Marcus Corp (MCS) 2004 Q2 法說會逐字稿

Welcome to the Marcus Corporation second quarter fiscal 2004 earnings conference call. This call is being recorded. With us today we have the Chairman and Chief Executive Officer, Stephen Marcus, and the Chief Financial Officer, Douglas Neis. At this time, I would like to turn the conference over to Mr. Neis. Please go ahead.

Thank you very much, and welcome, everybody, to our fiscal 2004 second quarter conference call. As usual, 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 rate expectations for our limited service lodging and hotels and resorts divisions; our expectations about the quality, quantity, and audience appeal of film product expected to be made available to us in the future; our expectations about the future trends in the business, group and leisure travel industry and in our markets; our expectations and plans regarding growth in the number and type of our properties and facilities; and our expectations regarding future capital expenditures. Of course, our actual results could differ materially from those projected or suggested by our forward-looking statements. Factors, risks and 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 disclosures, when applicable, on our website at www.marcuscorp.com.

So with that behind us, let's talk about what turned out to be a very good second quarter for us. With earnings from continuing operations up 88 percent for the quarter and nearly 18 percent for the first half of our fiscal year, we're clearly pleased with the progress that's being made. Before discussing each division's revenues and operating income, I do want to touch on just a couple of global issues that impacted our second quarter and first-quarter comparisons to last year.

Now as you can see in the segment results, all three divisions contributed to our improved results this quarter, with the largest increases year over year coming from our 2 lodging divisions. These increases were achieved despite continued pressure on operating margins from increased insurance costs, and in particular health insurance. And while our focus during this conference call will be on our operations, I do want to point out changes in a couple of our below the line items.

Specifically, you'll note that our interest expense was down another $900,000 for the quarter and is down 1.7 million year to date, due to both the lower rates on our variable rate debt and to the significantly reduce overall debt on our balance sheet. In fact, our overall debt to capitalization ratio at the end of the quarter remains below 40 percent for the first time in six years. And while I expect this ratio to possibly creep up into the low 40s as we head into the slower winter months, our balance sheet remains in absolutely great shape.

Conversely, our comparisons to last year's second quarter and first half were negatively impacted by a small reduction in capital gains during both periods, compared to last year during those same periods. Now the net gain recorded this quarter included a gain on the sale of excess land, offset by a loss on the disposition of a former Baymont joint venture property. We have several additional pieces of property under contract and I would anticipate that additional real estate sales and potential gains would be likely in subsequent quarters of this year.

Our total capital expenditures during fiscal 2004 through the first half totaled approximately $20 million, versus 11.5 million last year. The breakdown was as follows -- limited service lodging, $12.5 million; hotel and resorts, $2.5 million; theaters, 4 million; and corporate, another 1 million. Now the biggest project we have underway currently is the downtown Chicago Baymont's renovation, which accounted for a portion of the limited service lodging (indiscernible). The remainder of the Baymont spending was primarily related to scheduled 6 and 12 year renovation projects. The hotel spending includes primarily maintenance projects and the initial costs associated with the construction on the new spa at our Mermonte (ph) property.

The theater expenditures include the five screens added during the quarter and referred to in the press release, plus another UltraScreen project currently under construction. At this stage, I'm still targeting our total capital expenditures for fiscal 2004 to be approximately $50 million, ending upon the timing of the actual expenditures on several projects that are planned for calendar 2004. We will of course monitor this closely as we have in the past, and we'll adjust our plans as we feel necessary in response to current conditions.

Now, before Steve talks to about the progress of each of our divisions, let me provide you with a few additional financial comments on each division. Beginning with the theater division. As you can see, box office revenues were up 2.8 percent and concession revenues were up 2.7 percent for the second quarter, with most of the increase occurring during September, which is historically the slowest month of the year for us. And while the quarter didn't have the benefit of a Harry Potter movie or My Big Fat Greek Wedding, both of which performed better last year than our top movies this year during the quarter, the depth of the film product this year was very good. We continue to benefit from a consistent and slightly increasing supply of film releases from Hollywood, which is very encouraging.

