Marcus Corp (MCS) 2005 Q4 法說會逐字稿

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

Thank you very much and welcome, everybody to our fiscal 2005 fourth-quarter and year-end conference call. As usual, I need to begin by stating that we plan on making a number of 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 the sale of the Limited Service Lodging division, our future revenues and earnings expectations, our future RevPAR, occupancy rates and room rate expectations for our Hotels and Resorts division, our expectations about the quality, quantity and the 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 and 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 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 will 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 fourth-quarter and year-end results. Before I give you our results from each division, let me briefly comment again on the various below-the-line, below operating income type items, and their variations versus last year. First item of note is the gain on disposition of property and equipment for continuing operations. As noted in the press release, our fourth quarter is one of those quarters where we have a significant difference between the gain reported this year versus the prior year. As you've heard me say many times before, with a large amount of real estate in this Company, it's not unusual for us to sell assets, most often, at 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 in our earning statement.

This particular quarter the swing was $0.03 per share; so it was noticeable, particularly when our earnings from continuing operations were down $0.04 in total. Now for the entire fiscal 2005, our reported gains from sales of assets for continuing operations was down approximately $600,000 or about $0.01 per share compared to fiscal 2004. We're actively attempting to sell additional noncore property and equipment and we do believe that additional gains will be likely to be recognized during the coming fiscal year.

Now going the other way, investment income continues to be as expected, up over the prior year as a result of the sales proceeds from the Baymont and Miramonte sales. You'll see two large cash balances on our balance sheet. The cash balance of approximately 259 million is currently invested in short-term, tax-free instruments, which accounts for our lower than usual effective income tax rate for the quarter and the year. In addition, approximately $28 million of cash was being held at quarter end by intermediaries to facilitate potential tax deferral opportunities we were seeking from the sale of our Miramonte Resort. Now we were earning taxable interest on those funds.

Early in the first quarter of fiscal 2006, we were able to achieve those tax deferrals that we were seeking by utilizing a portion of these funds for the purchase of the Wyndham Milwaukee Center hotel right here in Milwaukee, downtown Milwaukee. Now the remaining unused funds were returned to us and we no longer have any substantial funds held by intermediaries.

On investment income, though, it will continue to exceed prior year amounts in future periods and our effective income tax rate will likely remain below our historical 39% to 40% range until a further determination of the potential uses of the Limited Service Lodging division sales proceeds are made.

Moving onto the next line, interest expense continued to track down during the quarter and ended up down 1.7 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 year was just over 28%, down from 38% at the end of May last year. Once again, pending a final determination of the use of the sales proceeds. We would expect our interest expense to continue to decrease during fiscal 2006 as a result of the additional payment of scheduled current maturities of our long-term debt.

Our total capital expenditures during fiscal 2005 totaled approximately 63 million compared to 51 million last year. Approximately 36 million of this total came from our Theater division to fund one new theater, that was in Saukville, Wisconsin; eight street editions, four land parcels for future theater development as well as the project 2010 renovation work that we've discussed previously. Another $21.5 million of this total 63 million 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 & Spa.

The Limited Service Lodging division accounts for about 4 million of that remaining $5.5 million representing carryover renovation projects that we had previously committed to. Not included in my $63 million capital expansion total for fiscal 2005, our additional investments and joint ventures during the year totaling just over $4 million. As noted in our previous discussions and disclosures, the majority of this amount relates to our investment in the Las Vegas Platinum, the condo hotel project.

As we look toward capital expenditures for fiscal 2006 and pending the decision regarding the use of the sales proceeds, we're currently estimating that our fiscal 2006 capital expenditures may increase to the 80 to $100 million range. Now, excluding the purchase and renovation of the Wyndham Hotel and payment of the final cost of the downtown Chicago Four Points by Sheraton, so those costs are included in that 80 to $100 million number, we currently expect the remaining capital to be divided approximately equally across our Theater and Hotels and Resorts division and will likely include selective theater screen additions and potential new locations, potential strategic equity investments and hotel projects and maintenance and project capital, including several significant potential projects at our Pfister Hotel and Grand Geneva Resort & Spa. We will of course monitor those closely as we have in the past and will adjust our plans as we feel necessary in response to current conditions.

