Marcus Corp (MCS) 2004 Q3 法說會逐字稿

Good day everyone. Welcome to the Marcus Corporation third 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 would like to turn the conference over to Mr. Neis for any remarks. Please go ahead sir.

Thank you very much and welcome everybody to our fiscal 2004 third quarter call. As usual I need to begin by stating that we plan on making a number of forward-looking 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 division, 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 in leisure travel industry and in our markets, our expectations and plans regarding growth in the number and types 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 could be obtained from the SEC or the company. We'll also post our Regulation G disclosures when applicable on our web site at www.Marcuscorp.com. So with that behind us, let's talk about another positive quarter for the Marcus Corporation. As you may know, our fiscal third quarter is historically the weakest earnings period of our fiscal year.

Having said that, with earnings from continuing operations up nearly 32 percent for the quarter and over 20 percent for the first three quarters of our fiscal year, we're clearly pleased with the progress that is 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 third quarter and year to date comparison for the last year. While our focus on this call will certainly be on our operations, there was a fairly sizable variation in each of our, if you will, below the line items this quarter.

So I want to briefly comment on those items. First of all, as we noted in the release, interest expense was down another $800,000 for the quarter and is down $2.5 million year to date due to both the lower rates on our variable rate debt and for the significantly reduced overall debt on our balance sheet. In fact, our overall debt to capitalization ratio at the end of the quarter remains below 40 percent, despite the fact that this ratio historically tends to trend up during our slower winter months when operating results are at their lowest and capital spending is usually in full swing.

The bottom-line is that our balance sheet remains in absolutely great shape. Now comparisons to last year were also favorably impacted by the significant increase reflected on our investment income and loss line on the earnings statement. This is due to the fact that as you may recall, last year during this quarter, we reported a onetime $2.2 million investment loss related to loans to and investments in a Baymont Inns & Suites joint venture. Conversely our comparisons to last year's third quarter and first three quarters were negatively impacted by a significant reduction in capital gains during both periods, compared to last year in the same period.

As you know, with a large amount of real estate in this company it is not unusual for us to sell assets and most often for a net gain. The timing of these periodic sales however can vary from quarter-to-quarter, often resulting in noticeable swings in this line item on our earnings statement. We have several additional pieces of property under contract right now and I would anticipate that additional real estate sales and potential gains would be likely in future quarters. On a year-to-date basis, the fact is that the significant increase in investment income and the significant decrease in gains on sales of assets potentially offset each other.

Our total capital expenditures during the fiscal 2004 first three quarters totaled approximately $34 million compared to $15.5 million last year at the same time. The breakdown was as follows, limited-service lodging about $20.5 million; Hotels and Resorts, $4.1 million; theaters 8.2 million; and corporate around $1 million. The biggest project we have underway currently is the downtown Chicago Baymont renovation and that project is accounting for a good portion of the limited-service lodging expenditure. The remainder of the Baymont spending was primarily related to scheduled six and twelve year renovation projects.

For the hotel division, the spending includes primarily maintenance projects and costs associated with the construction of a new spa at our Miramonte property. Theater expenditures included the five screens added during the second quarter and the Elgin UltraScreen referred to in the press release. It still appears likely that our total capital expenditures for fiscal 2004 will end up in the $50 million range depending upon the timing of the actual expenditures on several projects that we're working on right now. We will of course monitor this closely as we have in the past and will adjust our plans as we feel necessary in response to current conditions. Now before Steve talks to you about the progress of each of our divisions, let me provide a few additional financial comments on each division.

I will begin with theaters. As you can see, box office revenues were down 1.5 percent and concession revenues were up 0.3 percent for the third quarter. As noted in the release, our holiday season was very strong thanks to a couple of very strong post Thanksgiving weeks and then thanks to the blockbuster, Lord of the Rings. In fact, the week between Christmas and New Years set a new box office record for our circuit. Unfortunately Hollywood couldn't sustain that momentum in the subsequent two months and in fact, until just last week of the period when we benefited from the opening two days of The Passion, we went through a stretch where the box office declined for six weeks in a row.

