Marcus Corp (MCS) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to The Marcus Corporation first-quarter fiscal-year 2006 earnings conference call. Today's call is being recorded.

With us today we have the Chairman and Chief Executive Officer, Mr. Stephen Marcus, and the Chief Financial Officer, Mr. Douglas Neis.

At this time, I would like to turn the call over to Mr. Neis for opening remarks. Please go ahead, sir.

Thank you very much and welcome, everybody, to our fiscal 2006 first-quarter conference call.

As usual, I need to begin by stating that we plan on making a number of forward-looking statements on our call today. Our forward-looking statements could conclude but not be limited to statements about our use of the proceeds from our sale of the Limited-Service Lodging Division, our future revenue and earning expectations, our future RevPAR, occupancy rates and room rate expectations for our Hotels and Resorts divisions; our expectations about the qualities, 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 those projected or suggested by our forward-looking statements. Factors, risks, or 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 our 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 Web site at www.marcuscorp.com.

So, with that behind us, let's talk of little bit about our fiscal 2006 first-quarter results. We're certainly pleased to be reporting increased earnings from continuing operations this quarter and we have several (indiscernible) items to thank for that. So let me briefly comment on these favorable variations versus last year before I get into some of our results for each division.

The first item of note is the fact that investment income continues to be, as expected, up over the prior year as a result of the significant cash balance on our balance sheet. The majority of the cash balance of approximately $284 million is currently invested in short-term tax-free instruments, which also accounts for our lower-than-usual effective income tax rate for the quarter. Our investment income 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 for the potential uses of the Limited-Service Lodging Division's sales proceeds is made.

The next item to focus on is the gain on disposition of property, equipment, investments and joint ventures for continuing operations. As we have said many times before, one of the strengths of this Company is the significant value in our real estate. Some of that value is unlocked during this strong real estate market by several sales this particular quarter. Specifically, we sold a theater out-lot and the University of Phoenix project that we had developed on another theater out-lot this quarter. We also sold a strip shopping center that we had developed with a partner on yet another piece of land that has been acquired and was adjacent to one of our theaters.

While clearly not our primary business, our ability to maximize the value of land purchase for our operating division continues to be a hallmark for this company. You have certainly heard me say many times before the timing of these sales can certainly vary from quarter to quarter, so we won't report gains like this every quarter but we have had annual gains on disposition of property and equipment of 2 to $3 million in each of the past three years. We are actively attempting to sell additional noncore property and equipment and we believe that additional gains could -- may be recognized during the coming fiscal year.

Moving on, interest expense continued to track down slightly during the quarter as we continue to pay our current maturities. Our overall debt capitalization ratio at the end of the quarter remained at about 28%. 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 payments of scheduled current maturities of our long-term debt.

Shifting gear, our total capital expenditures during the first quarter of fiscal 2006 totaled approximately $31 million compared to 9 million last year. Now, approximately 28 million of this total occurred in our Hotel division and included the purchase of the Wyndham Milwaukee Center hotel as well as additional funding for our new Chicago hotel and several projects at the Grand Geneva Resort. Miscellaneous Theatre division projects made up the bulk of the remaining capital expenditures during the quarter.

At this early Stage of our fiscal year, I have no reason to adjust our previous estimate for capital expenditures for fiscal 2006 of an amount in the 80 million to $100 million range. Projects currently in development that are expected to add to our expenditure total this year include the Ultra Cinema plan for Brookville, Wisconsin as a replacement for two smaller theaters, the Oklahoma City Skirvin Hotel redevelopment project, a planned renovation of the Wyndham hotel, and several significant projects at our Pfister Hotel and Grand Geneva Resort. The actual timing of these known projects will certainly impact our final capital expenditure number as will any currently unidentified projects that we have allowed for in that higher end of that annual estimate I gave you. 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.

