Marcus Corp (MCS) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the The Marcus Corporation third-quarter fiscal 2005 earnings conference call. This call is being recorded. With us today we have Chairman and Chief Executive Officer, Mr. Stephen Marcus, and Chief Financial Officer, Mr. Douglas Neis. At this time, I will turn the call over to Mr. Neis for opening remarks. Please go ahead, sir.

Thank you very much and welcome to our fiscal 2005 third-quarter conference call. As usual, I need to begin by stating that we plan on making a number forward-looking statements in our call today. Our forward-looking statements could include, but not be limited, to statements about our use of the proceeds from our sale of the limited-service lodging division and Miramonte Resort, our future revenue and earnings expectations, our future RevPAR occupancy rates and room rates expectations for our hotels and resorts division, our expectations about the quality, quantity and audience appeal of film products 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. With that behind us, let's talk about our fiscal 2005 third-quarter and year-to-date results.

Before I get into the results from each of our divisions, let me briefly comment on the various below-the-line items and their variations this quarter versus last year. The first item of note is investment income which continues to be as expected, up over the prior year, as a result of the recent receipt of sales proceeds from the Baymont and Miramonte sales.

You will see two large cash balances on our balance sheet. The cash balance of approximately 176 million is currently invested in short-term tax-free instruments, which accounts for our lower-than-usual effective income tax rate on a year-to-date basis. In addition, approximately $155 million of cash was being held at quarter end by intermediaries in conjunction with potential tax-deferral opportunities we were continuing to explore. We were earning taxable interest on these funds.

Now early in the fourth quarter, the majority of these potential tax-deferral opportunities expired and thus we have subsequently received another $123 million from the intermediaries, all of which has also been invested in short-term tax-free instruments for the time being.

Now moving on to the next line, interest expense, it's continued to track down during the quarter and is down almost $1 million year-to-date; again, due primarily to reduced overall debt on our balance sheet. Our overall debt-to-capitalization ratio at the end of the quarter was slightly below 30 percent, down from 38 percent at the end of May. Gains on disposition of assets of continuing operations were negligible during the third quarter, both this year and last year. Year-to-date we're ahead of last year in this line item. As you've heard me say many times before, however, with the large amount of real estate in this Company, it's not unusual for us to sell assets, most often for a net gain; and the timing of these periodic sales can vary from quarter-to-quarter, often resulting in noticeable swings in this line item of our earnings statement. We do have additional excess real estate that we may sell during the remainder of fiscal 2005 and beyond.

Our total capital expenditures during the first three quarters of fiscal 2005 totaled approximately 36 million, compared to 34 million last year at this time. Approximately $17 million of this total came from our theatre division related to the new theatre that opened recently and the screens under construction, as well as the Project 2010 renovation work that we have previously described. Another $15 million of this amount is attributable to our hotels and resorts division, with the bulk of those dollars related to the Chicago project, as well as several remodeling projects at our Grand Geneva Resort and Spa. The limited service lodging division accounts for the majority of the remaining $4 million, representing carryover renovation projects that we have previously committed to. As previously disclosed, and noted again in our press release, we have multiple theatre expansion projects under way or scheduled to begin shortly, so we will certainly see these theatre expansions increase in the fourth quarter as well.

Depending upon the timing of several projects scheduled to begin during the fourth quarter, I'm currently projecting our total fiscal 2005 capital expenditures to be approximately $60 million.

Before I turn the call over to Steve, let me provide a few other additional financial comments on each division, including our discontinued operations.

Starting with theatres, as you can see, box office and concession revenues were both down 5.5 percent for third quarter. As the press release noted, the entire decrease occurred in the last two weeks in December when we were going up against the "The Lord of the Rings" comparison and dealing with a holiday calendar that was not as favorable as the year before. Total attendance decreased 8.1 percent for the third quarter, but our average admission price was up 2.8 percent; partially offsetting that decrease. Our average concession revenues per person were up 2.9 percent compared to last year.