Total attendance decreased 3 percent for the third quarter and is now down 1.9 percent for the first three quarters of the year. Our average admission price was up 1.6 percent for the quarter and our average concession revenues per person were up 3.4 percent. Year-to-date our average admissions and average concessions are up 3.2 percent in 3.1 percent, respectively. For the continued strong emphasis on cost controls and another increase in other revenues, primarily from preshow advertising, the division basically ended up even with last year in both revenues and operating income. Year to date with operating income up 6.4 percent, this division remains on a pace to set a new record for operating results. Hotels and Resorts, in that division our overall hotel revenues were up 9.4 percent during the quarter.

Last year, we were required to report time-share revenues during this quarter on what was considered the percentage of completion method because we were selling into a building that was still under construction. So if you remove the time-share revenues from the comparisons it really is an apples-to-oranges comparisons, total division revenues were still up nearly 8 percent this quarter. As noted in our press release our overall RevPAR was up 7.5 percent during the third-quarter which was again higher than the national averages being reported by Smith Travel Research for the upper upscale segment of the industry for these same months. While we do not disclose individual hotel performance for competitive reasons, I will say that our increases in RevPAR were very broad-based this quarter with virtually all of our properties contributing to the robust growth.

When that fact is combined with the knowledge that several of our hotels rely more on the individual business traveler, the results become even more encouraging. Now the obvious question would be if RevPAR grew at such a healthy pace why didn't operating income increase as well? The primary answer here lies in two factors that we cited in our press release. The first has nothing to do with this year at all and everything to do with last year. Last year's third quarter benefited from nearly $700,000 of real estate tax accrual adjustments, the results of reduced tax assessments in the wake of 911 and the impact it had on the industry. Secondly, this year's results include approximately $200,000 of our share of startup costs related to our recently announced joint venture in Las Vegas.

Without the impact of those two items this division's operating income would have in fact increased over the prior-year. Year to date even with these items, our operating income is still up 9 percent over last year. Moving onto limited-service lodging, as you can see in the segment data, our third quarter revenues were up 0.4 percent and our operating income increased approximately 117 percent. As noted in the release, same month RevPAR was up 0.9 percent for the quarter and that was the result of a 0.4 percentage point decrease in occupancy, and a 1.7 percent increase in our average daily rates. Woodfield Suites had a more difficult quarter with RevPAR down 9 percent during the quarter.

As noted in the release, increased franchise revenues also contributed to the overall increase in division revenues both for the quarter and year to date. While final February numbers are not yet available from Smith Travel Research, based upon results for January, Baymont's third quarter and year to date RevPAR increase of 0.5 percent continued to exceed comparable results from our specific competitive set in this key measurement, gaining marketshare during what has continued to be a challenging time for our industry.

With revenues up only slightly during the quarter, we were very pleased to report another healthy increase in operating income. As noted in the release, the improvement was primarily the result of increased income from our franchising operation and reduced administration costs. With that I will now turn the call over to Steve with some comments on the quarter.

Thanks Doug. I will start my comments where Doug left off in the limited-service lodging division. You have seen the numbers and heard the additional detail from Doug. As you expect I am pleased to report another improved quarter of operating results in this division. Certainly a good deal of the improvement continues to come from a strong focus on controlling costs. We were also happy to see our franchise system outperforming our competitive set because when they do well, we obviously stand to benefit. Having said that, the real driver that would impact our operating results the most as we look ahead, continues to be an improving economy and resulting increase in business travel. We're certainly encouraged by our improved February results reported in our release, and hope that it is a harbinger of better things to come. A recent report by PriceWaterhouseCoopers suggest that the midprice of the food and beverage segment of the industry could experience an overall 5.8 percent increase in RevPAR for 2004, so that is another reason to be a very encourage.

The onset of the Gulf War a year ago likely had a dampening affect on travel for awhile so that may help future comparisons as well. When we look at some of the national numbers it quickly become apparent to us that there is a divergence in RevPAR results by geographic area. Right now, the national numbers are being driven by several high-profile destination cities that are experiencing significantly higher than average increases. Those cities include some of the areas that were impacted most by the downturn in the last couple of years which is Washington D.C., Orlando, San Francisco, and Los Angeles.