Before I turn the call over to Steve, let me provide a few additional financial comments on each division, including discontinued operations. In what was well-documented this past summer by the press, our box-office revenues in our Theatre division were down 10.5% during the first quarter with concession revenues down nearly as much. As we discussed with you in late July during our year-end conference call, this year's Theatre (ph) picture clearly was no match for the record performance we experienced during June and July last year. Our box office was down 11 of the 13 weeks during the quarter with the two exceptions being the last two weeks in July when Charlie & The Chocolate Factory and the Wedding Crashers came out. As a result, total attendance decreased 13.7% for the first quarter. Our average admission price was up 3.7% for the quarter, only partially offsetting the decrease.

Now, on the positive side, our average concession revenues per person were up 5.7% compared to last year during the quarter. Pricing and movie mix are the two primary factors that impact our concessions per capita numbers.

As would be expected, given the reduced attendance this quarter, our operating margins were down during the quarter. Our overall operating margin for this division was still a very healthy 26.4% but that compares to 28.7% last year during the first quarter with the impact of our fixed expenses on our decrease revenue accounting for the entire change. Film costs, as might be expected during a period of underperforming movies, were actually down as a percentage of box office.

In our Hotels and Resorts division, our overall hotel revenues from continuing operations were up 14.8% during the quarter compared to the same period last year. Now, this increase of course includes our two newest hotels, the Wyndham and the Four Points Chicago, and excludes the now sold Miramonte Resort.

Our press release noted that total RevPAR for comparable properties increased 4.8% for the quarter. During our first quarter, our RevPAR increase was the result primarily of a 1.8 percentage point increase in occupancy percentage and the 2.5 increase in our average daily rate, or ADR. During this particular quarter, our Milwaukee and Madison hotels posted the strongest year-over-year results, thanks at least partially to solid convention and group business during the summer.

The increased overall revenues during the quarter did not translate into increased operating income for a couple of reasons. One significant reason can be seen right on the face of our income statement, where you will note that we incurred over $300,000 in preopening expenses this quarter primarily related to the Chicago hotel opening. Other contributing factors included a continued slight decline in our timeshare results, as well as slightly reduced results from our non-Milwaukee and Madison properties.

Our Las Vegas project did not have a significant impact on our results this quarter and that will likely remain that way until later in the fiscal year when we begin to incur preopening expenses as we prepare for a late spring or early summer opening at that property.

Finally, let's turn our attention to the discontinued operations line of our earnings statement for a moment. As you will see, we reported a loss from operations this quarter from discontinued operations as well as another gain on sale. The majority of the loss from operations resulted from a one-time charge to earnings for exiting our former Baymont home-office space this quarter. The results also include the results from operations of three of our joint venture Baymonts that were excluded from the transaction and are now operating as Baymont franchisees.

The net after-tax gain of over $3.7 million on the sale of discontinued operations during the first quarter comes from the sale of two more of the Baymonts that had previously closed in escrow pending completion of certain legal requirements. At the end of the first quarter, we still had approximately $12 million of Baymont sales proceeds held in escrow pending completion of additional customary transfer requirements for four locations. The assets for these remaining locations were still on our balance sheet and as each location completes the requirements, the funds will be released from escrow and a resulting gain recognized. I currently estimate that we report nearly $2 million of additional after-tax gains on the Baymont transaction once these matters are resolved, meaning that, combined with the substantial gain that we reported during fiscal 2005, our final gain for this transaction will likely be over $80 million after-tax.

With that, I'll now turn the call over to Steve.

Thanks very much, Doug.

Taking my remarks in the same order as Doug, I'll begin by commenting on our Theatre division. The fact is that not very much has changed since we last spoke just over seven weeks ago. During those seven weeks, we had five more weeks of decreased box-office results before finally putting together two straight weeks here in September of all months of slightly increased results compared to the prior year. I say of all months because, as many of you know, September is traditionally the slowest box-office month of the year. It has been a pleasant surprise to see a couple of pictures, such as Transporter 2, The Exorcism of Emily Rose do a little bit of business. With a couple of more pictures opening up this month with some potential, Tim Burton's Corpse Bride and Flightplan, it would be nice if we could head into the fall season with some momentum.