On a year-to-date basis, our attendance is now down 3.9 percent compared to last year, with our average admission price up 2.6 percent and our average concession revenues per person up 4.8 percent. As would be expected, given the reduced attendance this quarter, our operating margins were down during the quarter as well. On a year-to-date basis, our overall operating margin for this division is 24.6 percent compared to 25.3 percent last year at this time. The division's largest single-cost line item, film cost, actually decreased slightly during our fiscal 2005 third quarter compared to the same period last year, but remains slightly higher than last year during the first three quarters.

In our hotel and resort division, our overall hotel revenues from continuing operations were down 3.6 percent during the quarter, but remain up 2.1 percent for the year compared to the same period last year. I again remind you that these totals exclude the Miramonte, the results of which are now included in discontinued operations. Our press release noted that total RevPAR, again excluding the Miramonte, decreased 1.4 percent for the quarter; and year-to-date total RevPAR is now running 1.3 percent ahead of last year. During our third-quarter, our RevPAR decrease was primarily the result of a small 1.9 percentage point decrease in occupancy percentage, partially offset by a 2.6 percent increase in our average daily rate, or ADR. Our RevPAR increase year-to-date has been the result of an overall occupancy increase of 1.3 percentage points, partially offset by a slight 0.7 percent decrease in ADR.

Turning our attention to operating income, in addition to the impact of slightly reduced revenues this quarter, predominantly at our group-oriented properties, a substantial portion of the third-quarter decrease in operating income and all of the year-to-date decrease can be attributed to reduced earnings from our timeshare operations due to increased marketing and selling costs. And approximately $380,000 and $940,000, respectively, of third-quarter and first three quarters start-up and pre-opening costs associated with our Las Vegas and downtown Chicago hotel projects.

And finally, let's turn our attention to the discontinued operations lines of our earnings statement just for a moment. As you see, we reported a loss from operations this quarter from discontinued operations representing various remaining costs associated with the now-sold Baymont division, as well as the results from three of our joint venture Baymonts that were excluded from the transaction and are now operating as Baymont franchisees. Our loss from operations also includes the final five days of operation from our Miramonte result to date -- resort prior to its sale, along with any remaining costs for that property. The net after-tax gain of over 5.6 million dollars on the sale of discontinued operations comes from three sources.

As we previously noted, the Miramonte was sold a week into the third quarter and, as a result of the sale, we reported a pretax gain of approximately $5.9 million, or about $3.6 million after-tax. In addition, during the third quarter, we also sold one of the Baymonts that had previously closed in escrow pending completion of certain legal requirements. And finally, one of the -- of the original four joint venture Baymonts that was excluded from the sale to La Quinta, specifically the relatively new hotel in Ontario, California, was sold during the quarter and our share of the gain on that property is also included in this quarter's reported results. Thus, on a year-to-date basis, our $76.6 million after-tax gain on sale on discontinued operations consists of $73 million reported to-date on the sale of our limited-service lodging division and $3.6 million related to the Miramonte sale.

As we previously noted, this will not be our final gain. At the end of the third quarter, we still had approximately $36 million of the Baymont sales proceeds held in escrow pending completion of additional customary transfer requirements. The assets for these remaining locations were still in our balance sheet and as each location completes the requirements, the funds will be released from escrow and the resulting gain recognized. In fact, early in the fourth quarter, nearly $14 million of these proceeds were released when two more properties cleared the necessary hurdles. Including these two properties, I currently estimate an additional 7.5 to $8 million of after-tax gain will be recognized on the Baymont transaction once all of these matters are resolved. With that, I'll now turn the call over to Steve.