It is this geographic dynamic that results in Baymont reporting only a 0.9 percent increase in RevPAR yet also reporting an increase in our marketshare. Our markets which are more heavily focused in the Midwest and the South are just not increasing as much this time. I'm talking about the overall markets aren't increasing as much. Right now, our overall improvement in revenues remains primarily driven by the leisure customer. Our weekends have been very strong and having Valentine's Day fall on a Saturday sure helped us in this quarter. This was also the second straight quarter that we have been able to report a small increase in our average daily rate and that is a very good sign.

We continue to focus on building brand awareness. We have experienced a 30 percent increase in reservations booked through our proprietary Baymont web site this year, which we believe is a sign that our brand awareness efforts are succeeding. It is also likely that this increase indicates that our recent technology improvements which include introducing a two-way interface between our properties and our reservation center are making a big difference. We also continue to be very excited by the performance of our new Baymont in Ontario, California. This high-profile location which is currently running at RevPAR significantly higher than our system average, will certainly also enhance our brand awareness in that part of the country.

Like so many others, we continue to be concerned about rising health care costs and we certainly have some level of concern over the potential for rising gasoline prices and the impact it could have on travel the summer. We will of course also continue to focus on controlling costs as we look forward to what appears to be an improving economy. All in all, we certainly believe that even better days are still ahead for us in this segment of our business. With that, but smooth onto hotels full-service Hotels and Resorts division. Although the bottom-line numbers do not necessarily reflect it, there was once again much to be encouraged by in this quarter when looking at the hotel revenue performance.

This is easily our slowest quarter of this for this division due to the impact of winter on our primarily midwestern locations. Solid increases in revenues at virtually all of our properties were another sign that business travel appears to be on the rebound. In fact, with the lead-time on advance bookings continues to be shorter than the historical levels, we are seeing the booking window lengthen slightly. Right now, based upon group business already on the books, our fourth quarter could be much better than last year at several of our properties and our summer business is already looking pretty good. I continue to moderate my enthusiasm by emphasizing that business and group travel has still not fully recovered but there appear to be clear signs that we're headed in the right direction and this division is poised to benefit as recovery continues on.

Construction is nearing completion on our new spa at the Miramonte. It will open in April. The Palm Springs, Indian Wells market has struggled during these past couple of challenging years, and we believe that this spa will greatly improve this property's competitive position right away. From a growth perspective, we are working on quite a few prospects projects right now, and hope that several of them are going to come to fruition in the near future. As I 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. Our recently announced investment in a joint venture to develop a condo hotel in Las Vegas is the latest example of this kind of effort.

Our partner in that venture developed the Timber Ridge Lodge on our Grand Geneva campus and has an excellent track record with condo hotel projects, where at the Timber Ridge Lodge we're are only the manager of that project. Here we're equal partner on the Las Vegas project and stand to earn a significant development profit if the project goes well. The preliminary effort to sell the individual hotel units is now underway and the early customer response to these units is very encouraging.

As Doug noted, we will incur our share of the startup costs during these first months of the sales effort which will have some negative impact on our operating results during the next two quarters in particular, but the long-term prospects for this particular deal appear very promising. If all goes as planned, construction could begin on Platinum Suites Hotel & Spa by later this summer with a tentative completion date in December 2005. After recognizing what we would hope will be a sizable development profit upon completion of the project, we would then begin to earn ongoing management fees on this hotel. Now, turning to theaters which is our largest and most profitable division.

Although our third quarter results didn't quite match last year, this was still our second most profitable third quarter in our history for this division. If you exclude an adjustment made last year to our real estate tax expense of approximately a quarter of one million dollars and consider that we had increased snow removal costs this year of nearly $100,000, we maintained our operating margins this quarter despite the overall decrease in attendance that Doug told you about. Year to date we have raised our margin nearly one full point from 24.4 percent to 25.3 percent. Contributing to the improved operating margins have been reduced film and concession costs and reduced fixed occupancy costs as a percent of revenues. Increases in other revenues which include management fees and preshow advertising income have also contributed to those improved operating margins.