With improved film costs and strong expense management, this division also has to be commended for its consistency. Total revenues were up 4.1 percent for both the second quarter and the first half of the year, and the division was able to leverage these increases into 12 percent increases in operating income for both time periods. Total attendance increased 0.9 percent for the second quarter, but was actually decreased 1.3 percent for the first half of the year. The new screens were opened near the end of the quarter, and thus, did not really have a significant impact on the numbers that have been reported.

Our average admission price was up 1.7 percent for the quarter, and average admission and concession revenues per person were up 1.9 percent. Year to date, our average admissions and average concessions are up 3.9 percent and 3.1 percent, respectively. Now one last item of note for this division would be that a significant increase in other revenues on the face of our earnings statement is at least partially the result of increases in ancillary revenues from this division. In addition to the $400,000 insurance settlement included in our first-quarter numbers and mentioned when we last got together, we continue to also see increases in our preshow advertising revenues, which drop directly to our bottom-line and further enhance our operating margins.

Moving on to the hotels and resorts division. Our overall hotel revenues were up 17 percent for the quarter. Last year we were required to report time-share revenues during this quarter on the percentage of completion method, because we were selling into a building that was still under construction. So if you remove time-share revenues from the comparison in order to kind of get apples and apples, total division revenues were still up over 14 percent for the quarter. As noted in our press release, our overall RevPAR was up 15.9 percent during the second quarter, which was significantly higher than the national averages reported by Smith Travel for the upper-upscale segment of the industry for the same month, which averaged the 2 to 3 percent range during the same time period. And while we do not disclose individual hotel performance for competitive reasons, it is fair to say that our newer properties and our properties that cater more to the group business segments contributed more significantly to this much improved quarter for the division. As noted in the release, although our second quarter results for this division were not a record, operating income was the highest since fiscal 2001, which was the year before 9/11.

Limited service lodging -- the division -- as you look at that segment data, you will see that our second quarter revenues were up 0.7 percent and our operating income increased approximately 74 percent. Now as noted in the press release, Baymont RevPAR was up 0.3 percent for the quarter. And this was the result of a half a point percentage point decrease in occupancy, and a 1.1 percent increase in our average daily rate. Woodfield Suites' RevPAR continues to improve and was only down 2.7 percent during the quarter. As noted in the release, increased franchise revenues also contributed to the overall increase in division revenues.

And while final November numbers are not yet available from Smith Travel research, based upon the results through October, Baymont's year-to-date RevPAR increase of 0.4 percent continues to exceed comparable results from our specific competitive sets in this key measurement. Gaining market share during what continues to still be a challenging time for our industry. With revenues relatively flat during the quarter, we're certainly pleased (indiscernible) be reporting the substantial increase in operating income during the quarter. Our operating team deserves credit for very good expense management during the quarter, both in our Baymont and our Woodfield Suites. Also contributing to the improvement was increased income from our franchising operation, which was the results of both improved performance by our franchisees, as well as a onetime termination 6 fee from a former franchisee.

So with that additional cover on the numbers themselves, let's turn the call over to Steve with some comments on the quarter.

Thanks very much, Doug. I'll start my comments where Doug left off, and that's with the limited service lodging division. You have seen the numbers and heard additional detail from Doug. As you would expect, I'm pleased to report significantly improved operating results during what continues to be a very challenging environment. As we noted in the press release, a good deal of the improvement came from a strong focus on controlling costs. Certainly, the added volume in early September from the Harley-Davidson celebration got us off to a good start this quarter, as well. Having said that, you have heard me say for several quarters now that the industry in general, and Baymont in particular, will continue to face challenges until business travel returns to prior levels. And that comment still holds true today.

Our overall improvement in revenues remains primarily driven by the leisure customer. Our weekends have been very strong as has been our holiday traffic. And while there have been some signs that the individual business traveler is starting to hit the road a little more often, our markets are not experiencing significant increases in demand yet, and business travel is certainly not back to prior levels. And without that increased demand, we'll continue to operate in an environment where it's very difficult to increase our average rate. This was the first-quarter in some time that we have been able to report a small increase in our average daily rate, and that certainly is a good time.