All of this, of course, doesn't change the fact that this was a very disappointing summer for the theater industry as a whole and our division specifically. While much has been written about Hollywood's failure to capture the average moviegoer's attention this summer, I ran across an interesting analysis of the summer film product that I'd like to spend a couple of minutes sharing with you. Nationally, box-office results essentially mirrored our reported results for our fiscal first quarter. What was interesting, however, was that despite the significant decline in overall summer box office, nine movies nationally made more than $150 million each in 2005 compared to only five summer movies that crossed that blockbuster barrier in 2004.

The problem was really twofold. First and obviously, most obvious, as we noted in our press release, none of these stop pictures did as well as last year's top three films, Spiderman 2, Shrek 3, and Harry Potter and the Prisoner of Azkaban. The second problem is not quite as obvious. A big difference between the summer of 2004 and the summer of 2005 was the number of movies that grossed between 100 million and 150 million nationally. There were seven in 2004 and zero in 2005. In 2005, there were no surprise hits like Dodgeball or The Village, both of which grossed about $114 million last summer. Instead, there were a few big hits, like Star Wars and War of the Worlds, and plenty of disappointments, such as Bewitched and Stealth.

The challenge, of course, is to determine what, if anything, we should conclude from all this information. We know we operate in a cyclical business that has had its various ups and downs over our nearly 70 years in this business. So, it's important that we keep our perspective as we view the results from the recent months. Just as it would be premature to draw sweeping conclusions that everything is back to normal because we have experienced box-office increases in each of the last two weeks compared the prior year, it would be equally dangerous to immediately conclude that something has fundamentally changed in the movie business because of the summer's performance.

Having said all of this, the outlook for film product appears to look brighter this fall and the upcoming holiday season. 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 ahead as well.

Recognizing that we are currently in a volatile time in our industry, we will continue to carefully review our opportunities to further grow this business as previously discussed by us in our public statements and most recently in our annual report. As you know, we have several parcels of land ready for new theaters with the Brookfield Ultra Cinema site closest to being ready to begin development. As always, the actual timing of our growth plans can and will change as we proceed through the development process.

We also continue to take steps to differentiate the Marcus Theatres experience from those of our competitors and for that matter the home entertainment experience. We believe that our project 2010 and our increased number of Ultra screens continues to define us as a leader in the industry.

I would now like to turn our attention to the Hotels and Resorts division. As you know, this division had a very busy summer as we added two new hotels to our portfolio. All in all, I would have to say that we were pretty pleased with the progress we made with both of the hotels during the quarter and, preopening expenses excluded, they both made positive contributions to our fiscal 2006 first-quarter results. While we certainly expect the Four Points by Sheraton Downtown Chicago hotel to need time to build a customer base and stabilize, just like any other new hotel, a strong summer for Chicago group business gave us an opportunity to expose that hotel to many guests and achieve a healthy ADR at the same time.

Our other new hotel, the Wyndham Milwaukee Center, had very strong occupancies throughout the summer. We are busy at the present time preparing for a significant renovation of this property and we look forward to further enhancing this excellent location.

As Doug noted, the strength of our comparable hotels this quarter were the Milwaukee and Madison properties. As we look ahead to the fall, I am encouraged by our current forecast for our business. Fall has historically been a very good quarter for the group segment of our customer base. And based upon the current advanced bookings, I am optimistic that we should be able to compare favorably to last year's results from this division, which were in fact very strong compared to the year before that. 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 to increase rooms under management.

The improvements we made during the latter half of fiscal 2005 at the Grand Geneva, which included remodeling the lobby and renovating and expanding two of our restaurants, as well as giving the resort a brand-new front entrance, have been well received by our guests. During fiscal 2006, we are evaluating several additional projects at the resorts as well as several important projects at our landmark Pfister Hotel, all of which should enhance the value of these important assets of ours.