As we indicated in our press release, fourth quarter is off to a tremendous start thanks to Mel Gibson's The Passion of the Christ. It just goes to show you once again that in this business all it takes is one strong movie to make a big difference. The interesting thing about this movie is that a lot of people who aren't regular customers are coming to our theaters. It gives us a chance to demonstrate how improved the movie going experience is today, particularly with stadium seating.

Movie-going in general can be habit and so when a guest has a good experience and enjoys the movie they are more inclined to come back again soon. The disappointing film product in January and February is long forgotten now and as we indicated in our press release there appears to be a solid lineup of new films that will be released during the remainder of our fiscal fourth quarter. March results will be very strong and we should benefit from a slightly earlier Easter week this year than last year. So April looks encouraging as well. Our preliminary look at May suggests that we may have a hard time matching last year's box office numbers that included X-Men 2, Matrix Reloaded and Bruce Almighty, each of which had opening weeks of over $80 million nationally, but the movies noted in our release all have the potential to do very well.

If you will permit me to sneak a peak at our fiscal 2005 first quarter, the summer product is looking very good. The first two weeks of June we will see the release of two expected blockbusters in the Day After Tomorrow and Harry Potter 3, and the fourth of July weekend will have Spider Man 2 which is a PG-13 that has a lot of buzz about it compared to last year's R-rated Fourth of July introduction of Terminator 3. The bottom-line is that we obviously continue to 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 in our previous call, 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 positions. Six new owned screens, including our fourth UltraScreen and six new managed screens have opened this year and additional new screens in existing theaters are also planned. In addition we recently announced a new theater in Saukville, Wisconsin that is a suburb of Milwaukee that should go under construction soon. 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, we are pleased to be reporting another good quarter for the Marcus Corporation. We certainly will likely have challenges ahead of us, particularly in our lodging businesses, but nevertheless we believe in the underlying value, in the strength of our assets and the businesses and that should bode well for the future. Our focus will remain on producing long-term and sustainable growth in shareholder value for the Marcus Corporation. I would add at this time, Doug and I would be very happy to entertain any questions you may have.

Thank you Mr. Marcus. (OPERATOR INSTRUCTIONS). David Cumberland with Robert W. Baird.

Good afternoon. Thank you. Could you comment further on the Las Vegas property, how that might impact expenses over the next year? And then the development profit that Steve mentioned, when you might see that and also any comment on the range of magnitude of that?

First of all, as we indicated, our share was about $200,000 in this quarter. I, right now, expect that number to maybe be slightly higher in our fourth quarter. Frankly, it's a moving target because as we indicated, thus far is going very well. We're very pleased with the response of this, so while there is a budget for these costs related to the sales process, it appears as if maybe it can go a little quicker than what we had thought. So from that perspective, it is somewhat of a moving target. I am currently planning for another quarter of a million dollars or so in the fourth quarter and maybe an equal amount, give or take, in the first quarter of this year.

But I just caution you that number is a little soft. It is a changing number. What will happen is that if this project goes as well as it appears that it might be, and so it reaches a sales limit to allow construction to begin. As we indicated that would happen likely in late summer and if the timetable as it is currently laid out followed through and we completed the construction in December of '05, at that point, again this being a condo hotel, all of the individual transactions would close.

That is when the development profit, if there was any, would be recorded. I don't have the ability nor can I, since I haven't publicly released anything along those lines, disclose what that number could be. We think it could be a significant number if the project goes well. So, it's one of those ones that you're just going to have to stay tuned, but it would be a onetime development profit that we would record at the time of closing of and opening of the property.

As we get closer to that potential event, would you be able to perhaps comment on that in advance?