The actual timing on many of these investment has yet to be finalized, which could alter the final report and capital expenditures for fiscal 2006 one way or the other.

Before I turn the call over to Steve, let me provide a few additional financial comments on each division, including our discontinued operations. Starting with Theaters and what shouldn't have been a surprise to anyone, our box office concession revenues were both down double digits for the fourth quarter. We knew there was no comparable picture this year to last year's phenomenal The Passion of the Christ. But as was well documented by the press, the box office decline has extended beyond that. For example, we were particularly disappointed by the performance of the two films that kicked off the summer season in May, which is the traditional start of the summer season these days. Kingdom of Heaven and Monster-in-Law were those two pictures, the first two weeks in May, and they significantly underperformed last year's comparable films of the same weeks, Van Helsing and Troy.

So again, those are just examples, but it shows that it does go beyond The Passion. Having said that, as we did indicate in the press release, The Passion was a significant film and we'll go over that a little bit more in a little while. As a result, overall, our total attendance decreased 19.6% for the fourth quarter. Our average admission price was up 3.9% for the quarter, only partially offsetting that decrease.

On the positive side, our average concession revenues per person were up 11.3% compared to last year during the same quarter due primarily to the fact that The Passion is not exactly a concession-friendly picture. Now on a year-to-date basis, our attendance ended up down 7.5% compared to last year with our average admission price up 2.7% and our average concession revenues per person up 5.9%. As would be expected given the reduced tens (ph) 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 was 23.3% compared to 25% last year. With the impact of our fixed expenses on our decreased revenues really accounting for that entire change.

Moving over to Hotels and Resorts, on that division, our overall hotel revenues from continuing operations were up 8.6% during the quarter and ended up 3.6% up 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 our total RevPAR increased an outstanding 14.2% for the quarter and year-to-date, again excluding the Miramonte, total RevPAR ended up 4.2% ahead of last year.

During our fourth quarter, our RevPAR increase was primarily the result of 4.3 percentage point increase in our occupancy percentage and a 6.9% increase in our average daily rate, or ADR. Our RevPAR increased for the full fiscal year has been the result of an overall occupancy increase of two percentage points and a 1% increase in ADR.

Turning our attention to operating income. I would just direct your attention to our press release where we quantify the impact of the decline in our timeshare results and the substantial startup in preopening costs associated with our Las Vegas and downtown Chicago hotel projects. Make no mistake about it, these costs were real during fiscal 2005 and I don't mean to minimize them by any extent. But given our relatively small size, it certainly is a fact that costs such as these will have a noticeable impact on our overall results and can mask what is actually going on in our ongoing operations. We thought it was import to note that the significantly improved results of our five owned hotels during the quarter and during the year. We noted that in the press release. I think when you strip those costs off, we were up about 12%.

As we look ahead to fiscal 2006, while we expect to incur additional preopening expenses and other startup losses from the Las Vegas and Chicago projects, we currently expect that those amounts will be less than those incurred during fiscal 2005. So that should be a favorable comparison.

Moving on just briefly to discontinued operations. Let me just talk about a couple of those lines for a moment. As you'll see, we reported a loss from operations this quarter from discontinued operations representing various remaining costs associated with the now sold division as well as results from three of our joint venture Baymonts that were excluded from the transaction and are now operating as Baymont franchises.

The net after-tax gain of over 1.7 million on the sale of discontinued operations during the fourth quarter comes from the sale of two of the Baymonts that had previously closed in escrow pending completion of certain legal requirements. Thus, on a year-to-date basis, our $78.3 million after-tax gain on sales of discontinued operations is broken down this way. It consists of a $74.7 million reported to date gain on the sale of our Limited Service Logic division and $3.6 million related to the Miramonte sale.