We continue to focus on building brand awareness. Our reservation center contribution continues to increase, and we continue to utilize the various Internet distribution channels to expand our customer base. As new customers tried Baymont and experienced their outstanding service amenities and excellent value, our job is to convert as many of them as possible into loyal customers for years to come. We will, of course, also continue to focus on controlling costs as we look forward to what appears to be an improving economy.

Now from a development standpoint, we have said that we're going to use company growth capital for activities that provide strategic value for the brand. And with that in mind, we opened our first Baymont in California this quarter, which is a joint venture property in Ontario California. And I'm pleased to tell you that that property has opened extremely well. With this very successful introduction to the L.A. market behind us, we're hoping to expand on our presence in this important market in the near future.

Construction also continues on our downtown Chicago location. Another project that we believe will have exceptional strategic value to the brand. Franchising activity remains pretty quiet right now, given the current market conditions and the financing environment, but we're really hopeful that we'll see increased activity in the near future as the economy continues to rebound.

With that, let's move on to our hotels and resorts division. As you saw in the numbers, our hotel had a much improved quarter which was very encouraging. And like our limited service lodging division, we certainly benefited from the Harley celebration in Milwaukee in early September. But that was just the beginning. Solid increases in corporate group business throughout the quarter contributed significantly to our overall improvement. Revenues from our leisure customer segment have remained consistently strong and we have even seen some signs that individual business travel is starting to improve. With all this encouraging news, I have to moderate my enthusiasm by emphasizing that business and group travel still hasn't fully recovered. Group bookings continue to be made within a relatively short lead time, and it's clear that companies are still remaining very conscious, resulting in a somewhat unpredictable reservation flow for us. Based upon current advanced bookings in the third quarter, which is historically our slowest quarter of the year for this division, has the potential to be better than last year, but probably not to the same degree as this past quarter. While it's still early, given the short leadtimes on the bookings, our fourth-quarter looks like it could be much improved over last year's.

Fueling some of our improvement are the continued increases in operating results from two of our newest projects, one being the Hotel Phillips in Kansas City, and the other being Timber Ridge Lodge at Grand Geneva (ph). Timber Ridge continues to grow with increased consumer awareness and Philips is slowly but surely growing its customer base and seeing very nice year-over-year improvement. So the revenue growth in this division is also coming from the food and beverage component of our properties, and that can be attributed, at least partially, to the successful introduction of our Chop House restaurant concept at the Madison Hilton and the Hotel Phillips (ph). Following up on the lead of our successful concept at the Milwaukee Hilton, those two restaurants are increasing revenues and exposure for the hotel. We're very happy to note that the capital Chop House in Madison just received an outstanding review in the local newspaper there.

Construction continues on our new spa at the Miramonte (ph). We currently (indiscernible) believe we'll open this very special amenity by approximately March 1, and believe it will have a very positive impact on that property right away. Now from a growth perspective, we're working on quite a few projects right now, and believe that several of them will come to fruition in the near future. As I have indicated in the past, our focus is on expanding our management business with the possibility of making small equity investments in some projects as needed. The pace of activity does seem to be increasing considerably, which is encouraging. And I believe it's recognition of the value-added that Marcus Hotels is able to bring to the bottom line for hotel investors.

Turning now to the theater division, our largest and most profitable division. We have got another quarter behind us and it's another record performance. Once again, we successfully leveraged relatively modest growth in box office revenues into even stronger growth in operating income, improving our second-quarter operating margin from 20.5 percent last year to 22.1 this year. For the first half of the year, our margins have gone from 23.5 percent to 25.3 percent. Contributing to the improved operating margins were reduced film and concession costs and reduced fixed occupancy costs as a percentage of revenues. As Doug indicated, increases in other revenues -- which include management fees and preshow advertising income -- also contributed to that improved operating margin.

As we indicated in the press release, the third quarter is off to a good start, and it just got better yesterday with the release of the third and final chapter -- it kills me to see the final chapter -- the third and final chapter of the Lord of the Rings series. The reviews on this blockbuster have been universally great, and the expectation is that this film will outperform the first 2, which is really no easy task, as you know.

