Marcus Corp (MCS) 2006 Q2 法說會逐字稿

Good day everyone. Welcome to The Marcus Corporation second-quarter fiscal 2006 earnings conference call. This call is being recorded. With us today, we have the 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.

Thank you very much and welcome everybody to our fiscal 2006 second quarter conference call. As usual, I need to begin by stating that we plan on making a number of forward-looking statements on our call today. Our forward-looking statements could include but not be limited to statements about our use of the proceeds from the sale of our Limited Service Lodging Division; our future revenue and earnings expectation; our future RevPar occupancy rates and room rate 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 market; our expectations and plans regarding growth and 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 Factor section of our form S3 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 Web site at www.marcoscorp.com.

So with that behind us, let's talk about our fiscal 2006 second quarter results. We're pleased to be reporting increased earnings from continuing operations this quarter and we're especially pleased to report an overall increase in operating income. Before I get into the operating results, however, let me first address the variations in the below the operating income line via the various items below that line versus last year.

First item to note is the continued increase in investment income, as expected, as a result of the significant cash balance on our balance sheet. The majority of the cash balance of approximately 274 million continues to be invested in short-term tax-free instruments which also accounts for our lower than usual effective income tax rate for the quarter and first half of the year. 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 Services Lodging Division's sales proceeds has made.

Interest expense continues to decline as we pay the current maturities of our senior notes. Our overall debt to capitalization ratio at the end of the quarter is now approximately 27%. Once again, pending a final determination on the use of the 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.

And one item to note on that particular topic is that you will see that our current maturities on our balance sheet total approximately $50 million, which is significantly higher than what our normal level has been. The reason for that is that we have a separate mortgage note on our new Chicago hotel that has an initial maturity date that, if not extended, would result in the end entire approximately $25 million balance being due next summer. We currently anticipate extending that maturity date under the note, which would put the amount back on the long-term debt line at that point in time.

Now the next item to focus on is the gain on disposition of property, equipment and investments and joint ventures for continuing operations. Last quarter, you may recall that we had significantly higher gains compared to the prior year. During the second quarter, just the opposite occurred with our pretax gains from disposition over $1 million less than the prior year's second quarter. Year-to-date however, we continue to benefit from this item compared to last year. And as you've heard me say many times before, the timing of these periodic sales of real estate can vary from quarter to quarter, causing these fluctuations.

In total, we've had annual gains on dispositions of $2 to $3 million in each of the past three years and we are actively attempting to sell additional noncore property and equipment and we believe that additional gains may still be recognized during the remainder of the fiscal year.

Shifting gears, our total capital expenditures during the first half of fiscal 2006, including our $23.5 million acquisition of the Wyndham Milwaukee Center last quarter, totaled approximately 38 million compared to 24 million last year. In addition to the Wyndham acquisition, approximately $9 million of that total was incurred in our Hotels and Resorts Division, with the largest amount related to the completion of the new Chicago Four Points Hotel and several projects at our Grand Geneva Resort. Miscellaneous feeder (ph) division projects made up the bulk of the remaining capital expenditures during the first half of the year.

At this stage of our fiscal year, I am revising slightly downward our previous estimates for capital expenditures for fiscal 2006 to an amount probably more in the 60 to $80 million range, including the Wyndham acquisition. If you recall previously, I was saying 80 to 100 million. Projects currently in development that are expected to add to our expenditures this year include the Ultra Cinema plan for Brookfield, Wisconsin as a replacement for two smaller theaters; the Oklahoma City Skirvin Hotel redevelopment projects, a planned renovation of the Wyndham Hotel and several significant projects at our Pfister (ph) Hotel and Grand Geneva Resort. The reduction in our estimate is a result really of a timing issue of an update on the believed timing of these known projects, as well as any current unidentified projects that we've allowed for in that higher end of the estimate. We will of course monitor this closely as we have in the past and we will adjust our plans as we feel necessary in response to current conditions.

Before I turn call over to Steve, let me provide a few additional comments on each division, including discontinued operations. Starting with theaters, our box office revenues were down 1.7% during the second quarter with concessions revenues down slightly more. And while we would much rather be reporting an increases in box office this quarter, we certainly were encouraged by a better performance compared to our 10.5% decrease in box office reported during our first quarter. As we noted in the press release, it was an up-and-down quarter. September was much improved over the prior year, but then we went through a seven-week stretch in October and early November where box office was down anywhere from 5 to 20% in six of those seven weeks if the films played could not match the results of last year’s top pictures -- The Incredibles and Shake Tale.