As we previously noted, this will not be our final gain, however. At the end of the fourth quarter, we still had approximately $22 million of the Baymont sales proceeds held in escrow pending completion of additional customary transfer requirements for six locations. The assets for this remaining locations were still on our balance sheet and as each location completes the requirements, the funds will be released from escrow and the resulting gains recognized. In fact, early in the first quarter fiscal 2006, one more of these properties cleared those necessary hurdles. I currently estimate that an additional $6 million of after-tax gains will be recognized on the Baymont transaction once these last matters are resolved, meaning that our final gain for that transaction will likely be over $80 million after taxes. With that, I'll now turn the call over to Steve.

Thanks very much, Doug. I will begin my remarks by commenting on the Theater division. After reporting numerous record quarters in three straight record years, it certainly is not a secret that this has been a difficult year for Hollywood in general and Marcus Theatres in particular. With this summer getting off to a very slow start, albeit against record June and July results last year, there has been much speculation in the media and around the water cooler about what is wrong with the movie business. So I would like to spend a couple of minutes giving you our perspective on that.

First of all, I think it's important to recognize that we operate in a cyclical business that has had its various ups and downs over our nearly 70 years in this business. Just as it would be dangerous to draw sweeping conclusions that everything is back to normal because we have experienced box office increases of roughly 20% in each of the last two weeks compared to the prior year, it would be equally dangerous to immediately conclude that something has fundamentally changed in the movie business because of the well-documented consecutive decline in weekend box office streak that was being reported every Monday morning until recently.

So let's talk about what we do know. Certainly you have heard us say many times before that our results are ultimately going to be driven by a quantity and quality of the movies made available to us. There probably wouldn't be very much debate about the fact that the quality of movies in recent months, with a few notable exceptions such as the final Star Wars episode, has been lacking. The quality just wasn't there. In the second half of our fiscal year in particular we didn't have a picture that would come close to performing at the level of the last Lord of the Rings movie or The Passion of the Christ. By no means do I need to blame the entire box office decrease on the comparison to The Passion but the fact that an independently distributed movie in late February in March would end up doing more business than any single picture did for us during all of fiscal 2005 is really extraordinary.

When you couple this fact with a series of very ordinary remakes, sequels and generally uninspiring films, it is clear that a significant component, if not the significant component, of the box office declines can be attributed to the quality of the film product. Within the question is the problem just the movies or is it more than that? When it comes to that question everybody has an opinion and we read many of those opinions in recent months. Some believe that movie piracy is a bigger problem than previously reported and that it is impacting the box office. Certainly piracy is a significant concern for the industry. Having seen what has happened to the music industry, it is important that the motion picture industry continues to take steps to combat this currently unquantifiable problem. While there is much work to be done and digital cinema will add yet another complexity to the issue. We are encouraged by the recent crackdown on illegal Internet piracy by federal authorities.

The other most common theory is that the rapid rise in the popularity of DVDs, large screen TVs and other home entertainment options is keeping people from going to the movie theaters. Once again, any potential impact of these factors is very difficult to quantify. Could someone's new 50 inch flatscreen TV change their moviegoing habits? Might the fact that the window between the release of a movie in a theater and a movie on DVD has been shrinking each year cause some people on the margins to choose to wait for a movie rather than go to the theater? The answer certainly could be maybe to both questions but then how do you explain the 20% increase in box office in the last couple of weeks? Did people suddenly not care about their TV and the shrinking window? The answer is that no one really knows for sure because those kinds of judgments can only be made over a longer time horizon and it would be a mistake to jump to any conclusions.

Many of you have heard me say before that people predicted the death of movie theaters when television was first introduced. When VCRs first started appearing in every home, it was suggested that the business was doomed once again. The reality is that, while those events certainly did cause some change in consumer habits, the movie business adapted and in fact, went on to record years. One of the reasons for that was that Hollywood was incented to increase production because of the opportunities to make more money in the so-called aftermarkets, even as DVD profits now match or exceed the profits movie studios achieve through theatrical distribution, that same incentive remains in place today. We continue to believe that there is a very strong benefit to the studios in maintaining a proper window between distribution points in order to maximize their investment.