While we are going up against a record holiday film season last year, weather permitting, it certainly looks like Hollywood has the pictures lined up to match and hopefully exceed last year's results. As we look into the remaining months of fiscal 2004, there is a very good supply of products scheduled for release, and May in particular looks like it could be very good. While release schedules are always subject to change, this summer -- which already has the next Harry Potter and Spiderman movies booked -- looks very good on paper. The bottom line is that we, obviously, feel very good about our ability to leverage good film product into significant profits for the Company in the months and years ahead.

As I noted last quarter, after two years of very little growth capital spent in this division, we're now once again focusing on opportunities to further strengthen our already strong market position. 5 new screens opened this past quarter and additional new ones at existing theaters are planned. In addition, we are 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 process.

To wrap up my comments, it sure is a pleasure to report the substantial improvement in operating results to you today. We certainly will continue to have challenges ahead of us, particularly in our lodging businesses. We're not going to be reporting 88 percent increases in net earnings every quarter, but nevertheless, we believe the underlying foundation that resulted in this increase bodes well for the future. Our focus will remain on producing long-term and sustainable growth and shareholder value for the Marcus Corporation and for its shareholders.

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

(OPERATOR INSTRUCTIONS). David Cumberland, Robert Baird.

Congratulations on your results. On limited service lodging and Baymont, I would like you to elaborate on the pricing environment and how you're able to raise the average daily rate? And also, how the mix of Internet distribution factored into the daily rate in the quarter?

We're able to raise our rates with great difficulty. The pricing power out there is still very, very difficult. And the -- some of that comes as a result of the impact of the e-commerce channels. As I'm sure you have followed many of the -- I shouldn't say many -- but a number of the larger chains have now taken some steps to reduce the impact of that. And I believe that that is going to have the impact of making -- it will certainly tend to reduce the demand levels and inventory at the alternate e-commerce channels, and I believe will make our participation more important to them. And so we look for opportunities to -- let's put it this way -- reduce the level of discounting that has to be done through those channels.

Also on LSL on the cost side, you saw a strong improvement in margin. Would you expect some year over year improvement over the rest of your fiscal year, if you're able to generate positive RevPAR there?

Yes.

On the Baymont business, in the past at times you have commented on a RevPAR index. Do you have an update on that?

No. We have, and I have held off because the November numbers are not in yet from (indiscernible) travel. In the past, it has been so clear-cut that I was able to go ahead and comment (indiscernible) that time when we didn't have the final months available. This time, we're pretty much on track with what the competitive set was doing during this quarter. So it is fair to say that we held our ground (indiscernible) the games that we have obtained over the last year and a half or so. Too early for me to tell you until the numbers are in whether we gained additional ground or not.

How about also in Baymont the percentage of business from Ovation's customers?

That's holding steady in the mid '20s or so.

Steve and Doug, both of you talked about a challenging business travel outlook -- what is your outlook and perhaps the outlook of the other experts on business travel for calendar 2004?

From my perspective, that's gradually strengthening. I'm seeing much more confidence out there now. And as a result, my sense is that -- we can see the trend -- I think the -- it seems to me that the slippage in business travel has stopped. It's leveled out. My sense is that it's now beginning to shift back a little bit, and I think we're seeing a little more in the full-service hotels, not nothing that you'd want to bet your life on but it sure is a different environment than, let's say, a year ago. I think people are finding a need to get back out there again. They have been postponing meetings of all kinds. They've been postponing business travel of all kinds, even just getting out and seeing customers. And I think now they're finding that they can take advantage of the opportunities. In addition to that, I think air travel has now -- people plan ahead a little bit air travel is recent reasonably inexpensive. Even lodging travel is inexpensive. If people plan ahead a little bit, air travel is reasonably inexpensive. Even lodging travel is inexpensive. The lodging portion of it is relatively inexpensive. So I think what's happening is that the business community have woken up and found out -- gee, I can go out there and make personal calls. It’s less expensive than it was a year or two years ago.