The quarter ended, however, on an extremely strong note with the release of Harry Potter and the Goblet of Fire. As a result, total attendance decreased 4.9% for the second quarter. Our average admission price was up 3.4% for the quarter, partially offsetting that decrease.

Our average concession revenues per person were up only slightly at 1% compared to last year during the quarter due to the fact that last year's previously mentioned top films were particularly kid and family friendly. And as you recall, pricing and then particularly movie mix are the two primary factors that impact our concession per capita numbers.

On a year-to-date basis, our attendance remains down 10.4% compared to last year thanks to that previously mentioned disappointing summer, with our average admission price up 3.5% and our average concession revenues per person up 3.9%. As would be expected given the reduced attendance this quarter, our operating margins were down during the quarter and first half as well. On a year-to-date basis, our overall operating margin for this division was still a very healthy 22.7%, but that compares to 25.1% last year during the first half with the impact of our fixed expenses on our decreased revenues accounting for the entire change. Film costs, as you might expect during a period of underperforming movies, were down as a percentage of box office.

Moving onto our Hotel and Resort Division, our overall hotel revenues from continuing operations were up 22% during the quarter and 18.1% for the year compared to the same period as last year. These increases of course include our two newest hotels -- the Wyndham and the Four Points Chicago -- and exclude the now sold Mira Monte Resort. Our press release noted that total RevPar for comparable properties increased a very robust 9.8% for the quarter and is now up 7% for the year. These RevPar increases have come from both increased occupancy, which was up 3.4 percentage points in the second quarter and is now up 2.6 percentage points year-to-date, and increased average daily rates, or ADR, which was up 4.5% during the quarter and 3.3% year-to-date. The increase in overall revenues during the quarter translated to a nearly 34% increase in operating income during the quarter. Our year-to-date operating income is now up 8% over the last year, and that is despite $360,000 of preopening expenses related primarily to the Chicago hotel opening, continued might as startup costs associated with our Las Vegas venture and a previously noted decrease in operating income from our time share operations.

Now finally, let's turn our attention to our discontinued operations for a moment. We reported another gain on sale during the quarter, this time as a result of selling one of our three remaining Baymont joint venture properties that were not sold with La Quinta last year. We have two remaining Baymont joint ventures that we're still operating for the time being. At the end of the second quarter, we still had approximately $12 million of the 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 if these locations completes the requirements, the funds will be released from escrow and the resulting gain recognized. We currently estimate that we reported nearly $2 million of additional after-tax gains on the Baymont transaction once these matters are resolved, meaning that combined with the substantial gain reported last year, our final gains for this transaction will likely be over $80 million after-tax. In fact, early in our fiscal third quarter, we closed on one of those four remaining properties and we currently anticipate closing on the final three within the next 90 days.

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

Thank you very much, Doug. I'll begin my remarks by commenting on our Theater Division. Between the press release and Doug's comments, I think you got a pretty good indication of what our second quarter was like. During the last conference call, I commented on the ups and downs that we've experienced in the theater business over our 70 years of operation. Well as you have heard, those same ups and downs can occur within a single fiscal quarter due to the vagaries of the movie release schedule. Within this quarter alone, we had year-over-year weekly box office comparisons ranging from down 22% to up 45%. You of course can read about these weekly comparisons every Monday morning in the national press. Dramatic swings like this only reinforce the fact that we need to avoid riding the weekly roller coaster and focus on the long-term aspects of our business.

From the bigger picture perspective, we certainly are encouraged by an improved box office trend following an extremely disappointing summer. This is not to say that the industry still doesn't have many issues to focus on, including competition from in-home movie technology to timing of the DVD release window, film piracy, digital cinema and the overall quality of the movies -- these are all significant issues for our business, none of which will be resolved overnight.