We will continue to work with our National Theater Owners Association and our studio partners on these very important issues and I'm confident that the industry will once again adapt to the changing times. In all cases, it will be extremely important for companies in the in the industry to maintain very strong balance sheets.

Having said all of this, the outlook for film product appears to look brighter this fall and upcoming holiday season and our press release notes several of the movies that the industry has high hopes for. In the end, we continue to take a long-term approach knowing that movies will change from week-to-week and quarter-to- quarter and the business itself has and will change over the years as well. The bottom line is that we 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. With that in mind, you've already heard about several steps, including the acquisition of four parcels of land during this past year, that we have taken to prepare this division for future growth. We believe that there are selected opportunities to add theater screens, particularly in developing markets and we will act on those opportunities as it is appropriate.

Recognizing that we are currently in a volatile time in our industry, we will continue to carefully review additional opportunities to develop or acquire new locations in and around our existing markets and to further strengthen our existing asset base if and when appropriate. We will also consider opportunities to expand outside of our existing markets, particularly if we have 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. We also continue to take steps to differentiate the Marcus theater experience from those of our competitors and for that matter, from the home entertainment experience. We believe that our project 2010 and our increased number of UltraScreens continue to separate us as we strive to achieve our vision of creating magical movie memories for our guests.

With that, let's turn our attention to the Hotels and Resorts division. Both Doug and the press release pointed out that there was in fact much to be incurred by our fourth-quarter and fiscal year results. I won't repeat all the facts but suffice it to say that given the group business -- that group business remained somewhat sporadic during the year, we're pleased with the improvement that occurred during the year. When we add to that the fact that group business is much stronger during the fourth quarter and in the beginning of fiscal 2006 first quarter, you can understand why we, like others in our industry, are pretty enthusiastic about the prospects for the coming year. Advanced bookings are solid so we currently have no reason to expect anything other than continued improvement out of our existing hotels.

With that in mind, we continue to make investments in this division both to preserve and enhance the value of our existing assets as well as to facilitate future growth through increased rooms under management. During fiscal 2005, we made several improvements to the Grand Geneva, including remodeling the lobby and renovating and expanding two of our restaurants and lounge as well as giving the restaurant a brand-new front entrance that is drawing rave reviews. During fiscal 2006, we are attempting -- we are contemplating several additional projects at the Resort as well as several important projects at our landmark Pfister Hotel, all of which enhance the value of these important assets of ours.

Our Hotels and Resorts division had a very busy late May and early June as we added two new hotels to our portfolio. Shortly after year-end, we purchased the 220-room Wyndham Milwaukee City Center in the heart of Milwaukee's theater and financial district. The property will need a major renovation in order to position the hotel at the level at where we want it to be but we have a lot to work with and the location is outstanding. With two other hotels in downtown Milwaukee, this was a strategic acquisition for us and we believe that this will prove to be an excellent investment for us in the years to come.

Just a few short days after acquiring the Wyndham, we opened our new downtown Chicago hotel, the Four Points by Sheraton Chicago downtown magnificent mile. This hotel features 226 units, including 130 suites and an indoor swimming pool and fitness center, high-tech meeting rooms and on-site parking facility that will open later in fiscal 2006. We will also lease space to several area restaurants. As we noted in the release, the hotel has opened very strong thanks to a very good summer so far in Chicago. Like most new hotels, we expect that this property will incur some additional startup operating losses during fiscal 2006 prior to stabilizing. Given that the hotel incurred significant preopening expenses during fiscal 2005, we don't expect a significant negative impact on year-over-year comparisons. The property has already met its budget for June so it is off to a good start.

You have heard a lot about our Las Vegas project in the past year and I'm happy to tell you that construction is progressing nicely on this condo hotel. The project, which once again is sold out, is scheduled to open in late spring or early summer next year. Upon completion of the construction and the closing of the condominium, unit sales will share in any development profit on the project. This could occur late in fiscal 2006 but more likely in early fiscal 2007. We will of course then manage the hotel for a fee and share in any joint venture earnings on the common areas such as the restaurants, spa and the bars.