I think the things that I have read that we've just -- the national (indiscernible), if you will David -- (indiscernible) pretty much stated exactly what Steve is saying. I know Price Waterhouse Coopers just came out with something a week ago today you might want to take a look at. It's -- in general, the consensus seems to be growing that calendar 2004 will continue to show some nice overall increases for the industry. Obviously, (indiscernible) would have to be further dissected by various segments, and even within markets. One of the things that we have noted is that even some -- a little bit of the recovery that's occurring now and some of the national numbers that you'll see, is not necessarily across all markets here in the United States. Some of the markets that got hit the hardest in some of the larger destination markets are probably showing larger RevPAR increases right now than some of the markets that, again, stayed a little more stable throughout these last couple of years. So it's not -- it's a little -- you really have to dissect the national numbers, really, to kind of understand what is going on. And when we talk about our individual numbers, that's why we all spoke (indiscernible) against competitive sets in our market, because San Francisco is operating a lot differently than Nashville, for example.

Understood. One another question. Doug, you mentioned among the factors benefiting margin in LSL (ph) a onetime termination fee. Roughly how big was that fee?

Certainly that's not a number that I can disclose, for both legal and competitive reasons, but it was -- let me put it in perspective. It was certainly large enough for me to be able to (indiscernible) -- that I needed to mention it, but it's not by any means is it accounting for a majority or the largest part of what increased here. The majority of the improvement in this division occurred over a variety of different cost categories and improvement in Woodfield Suites and franchising in general, as I mentioned.

Greg Nikosko, Lord Abbott.

Nice quarter, very nice. I will start with theater. Would it be fair to say -- the quarter was real nice and strong, and if we just look at sort of the positive side of it, would it be fair to say that the theater was the biggest positive surprise?

Due to the nature of the movie industry, frankly, it's all a surprise, because you're never quite sure what pictures are going to really be big and when they're going to be there. The important thing is to be positioned so that when they're there, you're ready to (technical difficulty) on them. And given the -- what we're seeing now is the culmination of a lot of things we've been putting in place for quite a while. And (indiscernible) just the business of the increased revenues from the preshow advertising; we've been pushing very hard in growing that side of our business, because it's got very strong margins attached to it. And I think we were fortunate we had a pretty good run of product through the fall.

And so that run of product, it was more the -- was it the run or the hits, or both? If it's a longer run, you generally do better. I remember you talked about My Big Fat Greek Wedding doing so well because it ran so long. Was there more longer runs out there?

I would actually attribute it more to the depth of the product. As I indicated -- in fact, our top couple of pictures were not as good as what we had last year, but there was just a nice solid depth. September was probably a little little bit of a surprise. Again, September is absolutely the worst month of the year in this business; kids go back to school, and there were a couple of nice holdovers from August that continued to perform and a couple of other pictures that just comparatively did better than last year. So it was just -- it was just a nice solid run of pictures, and that goes for the quantity as well. In some ways it's a numbers game, and so we are always most encouraged when we see that production is up and the number of films that are coming out is up. And that is the case right now, (indiscernible) that case -- that's continued to be the case this quarter.

Having said that, generally what we are seeing is that the pictures are playing off very fast. We see these very large openings, (indiscernible) openings, and then very rapid drop off in the second and third weeks. Pictures on average, I think, are playing shorter than they used to. That is being made up by pictures -- by just increased flow of product. My Fat Greek Wedding, in all honesty, was an anomaly in today's world.

The other thing that intrigues me is your -- the management contract for the Ho-Chunk Indian Nation. That seems to me in some sense to be like the hotel business. You look for, in a sense, investors to work with you or management contracts there. Is the idea maybe with this contract to maybe try to do a few more of those, and sort of leverage your capability without having to invest as much money, in terms of getting a nice return on investment as it were?

Yes, that's exactly -- that's where the idea was born. And this is our second management contract. We have a previous one going into the Chicago market.

The question remains what is the depth of that market. This really is not -- there's very little of this going on right now across the country, and so we have -- as you correctly indicated, we have got that experience in our hotel business, and so we felt we could leverage our existing management. We're certainly -- by adding a second one we've added exposure. We're certainly trying to put ourselves out there and marketing ourselves with the ability of doing that. We now just don't know (indiscernible) -- we have no current deals that we're working on to add to that, but we are attempting to market and expand on that.

Is this something that you need to be in the sort of the Midwest area, pretty close to your existing -- where your existing theaters are, so that you can negotiate contracts? Or could you do it around the country?