Absolutely. Absolutely. Right now we're just in the preselling stage, in the early stages. Once it reaches a certain level and there are hard contracts while there could be some rescission, it would be not without a great deal of pain on the part of anyone that put down a sizable down payment. So certainly the number becomes a little clearer when we hit the point when we know where the sales are and we're ready to begin construction.

Sounds good. A couple of questions on the Baymont side. Any update on the sales and marketing plan there, in particular, advertising, television advertising? And also an update on growth in the Ovations program or any metrics for Ovations?

I will answer the second part first and see if Steve has any comments on the marketing plan. I believe the last number I heard now is that we are at three hundred and twenty some-thousand members, so it continues to grow. So we're very pleased with that. It continues to provide mid-20s, as it relates to the percentage of our overall revenue or reservations and rooms booked. Steve any comments on the marketing plan?

As far as the marketing plan is concerned, last year we introduced for the first time in a long time a very heavy national television schedule. The results on that were quite good. We were very pleased with it, and as a result, we're going to continue with that this year. We're rolling out some new TV commercials, and I am not -- I believe it's in the next couple of weeks that those will begin to roll.

One other question on Baymont before going to theaters. Doug, did you mention a time frame on the Chicago property when that remain open?

I did not. It is currently, we're looking at the end of this calendar year. I have heard November as a date, but that's what where we're targeting right now.

Great. On theaters, the screen count actually went down from your earlier press releases, and I'm just wondering if any properties had closed or just some other situation explaining that?

No, that was a small six screen theater in the Minnesota market that was closed and sold during the quarter.

Great. You gave this number, I just didn't get it, the change in attendance?

It was down 3 percent for the quarter, and year to date now we're down 1.9 percent.

Great. Thank you very much.

David Loeb at Friedman, Billings, Ramsey.

I just wanted to ask one about Baymont. In looking at the numbers from the quarter, I tuned in a minute or two late, so I may have missed the discussion of this. It sounds like most of the improvement came from franchising and from lower operating costs. How much RevPAR improvement do you think you need in order to offset rising costs at owned hotels before you are able to on a kind of same-store owned basis show rising profitability?

Basically David, in this particular quarter, as we indicated that with our 0.9 percent increase we were basically at the Baymont operating level, flat. So it wouldn't take much more to move that needle.

It sounds like you have really tightened costs down at the unit level pretty tightly then?

I would agree with that statement, yes.

That's great. All you need is the industry to show a bit of improvement, continue marketshare gain and then you should be able to have fairly dramatic profit growth?

The leverage will be very significant, yes.

Great. Thanks.

(OPERATOR INSTRUCTIONS). Greg Macosko at Lord Abbett.

Good to say hello again. Just with regard to the theater area of theaters, any expansion or acquisition possibilities kind of beyond internal growth? Is there any -- I know you have something with the Indian reservation in terms of management, but are there any opportunities out there with regard to acquisition?

I guess there are always opportunities out there, the question is at what price.

Right, and with regard to spin-offs in terms of existing chains, etc., any discussions in that area?

I haven't seen much of that yet. As some of the bigger chains begin to acquire other large chains there could be some of that, if I understand your question correctly, that there could be some of that occurring.

Right, exactly.

And we're staying in touch with the companies that are doing that.

With regard to Las Vegas, how many -- what is kind of the range in terms of number of condos in the development, at least initially?

There are 255 I think and 255 keys.

Okay, has that been expanded since the initial projections?

Well when you say the initial projections, it was actually reduced from an original plan for the site, but that was in the zoning and approval process that it got reduced.

Since the announcement (indiscernible) it hasn't changed, 255, generally ranging -- you know there are different sizes, but generally ranging from maybe a low of 300,000 and some change to a high of maybe $900,000 per unit.

Okay, so that is kind of the range of price per unit. And what is the size in terms of bedroom, studio or two-bedroom?

Mostly one bedroom. I think the smallest is around 900 to 1,000 square feet, and then there are some two-bedrooms and a couple bigger units.

Okay. As you were saying, the completion is expected to be at December of '05?

That is our best guess at this point.

So in that quarter then, I mean given everything, that is the quarter in which you would recognize that?

That is correct.