Thanks very much, Doug. I'll start my remarks by commenting on the theatre division. After reporting numerous record quarters and three straight record years, it's disappointing but probably not surprising that we've hit a stretch where Hollywood just hasn't been able to match their prior year results. As we indicated on our last call, we knew that we were going to face very difficult comparisons in those last two weeks in December so, to be honest with you, we were pretty pleased with how the rest of the quarter turned out excluding those two weeks.

And the fact is, as you've heard us say many times over, our results are ultimately going to be driven by the quantity and quality of the movies made available to us. After a record first quarter, the quantity of movies was the same as last year during the second and third quarters, but the quality unfortunately was not. You add in the fact that Christmas fell on a Saturday and you have our current year-to-date results, which are slightly behind last year's record pace. And, to get all the bad news out of the way, our fiscal fourth quarter in this division is as expected, off to a very tough start due to comparisons to last year's exceptional performance of "The Passion of The Christ". To get what turned out to be our third biggest movie of our fiscal year during the late February, early March time period, which is not historically a particularly strong movie-going period, was extraordinary last year. Based on that alone, it's hard for me to envision our fiscal fourth quarter theatre operating results matching last year's results.

Having said that, the outlook begins to look much brighter as we come out of the Easter break. May, in particular, which will include several potential hit movies noted in the press release, also includes the final "Star Wars" installment; of which expectations are very high. And while ultimately the pictures still have to perform, the summer movies look as though they have the potential to exceed last year's record results.

So in the end, we remain very upbeat about our theatre business, because we continue to take a long-term approach, knowing that movies will change from week-to-week and quarter-to-quarter. Bottom line is that we continue to feel very good about our ability to leverage good film product into significant profits for our Company in the months and years ahead.

With that in mind, I'm sure you've noted by now that we've begun to escalate our unit growth plans in this division. We believe that there are selected opportunities to add theatre screens, particularly in developing markets, and we're acting on those opportunities. As the press release noted, our newest location in Saukville just opened, and we expect to break ground on at least two of our recently announced new locations in the very near future. Our previously stated strategy hasn't changed. We will continue to review additional opportunities to develop or to acquire new locations in and around our existing markets and to further strengthen our existing asset base. We'll also consider opportunities to expand outside our existing markets, particularly if we've got the opportunity to manage multiple sites. As always, the actual timing of these plans can and will change as we proceed through the development process.

With that, let's turn our attention to the hotels and resorts division. Although we were disappointed with our overall results this quarter, there are several encouraging trends during what was otherwise a soft winter quarter in the Midwest. As Doug noted, our decreased operating results were primarily related to a soft group market during this quarter, continued challenges in our time-sharing business, and the fact that we continue to absorb the Las Vegas and Chicago start-up losses that Doug highlighted. We benefited this quarter from the continued improvement in individual business travel with our two newest properties, the Hilton-Madison and the Hotel Phillips, experiencing double-digit revenue increases. The unusual thing about this particular quarter was that group business travel was the strength of our second-quarter numbers, and this same segment of our customer base is expected to be the strength of our upcoming fourth-quarter results.

In fact, we're feeling pretty good about the upcoming fourth quarter as our advanced group bookings appear very strong. Frankly, we view our recently-completed third quarter as more of a slight setback that was more regional in nature, and we remain encouraged about the overall trends for this industry. One thing to keep in mind when you look at our results is that when times were tough the last couple of years, we made a very conscious effort to hold our rates while others were discounting heavily. The numbers bear out that this strategy worked, as our RevPAR declines were not as severe as others in the industry. But as the industry recovers, we don't expect our rates to rise as much as those who significantly reduced their pricing at least on a percentage basis.

And this also holds true from a geographic standpoint. We operate in markets that, while impacted by the slowdown in the last few years, were not hit as severely as some other markets that are now showing larger percentage increases in RevPAR.

And although you won't see it directly in our future operated -- future reported segment results because of the classification of the Miramonte as a discontinued operation, our overall year-over-year results will also benefit significantly from the recent sale of that asset. We've previously stated that the Miramonte has struggled during the past couple of years, post 9/11; and it had a particularly difficult year last year while we were under construction on the new spa. And, just for your information in that regard, last year in the fourth quarter we lost $1.5 million. And -- I'm sorry the fourth quarter and the first quarter we lost $1.5 million.