I think that we could probably do it anyplace. The question becomes the depth of management resources that you're able to put close by. It's not so much the individual theater and providing the management through that theater, it's the central office backup and the knowledge of those markets that we would -- that we'll have to analyze. And this is sort of a case where we are walking before we are running, and trying to be careful as we approach it.

Good. In the, sort of the last paragraph of the release, you talked about the pace of our long-term bookings. I assume that relates to the hotel business more than the Baymont, or not?

Yes, that's correct.

Is there much of a booking number with regard to the Baymont, or is that really kind of last-minute, just generally speaking?

It's all very last-minute.

You have mentioned mid 20s for the Ovation business as a percent of revenue. Is that kind of synonymous with your reservation center, in terms of percentage of limited service revenue going through that center?

You know, I don't think that we know what percent really goes (multiple speakers)

They're really unrelated numbers. They happen to be kind of in the same neighborhood, but the really don't connect that way.

You noted that the business travel, or business revenue from the hotel group is kind of picking up and looking better. In the past, has this been a leading indicator to some extent for limited service or in the old Budgetel days?

I don't think we have ever tried to do that correlation. Generally, if the industry is weak it will be affected across the board. And as it strengthens it will strengthen across the board. And it may not be to the same degree; it could be uneven, but it will -- it's sort of a rising tide situation.

Good. The Woodfield Suites, (indiscernible) just sounds like you have continued to work on management of the costs there. Are they kind of tracking in the same way that -- in terms of the RevPAR, etc., as Baymont is?

Yes they operate, obviously, in a different segment. (indiscernible) different piece of the industry than Baymont does. And they have consistently been tracking inn line with what we are seeing in the national numbers, and (indiscernible) compared the sets for that segment.

(OPERATOR INSTRUCTIONS). Herbert Bookbinder (ph), Wachovia Securities.

I appreciate you letting me come in on this. Three questions. Could you tell me if the Lord of the Rings deal with the studio this time around is any different from the first two, and a rough idea as to how you are going to receive revenues on this picture? Do you really need it to run for 10, 12, 15 weeks, or will you make some pretty good money in the first couple of weeks?

I cannot tell you specifically. It will depend a little bit on how the picture performs. In terms of the film rentals, the deals have all been very stiff. But they perform so well that, obviously, they're very profitable for both us and the folk film companies. We'll have some locations that will have more long runs like that, but I can't be -- we just can't tell; we just don't know.

Herbert Bookbinder The UltraScreens should do very well with this. I assume that all the UltraScreens would have this booked?

Yes. The UltraScreens always outperform on pictures like this.

Can you give me an idea of the size of the Baymont in Chicago in L.A. versus the typical unit and the relative room rates?

L.A. is 105 rooms, Ontario (multiple speakers) is 105 rooms, Chicago will be 220 rooms.

Herbert Bookbinder And the average of all the other units typically are what?

About 100.

Herbert Bookbinder Okay. Last question -- have you been looking at the relative merits, I guess, (indiscernible) buying back stock, raising the dividend with some of your excess cash. Have you ever had a buyback, and I guess you haven't raised the dividend in quite a while?

The dividend is a discussion that we have at a board level every quarter, because we are keeping an eye on it. As it relates to buybacks, we have had buyback programs in the past. Doug, I think you might know the specifics.

Yes. We actually still have an authorization of, I believe, nearly 2 million shares. Over the last (indiscernible) last couple of years, we suspended that program, basically with an eye towards our balance sheet. We felt that (indiscernible) ground in the lodging business, that this was a time to keep our balance sheet extremely strong, which we have done.

Herbert Bookbinder So you might start looking again at this buyback, or you still want to do some things with the balance sheet and look at some other alternatives?

We look at both of those, as Steve said, every quarter. (indiscernible) actually a discussion item that we have every quarter with our board, in relation to our various capital projects and (technical difficulty) expenditures.

There are no further questions at this time.

Thank you everybody. I certainly want to thank everyone once again for joining us on our conference call. We certainly hope that you and your families have a very happy holiday season and a happy new year, and we look forward to getting back together again with you in March when we release our third quarter results. Thanks again for joining us.

Once again, this does conclude today's conference call. We do thank you for your participation, and wish everyone a good day.