Following that, you will be managing the project and splitting it with the partner?

We will receive a management fee that we won't split, but there still is -- the partnership will still exist and some of the common areas, the restaurant and some things along those lines, would be under a split (technical difficulty). We would receive a fee that is just ours for the management.

Okay, would you expect that would be the majority of the income then, it would be from the management fees as opposed to the equity earnings and the venture?

I would think probably yes. But, if it runs well, the profitability from the common units and from the operation of the property itself could be a good number as well.

Are there any other discussions of projects of this nature in other locations or elsewhere at this point?

Yes, but nothing specific. They're relatively informal.

Finally, is Marcus going to have a hospitality suite in Las Vegas for all of its shareholders?

Was the laughter your answer?

Thanks very much.

Our chance to be entertained.

Herb Bavinder (ph) with Wachovia Securities.

What other showcase properties are you looking at beyond Ontario and Chicago for Baymont? Can you tell us, is Ontario performing above your expectations?

Ontario is performing above our expectations, yes.

And there are other, I don't know if I'd use the word showcase Herb, but there are certainly other, maybe a little higher profile or more strategic market locations that we're working on, kind of Alma (ph), Ontario. Chicago is more of a one-of-a-kind but Ontario is a model that we would like to duplicate with strategic market partnership agreements. And so there are some locations and some markets that are larger in nature that we are certainly taking a look at right now.

As far as your Miramonte property, are you seeing some advanced bookings that relate to the spa or it's too early to tell what kind of effect it is going to have?

It's a little early to tell because unfortunately we are opening at what is the end of the season. It is a little hard to see the momentum from it although my understanding anecdotally from just talking to people out there is that they expect a much better summer directly related to this.

And generally your advanced bookings for the summer and spring look pretty good for your resort properties?

Yes, generally that is true.

Because you made a comment in the last quarter that they looked good and now you're not saying too much.

No, I thought we actually did say that.

We did say that.

-- earlier, but that is in fact the case, that the advanced bookings are stronger.

Alright. Thanks a lot.

Larry Source (ph) at Robert W. Baird.

Good afternoon, Steve and Doug. Would you please comment Steve, kind of a broad brush back to the theater area, on developments that you're seeing, kind of the macro picture, with larger developers and what has gone on let's say over the last few years and where you see that going? Are there any major shifts from what you would have expected to be occurring at this time?

If I understand your question correctly, there is relatively little new development of movie theaters going on right now. Too many companies are gun-shy. They are just coming out of their bankruptcies and they understand how dangerous it is if you overbuild the marketplaces. So that has been very, very market specific. If it's an area that is experiencing a lot of growth, they're adding some news screens there. In some cases some old screens are coming off the playing field.

So it's a much healthier situation than it was a few years ago simply because we're not seeing all that much new supply being added. What I think we are seeing more is what we're doing which is adding two screens here, three screens there, expanding out where the market place is growing, not enough for a whole new theater to be put in place, but enough for some screen additions. That is the biggest thing we are seeing. Beyond that, it's a lot of mergers and consolidations going on, as I think you've been reading.

Do you see related to that the territorial expansion, where it has been kind of kind of a state by state domination by certain chains, do you see developments along the lines of reaching beyond that technique and perhaps becoming multistate or multiregion in development?

Are you speaking about us specifically?

No, not Marcus. The other players, the big players.

The big players are -- how can I say, they tend to have been created generally out of putting together good-sized regional chains. But they also, for example, AMC tends to be everywhere. They -- the tendency, with some exceptions, is they -- for example, we are very dominant in our marketplace with the exception perhaps of Kansas City. I don't know that AMC really is. We have as many or more complexes for example in Chicago than they do. Every chain has I think its own thinking about how it looks at that and how it goes about its development.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Showing nothing further at this time, Mr. Neis would you like to make any additional or closing remarks?

Certainly. Mainly I would just like to thank everybody once again for joining us today. Excellent questions and we appreciate the presentation. We will be back with you again in July when we announce our fourth quarter and year end results. Thank you once again for joining us.

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