From a growth perspective, work continues on the major projects that we noted in our press release. Recently we broke ground in Las Vegas, and we continue to target a late-May or early-June opening for the Chicago Hotel. We should be announcing the brand that we selected for this property very shortly. We also continue to work on quite a few new projects right now, and hope that several of them will come to fruition in the near future. The vast majority of the projects that we're currently working on involve either management only or management plus some equity investment. As we noted in a separate press release, we're also building our internal development infrastructure in order to pursue additional growth for our hotel and resorts division. I think it's an exciting time in our industry, and we're committed to growing this particular segment of our business as well.

Before I open the call up for questions, let me once again address the issue of the significant amount of cash on our balance sheet. First of all, as Doug noted, up until about two weeks ago, we didn't have most of the cash yet while we were exploring various tax-deferral strategies. Even now some of the cash is still in escrow and a smaller portion is still tied up with intermediaries. But, I'm here to tell you, that we do have a significant portion of the cash now. We've been patient as we let the tax-deferral opportunities resolve themselves and we've been thorough in our review of our potential growth opportunities and other uses of the proceeds. And, based upon the comments we've received from many of you, we appreciate the fact that our investors recognize that our focus remains on producing long-term and sustainable growth and shareholder value for The Marcus Corporation.

In that context, it's frustrating to see the market's reaction to our one quarter results, either up or down. We're in this for the long haul and we manage for the long haul. And from time-to-time, we may well have down quarters, due mainly to the visisitudes of the movie industry and to product flow. We've stated, with respect to the cash on the balance sheet, that we won't let the pressure of a calendar drive us to make a decision in a hasty manner that's not in the best long-term interests of our shareholders. And we continue to appreciate your support of management to that end. Having said that, let me assure you that management and the Board have been actively discussing each of the alternatives available to us and we anticipate continued discussions on these matters in the near future. We will continue to keep you informed as we navigate our way through these very important decisions. With that, at this time Doug and I'd be happy to entertain any questions that you may have.

[Operator Instructions]. David Cumberland, Robert Baird.

In your Theatres Business, how have your costs compared to plan as you have become more active on new construction and also the Project 2010 renovations?

I'm not sure that I understand. Are you talking -- are you asking how the costs of the development and the costs of renovations are concerned with respect to plan?

Yes.

Those I believe are coming in very much on plan. We're not seeing, yet, any surprises in that respect.

Great. And then, Steve, perhaps if you could update us on -- in-- also in the theatres business, any trends related to the move toward digital cinema and the financing related to that?

Well, I just spent most of last week at ShoWest, which is the major trade Show for producers of movies and exhibitors; and that was a topic of -- a big topic of conversation. From where it stands right now, there's pretty good agreement on the technical standards across the industry, and the issue now remains to develop -- the development of a solid business plan. It -- it appears that the studios are in accord that since they are the ones that will save the large amount of money as a result of the adoption of digital cinema, that they will be financing the rollout of it. But the question is, you know, how long their financing will continue in place; whether, in fact, they will be covering all of the costs of this conversion and ongoing operation of digital.

This is a world that we -- that nobody has a good handle on what -- what it will cost to operate it. We know what it costs to operate a -- a conventional booth today, conventional projection equipment; but nobody has much of an idea what it's going to cost to operate the digital type of equipment. And what the ongoing costs let's say, of -- of, you know, software maintenance and hardware maintenance, and so forth. And those matters still need to be worked out.

Steve, do you have any prediction on the possible timing of the rollout of digital equipment?