Having said that, it is encouraging to see the moviegoing public respond in large numbers when a compelling film is released. And with that in mind, the outlook for sale product appears to look brighter during this holiday season for sure and our press release notes several of the movies that the industry has high hopes for. The Chronicles of Narnia has the second biggest December opening on record, second only to the final installment of Lord of the Rings. King Kong opened last night nine to favorable reviews and could be a major blockbuster. The strong mix of comedies and dramas with even a musical thrown in provide alternatives and a spectrum of movies that we haven't seen in quite a while.

The fact that Christmas Eve falls on a Saturday doesn't help this year and we always keep an eye on the weather here in the Midwest. But all in all, we could be looking at a very strong holiday season.

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. In fact, a lot of our focus has been on preparing for that next 70 years of his business. How might the theater of the future be different and how might it be the same? Will we have more screens under one roof or less? Might we have more than one UltraScreen in the theater to accommodate the increasing number of big-budget events films, yet maybe have fewer mid-sized auditoriums? Might alternatives student beverage outlets for items like coffee, ice cream and pizza -- something that we're considering in our flagship UltraCinema currently being planned for Brooksville, Wisconsin -- play an important role in the theater of the future? How will digital Cinema change the way we do business? As we plan for our future investments in this business, the answer to all these questions becomes very important.

As you know, we have several parcels of land ready for new theaters with the Brookfield UltraCinema 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 this evaluation and development process. This deliberate, long-term focus approach to our business has made us a leader in our markets in this industry over the past 70 years and we look forward to facing the challenges and opportunities that lie ahead of us in the movie theater business.

For that, let's turn our attention to the Hotels and Resorts Division. You know we would love to have all of our businesses hitting on all cylinders at the same time, but the reality is that we don't always see that. The positive impact on that dynamic however is that while our Theater Division has been going through a difficult time during the last 12 to 15 months, our Hotel Division and the hotel industry in general is experiencing significant improvement, which results in our increased overall results for both the quarter and year to date. We were very pleased to report record revenues and operating income for our Hotels and Resorts Division during the second quarter.

Doug went over some of the key numbers on our comparable hotels for you. I think one of the key takeaways from those numbers is the fact that we and the industry in general are beginning to report increases in the average daily rate of our hotels. As we've have talked about in prior quarters typical to this industry as it recovers from the downtown, the first thing we usually see is increased occupancy. It's not until that occupancy solidifies and demand continues to grow that we typically see recovery in the ADR. The supply growth met remaining minimal, we're now seeing some ability to impact ADR in a positive manner.

Our hotels that draw heavily from the short-term transient business traveler have performed particularly well in recent months. Group business continues to be up-and-down, but on an improving trendline. In fact, the pace of group bookings over the past three months at our Grand Geneva Resort, one of our properties that has been most impacted by the sporadic nature of the group business customer, is the best we've seen in the last three years, so that is very encouraging.

Besides the obvious impact on our overall division revenues, our two newest hotels are also contributing to our improved operating results. We continue to be very pleased with the initial results from our downtown Chicago Sheraton Four Points Hotel with occupancy rates and ADR running higher than budgeted for a typical first-year property. Our parking ramp at the facility just opened and we don't have any of the retail tenants open yet, so our results should only get better over time. Our other hotel, the Wyndham Milwaukee Center, continues to run very strong occupancies and we're busy preparing for a significant renovation of that property.

As we look ahead at the next two quarters, I'm encouraged by our current forecast for our business. Our fiscal third quarter is always our weakest quarter due to our midwestern locations, but we currently expect our comparable properties to perform better than last year. It's early, but right now, our fiscal fourth quarter looks like it could be fairly strong compared to last year. We do expect to incur some preopening costs during our fourth quarter as we prepare for the opening of our Las Vegas condo hotel venture, which will have some negative impact on operating income. But comparatively, we had corresponding preopening costs from our Chicago hotel during the same period last year.

The aforementioned Platinum Suite Hotel and Spa in Las Vegas remains on schedule for a June 2006 opening, so we look forward to that. Interior demolition continues at the Skirvin Hotel in Oklahoma City and we are almost ready to begin the full-scale renovation of that property with a mid to late fiscal 2007 opening still the target date. The historic Skirvin is being developed under a very complex public/private structure.