As you know, we have also previously announced our participation in a joint venture to restore and then manage the Skirvin hotel in Oklahoma City. It's the oldest existing hotel in Oklahoma. After several delays in this project, which is a public private project, we now expect renovation of this historic hotel to begin later in 2006 with a fiscal 2007 completion date. When completed, this hotel is expected to have 225 rooms and 25,000 square feet of meeting space. Under the currently proposed structure for this project, we will be the principal equity partner in this venture and as a result, we anticipate including the results from this operation and our consolidated operating results. The project includes various tax credits and we currently expect the benefit from federal historic tax credits associated with the renovation during fiscal 2007. We don't expect this project to have any significant impact on the fiscal 2006 operating results.

We also continue to work on quite a few new projects right now and we hope that several of them will come to fruition in the near future. The vast majority of the projects that we are currently working on involve either management only or management plus some equity investment.

Now, before I open up the call for questions, let me once again address the issue of the significant amount of cash on our balance sheet. As we stated in the past, we continue to carefully consider our options with respect to that cash. As we noted earlier, we utilized our Miramonte proceeds to make a strategic acquisition of a downtown Milwaukee hotel. Including the cash still held in escrow and this not included on our balance sheet, we still have nearly $290 million of cash available to us at the moment. Our options remain the same, make additional investments in our existing businesses, consider other investments that would strategic fit our Company, consider various forms of capital and returns to our shareholders or some combination of the above. Management and the Board is making good progress on our evaluation of our options and while we continue to abstain from setting arbitrary deadlines, we certainly hope that we'll be in a position to shed further light on our thinking in the coming months.

We appreciate our shareholders continued support of management in that respect. With that, at this time, Doug and I would be happy to entertain any questions that you may have. +++ q-and-a.

(OPERATOR INSTRUCTIONS). David Cumberland, Robert W. Baird.

In Hotels and Resorts, Doug, can you quantify the preopening cost impact to the fourth quarter?

There is really two different numbers. There is actually a line item on the face of the P&L called preopening expenses, which you will see was a solid $400,000 in the quarter alone. There are additional losses, if you will, and costs that don't get categorized and for example in the case of Las Vegas, Las Vegas is a joint venture and so it doesn't show up on that line item. So you would have to then dig into it further into the financial statement to understand if there are some additional costs. That additional swing -- just looking it up real briefly here, was not significant during the fourth quarter. To be honest with you, that 400 for the fourth quarter is probably a pretty good number.

Also in Hotels and Resorts, the time-share operations have been called out here and in recent quarters as a bit of a drag. What is the outlook for fiscal '06 in that or do you expect that to be -- to continue to be a drag this year?

It's a tough business. We've talked about some of the challenges in that business, particularly as being a club of one here in the Midwest. We certainly, as I think you know, have access to a large network and that helps in the selling process. When they instituted the "no call rule" that is the main thing that has impacted the majority of the folks in this industry and certainly it has taken some time to change our marketing and to adapt to getting the tour flow that is really necessary to get the sales needed in this business. The summer has started off all right. It's not -- it's not doing gangbusters business. It's not, I wouldn't say that it is -- it's probably not -- I think we're looking at fiscal 2006 as certainly not being a drag compared to the prior year. In fact, we're hoping, expecting that it is going to do better than this past year. But it is a business that you can't really look ahead and say and predict where it is going to end up. It is a tour flow and sales conversion business and we have got some good people down there and we brought in a new guy in charge recently who's working very hard on it but it has been a challenge.

Turning to Theaters, in the past, Marcus has talked about a target of 600 screens by the end of 2007. Does that remain your target?