There isn't anything new to tell you regarding the Las Vegas project other than that construction is progressing nicely on this condo hotel. This sold-out project is scheduled to open in late spring or early summer next year. As we have told you in the past, upon completion of the construction and closing of the condominium unit sales, we will share any development profit on the project; that should 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 restaurant, the spa and the bars.

We also continue to work our way through the complex public/private structure that will restore the historic Skirvin Hotel in Oklahoma City. Demolition work has begun at this hotel and we hope to proceed with the renovation project in the very near future.

We also continue to work on quite a few new projects right now and as Doug mentioned, we plan for the possibility of one or more of these opportunities to 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.

Before I open the call up for questions, let me once again update you on the issue of the significant amount of cash on our balance sheet. As we have stated in the past, we continue to carefully consider options. Those options remain the same -- to make additional investments in our existing businesses, consider other investments that would strategically fit our company or to consider various forms of capital returns to our shareholders or some combination of the three. Management and the Board is making good progress on our evaluation of our options and while we'll continue abstaining from setting an arbitrary deadline, we certainly hope that we will be in the position to shed further light on our thinking in the coming months. We certainly appreciate your continued support of management toward that end.

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

(OPERATOR INSTRUCTIONS). Rob Damron with 21st Century Research.

Just a -- first of all, just a question again about the cash balances on the balance sheet. I'm sure what goes into part of that thinking is the availability and opportunity of new projects or more hotel opportunities, such as the one, the Wyndham in Milwaukee that you did a few months ago. Can you just talk a little bit about the pipeline of opportunities? Is it getting stronger? Are there a significant amount of good-quality opportunities out there that could fit well with the Company?

Well, there are a fair amount of opportunities out there. The pipeline is getting larger, particularly as the asking prices go up. So the issue is to make investments that make sense for us over the long haul so that we can get a good return on our investments for our shareholders. Obviously, we are also attempting to do that by taking smaller equity interests, along with management contracts, so that we can enhance those returns, but the pipeline is fairly good; it's better than we have had it -- seen it for quite awhile.

Then looking at the Theatre business, Doug, maybe you could let us know how many screens the Company operated during the quarter. Then in terms of the rollout of the new theaters maybe give us some thought on when some of those new screens will begin operating.

We are currently at, I believe, the same number of -- 504 total screens, 464 of those are Company-owned and operated, and the additional 40 are the operated-only for other owners, the management contract screens. So that really hasn't changed since last quarter. The projects that we had queued up are not likely to impact this fiscal year significantly at all because they tend to be -- they're all some pretty big projects. As Steve indicated in his remarks, the Brookville location is probably the first on that will come onboard. But I don't now. That one I don't think will impact this year at all, but we certainly expect to get going on that shortly.

We also have a handful --.

Excuse me. As a matter of fact, that site is currently being cleared. There was a very large building on it. There was also some environmental remediation that is currently going on.

So there is some work going on in that regard trade but again, no screen impact in this fiscal year likely. We do have a couple of potential screen additions at existing locations. Again, none of those projects have started yet and so to the degree that anything would happen, Rob, you are talking about something that would impact us only near the end of the fiscal year. We would expect, for the most part, during this fiscal year, the way these projects have kind of queued up, that we will operate the majority of the year with the screens that we have.

Okay, that helps. Then the last question is just the status of the timeshare business -- what your plans are with that business?

Well, you know, we are right now, we have one locations, or a club of one, if you will, although we certainly participate in a larger network. It was very site-specific that we were involved in that. As you know, we have 1300 acres at the Grand Geneva complex and that was a very opportune use of some of the acreage. It has helped the resort overall; it has added to the folks who are eating at our restaurants and golfing on our golf courses, etc. We have struggled there a little bit as has been well documented recently, particularly still struggling a little bit with the tour flow as a result of no-call rules that have gone into effect over the last year. So our biggest struggle continues to be getting adequate tour flow through the location to generate the sales necessary. So on a year-over-year basis, that's really what we have been referring to, is on a year-over-year basis, we have been down.

