Four Seasons Hotel Gresham Palace Budapest, Hungary 179 2003
Four Seasons Hotel Nile Plaza, Cairo, Egypt(x) 374 2004
Four Seasons Resort Costa Rica, Costa Rica(x) 148 2004
Four Seasons Hotel Damascus, Syria(x) 300 2004
Four Seasons Hotel Doha, Qatar(x) 235 2004
Four Seasons Hotel Florence, Italy 118 2005
Four Seasons Hotel Geneva, Switzerland 110 2005
Four Seasons Resort Great Exuma at Emerald Bay,
The Bahamas(x) 219 2003
Four Seasons Hotel Hampshire, England 135 2003
Four Seasons Hotel Hong Kong, Hong Kong(x) 390 2005
Four Seasons Hotel Istanbul at the Bosphorus, Turkey 170 2004
Four Seasons Resort Jackson Hole, WY, USA(x) 124 2003
Four Seasons Resort Langkawi, Malaysia 100 2004
Four Seasons Hotel Miami, FL, USA(x) 221 2003
Four Seasons Hotel Palo Alto, CA, USA 200 2004
Four Seasons Resort Provence at Terre Blanche, France 115 2004
Four Seasons Resort Puerto Rico, Puerto Rico(x) 250 2005
Four Seasons Residence Club Punta Mita, Mexico(x) 35 2005
Four Seasons Resort Whistler, B.C., Canada 271 2004
Four Seasons Private Residences Whistler, B.C.,
Canada(x) 35 2005
(x)Expected to include a residential component.
(1) Information concerning hotels, resorts and Residence Clubs under
construction or under development is based upon agreements and
letters of intent and may be subject to change prior to the
completion of the project. The dates of scheduled openings have been
estimated by management based upon information provided by the
various developers. There can be no assurance that the date of
scheduled opening will be achieved or that these projects will be
completed. In particular, in the case where a property is scheduled
to open near the end of a year, there is a greater possibility that
the year of opening could be changed. The process and risks
associated with the management of new properties are dealt with in
greater detail in the Company's Annual Report.
(2) The Company has made investments in Orlando and Sedona at Seven
Canyons in Arizona. The financing for these projects has not yet
been completed and therefore scheduled opening dates cannot be
established at this time.