I really don't. I -- my belief is that there will be a -- some kind of rollout beginning probably in the next 12 to 18 months. I don't know how large it will be. Very hard to tell, and it will take a long time because you're talking about converting 36,000 screens across the country. And in order for it to really be optimized for the film companies, they really need to get all the screens because, otherwise, they'll still be producing conventional film.

Also in theatres, interested in whether you're seeing competitors adding any screenings or theatres in markets that Marcus has the leading position in?

We -- our -- we are seeing some of that. We -- we're seeing a project in Columbus, Ohio, that is going in -- we believe is very close to one of our theatres and, of course, we'll -- as we always have in the past, we'll have to duke it out with them. But-- so we're seeing some of that. I don't think that it's particularly -- that there's any more than there always has been in the past. We -- we're keeping our markets very well fortified. Mainly, you know, Milwaukee and Madison and Green Bay and markets-- markets like that where -- where we're very strong and we're continuing to make sure we serve our customers by -- by having an adequate number of screens so that we're showing all the product that's available.

And then finally for Doug. Doug, you mentioned that a part of CapEx for Q3 was related to carryover renovation in the LSL business. How much of that might be left going forward?

No, to clarify, David, I was talking about first -- I was talking about year-to-date. That money was pretty much all spent in the first quarter. So there was really no LSL capital money in the third quarter. I was -- I was reconciling the year-to-date $36 million number.

[Operator Instructions]. Herb Buchbinder, Wachovia Securities.

I've got a couple of questions on Chicago. Can you tell me if-- if once this property opens it'll be put up for sale or if you plan to operate this for the long-term? Two, if you do operate it, what kind of losses will this have in the initial months versus the start-up losses? And three, have you started to take some bookings on this property yet?

Well, first question, will it be put up for sale? We've said all along that -- that-- that it was -- that in the long-term it was possible that our model could be such that we -- that we may be willing to -- to -- have a partner in that deal. When we first got involved in that deal we indicated that. We also recognized, given the nature of this project, that we needed to do it ourselves initially. So I wouldn't rule out the possibility, but we have no discussions in that regard going on right now. But, certainly, we've always indicated that any of our owned assets were -- that-- that that, you know, could -- could be a possibility. That property is certainly -- would be subject to that. Again, nothing specific at this time though.

We are very excited about the property, Herb, and think that -- and, again, we can't talk about the brand yet, but I suspect that I will be able to announce that shortly. We're looking forward to it. We think it's going to do well. It's pretty difficult to -- right now to say, coming out of the gate, we're going to be opening at the right time. So we think in that opening end of May-June. So that-- I think has the potential to minimize what is historically a -- you know in this industry a -- a ramp-up period that can take -- in bigger properties can take a couple of years. We certainly expect to come out gate this summer doing pretty well, because it was summer in Chicago, and -- but, you know, certainly in the industry, Herb, it's not unusual to have some.

We will have some-- some pre-opening expenses kind of at its peak in this fourth quarter. So we'll have some additional pre-opening expenses in this-- this coming fourth quarter for that project, as we really gear up to get that thing open; and we start hiring staff and things like -- now we have a general manager, and I don't know much beyond that, but we'll be hiring staff pretty shortly. So it'll be more in the fourth quarter than it will be in the first quarter.

So as far as booking anything, you wouldn't see anything until the next quarter at the earliest.

We haven't announced brand yet either. As so once we-- once we get that announced and we become part of a system, there'll be a lot more with that.

We'll start seeing it late in the fourth quarter.

The other thing is, can you refresh my memory on the timing of the expected gain from Vegas? What quarter that's most likely to hit?

That is -- as of my latest understanding, that will be most likely to hit, I think, in the fourth quarter of next year, give or take. I mean it -- I mean I could be off a quarter. It could lead into the first quarter of fiscal '07. It depends on -- on the final opening days. And then you have to go through the closing of all the various contracts. So it may not settle itself out until the first quarter of 2007. At the earliest it would be the fourth quarter of fiscal 2006.