That 600 or so remains our target. I think that we are going to -- in the MDNA that's going to be coming forth in or 10-K, we still talk about that number. We still talk about -- we indicate two to three years. So it could be that it could expand a little bit beyond the 2007 date. Just from a timing perspective, we have purchased four pieces of property. We're adding screens. We've at identified additional screens to be added but it takes some time and the wildcard in all of this is going to be whether there is any opportunity to acquire theaters as we've talked about in the past and that is really unknown. We think we can get to the 600 number without any acquisitions. Again, it is -- timing-wise it could extend beyond 2007. It could add an extra year to the process but we're still targeting that number.

Were the properties that have been announced already in theaters, would you expect each of those to open at some point in fiscal '06, by the end of fiscal '06?

To open?

Yes.

No, we don't. We are working on the timing of those projects right now. We are actually working on kind of the queue in terms of the order. We think we are pretty -- we're not going to formally indicate at this time in this call what the order is going to be yet. Although, again, we are trying to finalize that as we speak. But no, with Midwest Properties, the likelihood that all these things would be open at the end of the fiscal year is not good. So could we possibly be under construction under most of them or could be far along? I guess stay tuned. We'll give you the timing on that. We are developing that right now. I would not expect on any of those projects to have a significant 2006 impact. Even if they got -- if they got open now, it would be April, May anyway, so --.

And then one other question. Do you plan to expense stock options in fiscal '06 and if so, what would be the impact or would the impact be consistent with your footnotes and past filings.

The date was changed on that. Originally, fiscal '06 was our year of adoption but they recently changed the date and we have got this unusual May year-end. So it, in fact, pushed us into a fiscal 2007 adoption. Having said that, you can go to our footnotes and we -- the number will be the pro forma number that you have been seeing in the footnote and we will have that new number worked up in the next -- we'll be filing our K on August 9th. So that new number will be worked up at that point in time.

(OPERATOR INSTRUCTIONS). Rob Damrom, 21st Century Research.

I wanted to ask you a question about one of your higher margin revenues on your balance sheet being preshow advertising. Can you tell us a little bit about what your plans are there? Have you pretty much maxed out the opportunity or is there still upside from that revenue line?

I think it's clear that we have not yet maxed out that opportunity. I think that will continue to grow, especially as we become more digitized in that part of the business. The opportunities then will, I think, will grow exponentially because I believe there will be opportunities to match advertising directly to pictures much better than it is today which will open it up to far more advertisers. And having said that, however, it all relates to how good movie attendance is because people are paying for eyeballs there.

Second thing that I would add to it, Rob, is that one element that is going to be incrementally improved this coming year as we continue our project 2010 remodeling is that we are expanding on some in-lobby advertising as well. We're putting in some large flatscreen, (indiscernible) screens and showing trailers, showing movie trailers and interspersing some advertising as well. So that is a new revenue source. It's not in an initial year, it's not going to be huge dollars but it certainly going to be dollars that will be incremental and we see that as an expansion opportunity as well.

One other question. In the press release you mentioned that you're implementing a process for evaluating other investments. Could you describe that process for us?

Other investments in use of the proceeds I think is what it said. That is really -- that's just the discipline that we're currently going through is evaluating really the three options that Steve referenced in his prepared remarks. As it relates to other investments, we have a function that is in place, that is constantly evaluating other opportunities, real estate and other related type matters that could potentially be available to us. So we have just expanded on that existing function a little bit this past year. As it relates to recurrence of capital, that is a new area for us. Obviously, we've had our regular dividend but obviously our options have been expanded. So we have certainly put effort into understanding those options as well and so it really just is the discipline itself that we have instituted among management and ultimately, we are reporting to the Board on each of those three options.

Gentlemen, there are no further questions at this time. I'd like to turn things back over to you for any additional closing comments.

Thank you very much. We certainly appreciate all of you joining us here today for our year-end call. We look forward to talking to you again, once again, only in about two months now in September as we release our first-quarter fiscal 2006 results. Again, thank you for joining us and we'll talk to you soon.

Thank you once again, everyone. That does conclude today's teleconference. We do appreciate your participation and you may disconnect at this time.