We certainly -- overall this is not something that is hurting us tremendously; it's is just a year-over-year it hurts in that comparison. We continue to have an active flow of folks that are staying at the property. The property is well received. We financed a certain portion of the sales as you know as well. So there is also a non-operating component to this business. There's interest income that is recorded.

But having said that, right now, we are just trying to stabilize the sales force, stabilize the marketing effort and work our way through what has been a tough year or so in that business.

David Tarantino with Robert W. Baird.

Just to follow-up on the timeshare business, could you, Doug, give us an idea of the magnitude of the year-over-year impact on that business?

Well, certainly I can give you some sense of that. It is, in this particular quarter, year-over-year, I think that, from an operating income perspective, that impacted us by over $100,000 of difference.

Okay, great. When would you start to cycle some of the factors that are contributing to that decrease like the no-call rules?

Who we are just kind of doing that now I believe.

As a matter of fact, the most recent numbers I looked at in the current period -- about three weeks of the current period they were up significantly over the year.

Yes, so we are just now starting to pass the cycle if that main impact that we saw.

One question on theaters -- in terms of the number of screens that you're planning to add to either new locations or existing locations, has the recent trend in the industry tempered the pace there a little bit? What's your view on that?

I would have to say this -- it is not so much the recent trends, because if you where to look at a trendline -- and gee, it's too bad we don't have a visual for you today -- (inaudible) because I just saw a graph last week that was about a 70-year study of the industry that charted the peaks and valleys of the industry. There have been probably ten significant down periods within those 70 years. But each time the bottom of the trough -- as you went through time, the bottom of the trough kept going up. The top of the peaks let's say kept going up as well. So that within the cyclical -- the cyclicality of the industry, the trends have been consistently up.

Contrary to what I have read in some -- I've read a lot in recent months about the industry. The fact of the matter is that attendance has been tracking up as well. Some years, it goes down because of the cyclicality, because of the flow of product, but in other years, it goes up. As I say, that trendline has continued to move in an upward trajectory.

Having said all of that, we are going through also an unusual time in the industry as it relates to be advent of DVDs and the narrowing of the window between the release date of a motion picture to theaters and its release date on DVDs and other ancillary markets. That window has been a significant protection, if you will, of the customer flow for movie theaters. Now, we don't know whether a small -- a shorter window will have a larger impact are not, but there have been a number of studio executives who have said, well, perhaps it is time to eliminate the window. So, we are going to be cautious about investments in that area before we find out whether 18 screens is the right number or 14 screens is the right number.

I have no question in my mind but that there will always be a movie theater business. My father used to say, every home has a kitchen and people still go out to eat. The fact is every home will have a TV of one sort or another, and they keep getting better, but they've been getting better forever, and so I think that no matter what happens, there will still be movie theaters.

The major question will be, as I say, how many screens will be required. That will be a match-up between the velocity of films coming through the theaters and then how long they are there. It could be that the movies will move through the theaters faster but because of the significant profits available up and down the supply chain, we will be seeing many more movies being made and that there will be, in fact, a demand for as many or even more screens. But we need -- we are taking some time to just make sure that we understand where that is going. Long answer to a short question. I hope I've been helpful.

Great, understood. Thanks a lot.

(OPERATOR INSTRUCTIONS). Mr. Neis, at this time, there are no further questions. I will turn the call back over to you for any closing comments.

Well, we certainly want to thank you once again for joining us today. We hope to see some of you at our annual meeting on October 6 at the Pfister Hotel here in Milwaukee. We will certainly look forward to also talking to you once again in December when we release our second-quarter fiscal 2006 results. Thanks for joining us today.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.