Are all the available -- is all the available space there booked, sold already or is there still units to be sold?

I believe there is a handful to be sold yet.

I'm not even sure if it's double-digits.

Yes --

It might be single digits, 10, 12, something like that a couple that have to be sold.

Is that disappointing or is that what you-- where you thought it would be at this point?

As a matter of fact, what happened was, there was a delay in getting some of our permitting done, and so the construction start was delayed. And as a result, we went back to all the people we had contracts with, because the way the law works out there, if you're more than a certain number of months in that contract, before the unit is going to close, you -- you -- the -- the buyers of the units have an option to -- get their money refunded, and so we went back and had them all write new contracts with us, and virtually all of them did. Those that didn't, the units are being resold and they're being resold at higher numbers than what they originally were sold for.

Okay. So this project is on schedule as far as you're concerned and doing-- doing what you thought it would be doing, at least as well as you thought you'd be doing.

Yes.

Okay.

Yes, we're finally under construction now. It was -- it was a long haul in dealing with construction costs and getting that -- getting the contracts and getting it to where we wanted it to be, but we are now full speed ahead.

You do have more competition with this type of development going forward. There are a number of units that have been announced like this.

Yes.

[Operator Instructions]. Robert Pratner, Ryder. (ph)

Yes, I've got a couple of questions. The first being, have you all looked at rolling out IMAX screens at any of your theatres? And the second, if you could just kind of walk us through your thought process with the different alternatives you have of spending the cash.

Well, why don't I handle the -- the IMAX question first. We previously had two IMAX theatres, and I guess best way to put it is that a couple of years ago we decommissioned them both because they were not profitable for us. The model just wasn't working. And I suppose the implication is -- well, I mean-- the question for us as we look at it is, would we consider going back into it; and I guess it would depend on if the model were to change. But the way -- the way it was established initially, it didn't allow for -- you added the cost of the IMAX, and its various servicing agreements, it didn't -- and then add to that conventional film costs. In other words, the costs for conventional movies as opposed to the kinds of films that IMAX previously was playing, those costs made it an unsustainable model.

Now with respect to the possible application of the funds from the sale of our limited-service division, the options are stock buybacks, special dividends, increased dividends, acquisition programs; that type of thing.

We -- we've previously stated, Robert, that certainly we feel very good about our two existing businesses. We want to grow both those businesses. And so we -- you know we've -- been going through our strategic planning process. We've been evaluating our -- our-- you know, basically our three-to-five-year plan for both of those divisions, understanding -- trying to get an understanding of the marketplace. While at the same time also then looking at the other capital structure-type alternatives as well and trying to understand that. And we'll continue do do that and continue to have discussions with the Board about those options and, again, you should -- you know, you'll hear more from us on this in future.

All right. And I guess -- I know you all said that you're feeling no pressure to make a decision, and I think that's the right one. But are we talking, like, three months? Are we talking 18 months? Or -- is there any direction you can give us in that -- in the timing of it?

I think it's a little difficult. It's almost one of those "we'll know it when we'll see it" kind of things, because we're sort of working through a process with our Board right now; and trying to get a sense of where -- frankly, where our shareholders are even at because, after all, it's their money.

Certainly I would -- I would add to that by saying that given the parameters you gave as the example, you'll hear more from us on this topic, you know, closer to the sooner than the latter. It's not going to be -- 18 months from now aren't going to pass and you're not going -- and most likely with us not saying more about where we think we're headed and where we think we're going to go. But, again, we just won't let -- we won't put a date on it and say that by this date specifically all decisions will be made.

At this time, it appears we have no further questions. I would like to turn the conference back over to the speakers for any additional or closing remarks.

Well, we certainly want to thank you once again for joining us today. We look forward to talking to you once again in July, if not before, when we release our fourth-quarter and year-end results. Thank you very much for joining us.

And that does conclude today's presentation. We thank you for your participation. And you may disconnect at this time.