We also continue to work with a rather large pipeline of new projects right now. Each one of those potential projects of course has its own story and its own timeline, so predicting which of them will get to the finish line and when it gets there is very difficult. But we are prepared for the possibility of one or more of those opportunities to come to fruition in the very near future. The vast majority of the projects that we're currently working on involve either management only or a manager plus some equity investment.

Before I open the call for questions, let me once again update you on the issue of the significant amount of cash on our balance sheet. Doug and I have had the opportunity to individually and collectively talk to many of our current investors and potential new investors in the past months, and the subject of our plans for the cash is most certainly foremost in everyone's mind. We have appreciated the many thoughtful comments we have received and the words of encouragement as we've been going through our careful evaluation process. While we continue to consider our options, which as we've stated, could include various forms of capital returns to our shareholders as well as earmarking funds for additional investments in our existing businesses, we believe we're getting very close to further articulating our thoughts on this matter. We currently expect that we will be addressing this issue in the very near future. We appreciate your continued support of management as we've worked our way through these very important decisions.

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

(Operator Instructions). Rob Damron, Midwest Investment.

Good afternoon. Just first of all a question about your new theater projects. You mentioned that the Brookfield location is the one that is farthest along, the one that will probably be opening up first. Maybe you could just give us some sort of timeline on when you think that might be opening and then talk a little bit about the other theater projects that you have slated?

Well, with respect to Brookfield, we are still trying to make a final determination on the configuration of that building. As I referred to in my remarks, we are faced with some very rapidly shifting release patterns. Windows are getting a little shorter than they have been in the past. We seem to be seeing more blockbuster type pictures relative to the total quantity of pictures that come out with very quick large openings, front-loaded marketing schedules and so forth.

And then there doesn't seem to be a great mid-market out there right now and we're not quite sure why that is. Pictures that typically would be, we'd call it average grossing picture; now we look at it and say, gee, that's not quite up to snuff. And there seems to be more of those at the lower grossing levels and I think some of it has to do -- there are those who would argue, it has to do with picture quality; there are others who would argue that it has to do with the shortening of windows and the fact to the marketing is so front-loaded that pictures don't have time to get traction.

So that is all being factored into our considerations about, they say the size of auditoriums and the quantity of screens. But we are working very hard to make those decisions and I would guess that that theater will have an opening sometime about a year from now.

The weather did not help us here in the Midwest either. We have pretty much cleared the site and we had a shot at potentially of getting into the ground, but we have had a rough early winter here. So the likelihood is that getting a Christmas opening for next year might be difficult given that. So we're probably, as Steve said, looking just slightly that.

And are the other projects basically just put on hold until we get some more clarity on which direction you're going to go, in terms of how large the theaters and UltraScreens and things of that nature?

That would be a fair statement, yes.

Okay. And then maybe you could give us an update on the Wyndham renovation -- when do you anticipate that occurring? And if --- or when and if that does occur, will there be an impact to the revenue stream out of Wyndham during that period of time?

We're going to be seeing some of the final plans, if you will, for the renovation actually very shortly here. And so I expect that sometime early in '06, calendar '06, the renovation will begin. I've not seen the phasing of how that will be done yet. But yes, I think it's fair to say that we would expect that there could be some impact. Of course, if we get -- this is generally a downtime for the business, and so we're certainly going to try to be smart about how we take rooms out of commission or whatever. And certainly some of our areas, the renovations are going to be in the common areas and we'll certainly try work around that as best we can. But yes, I think it's reasonable to suggest that during that time period, we're going to have some impact. I don't know that it will be dramatically noticeable given that certainly on a year-over-year basis, it wasn't there in the first place. But it's fair to say that.

Also, we'll have some success in moving into some of that business to one or two of the other hotels that we have in the downtown Milwaukee market.

Lastly, just the Four Points in Chicago. I know that's only about six months old, but the way I read the press release -- did it contribute to operating income in the quarter?

Yes it is.

Okay, great. Thank you so much.

(Operator Instructions). David Cumberland, Robert W. Baird.

Good afternoon. On the Las Vegas property, can quantify the size of the development profit, whenever that arrives; and also, the ongoing and income stream from that property once it's opened?

We have not indicated that as yet. I would suspect that you could probably look -- the (indiscernible) of the development profit, you can probably look for us to quantify that yet this year as we get closer to that. But obviously, we're still working our way through these. And so far, the construction seems to be going as it should be. But I don't want to give a number until we really know exactly where the overall project comes in at. As we've told you, it's sold out. And so certainly, it's -- I'd only characterize it to date as a meaningful number. You will notice that -- but I don't want -- this is not a $10 million number or something like that. I don't want you to put it in that kind of to perspective. It's the lower end of that. But it certainly is a meaningful number that would certainly be very noticeable.

As it relates to the ongoing stream, this will be a management contract and it'll have two sources of revenue for us, David. This will be like our Timber Ridge project in that the way this will work is it will not be your usual management fee. A typical management fee might be 5% of revenues or 2% of revenues or 3% or some sort of percentage with an incentive management fee associated with profit. This particular arrangement will be a situation where for every room rented, a given, agreed-upon percentage of that room rental will go to the owner of that unit. And for the sake of discussion, we'll say roughly half, but it may not be exactly that, but it's in that neighborhood. And then the other portion will go to us to cover our cost and then to make some profit.

So the Timber Ridge, for example, is our most profitable management contract because of that nature. It's not your typical type of fee stream. So we would expect it to be -- this property to be above our average as it relates to fees. We don't disclose any individual ones, but it would be above our average.

And then we also will have -- the partnership will continue to own the common areas. It would include the restaurants, the spa, et cetera. And so as long as the partnership is in place, 50% of what would be made from that would be kind of equity earnings as well. So, again, I cannot quantify that for you at the moment, but I just would say that it's probably above average for management contracts.

That helps. And on the Oklahoma City property, sort of a similar question, or at least a question on how that looks. In the early stages when the renovation is underway, as the deal is being structured, how are you being compensated or how could that impact your income statement?

Well, we are -- we will be compensated through a services fee, if you will, I believe in the early stages. This property will, the way it is finally being structured, again, it is that public/private venture, but we are the principal equity holder here. So it will sit on our balance sheet, it will --- we will consolidate its results. There's certainly, like any new property, we will have some negative impacts with things that you can't capitalize that GAAP requires that you expand. So any early costs, et cetera, that cannot be capitalized will negatively impact us just like we have seen in the Vegas and Chicago projects. So there will be a little negative impact in that -- during that year of construction, if you will and with some preopening expenses leading up to the opening. And then once it gets going, again, it's fully consolidated. You will see the entire revenues and impact and the kind of the public piece of this occurs through lease -- rental fees and some things along those lines. And again, just to reiterate, this will be a fiscal '07 event and the latter half of fiscal '07.

Great. And then one question on theaters. The preshow advertising was something you had talked about more extensively in earlier calls. And I'm wondering if that business has been impacted by the recent -- or the decline in attendance in recent quarters, and what you see as the opportunity in that business going forward?

Just in a general sense, it doesn't seem to have been terribly affected by it, mainly because it has been on a growth trajectory. And so the demand for time continues to grow. On the other hand, I suppose like any other marketing medium, if the attendance is down, that means eyeballs are down and eventually, that will reduce its potential.

I would add to that and say that we had an initial significant increase in that line item, and that was kind of in conjunction with signing a new contract, multiyear contract. We're not seeing and we've indicated that we wouldn't see a sustained year-over-year growth in that under this existing contract. An area that we are spending some time on that takes it one step further is on in-lobby type advertising. And so there's been some focus on a lobby channel and selling some of advertising within that. And so that is then additional growth area that is just kind of getting started now.

Okay, and then one other question for Doug. Doug, did I hear you say that there is 12 million being held in escrow?

That is correct.

Because there's 5 million shown in this cash held by an intermediary (MULTIPLE SPEAKERS).

-- two different numbers. The 12 million you won't even see on our balance sheet. What you see on our balance sheet is actually the assets. Until those properties close, we actually still have the assets on our books. And so that's -- the equivalent of that 12 million is the assets held for -- or assets of discontinued operations on our balance sheet.

Understood, thank you.

(Operator Instructions). Gentleman, it appears we have no further questions at this time.

We certainly would like to thank you once again for joining us today. We hope that you all have a very happy holiday season and a healthy new year. And I thank you again for joining us and we will talk to you very soon.

That does conclude today's conference call. I'd like to thank everyone for their participation.