Marcus Corp (MCS) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to The Marcus Corporation third quarter fiscal 2006 earnings conference call. This call is being recorded. With us today are Chairman and Chief Executive Officer Mr. Stephen Marcus, and Chief Financial Officer, Mr. Douglas Neis. At this time, I will turn the call over to Mr. Neis for opening remarks. Please go ahead.

Thank you, and welcome, everybody to our fiscal 2006 third 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 our sale of the limited service lodging division of the remaining proceeds; our future revenue 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 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 in leisure travel industry and in our markets, our expectations and plans regarding growth in the number and type of our properties and facilities, and our expectations regarding future capital expenditures. Of course our actual results could differ materially from those projected or suggested by our forward-looking statements. Factors, risks and uncertainties, which could impact our ability to achieve our expectations are included in the risk factors section of our form S-3 shelf registration statement dated August 15, 2001 and 10-K and 10-Q filings which can be obtained from the SEC or the company.

We also post all Regulation G disclosures when applicable on our website at wwwMarcuscorp.com. So, with that behind us let's talk about our fiscal 2006 third quarter results. We're pleased to be reporting our third straight quarter with increased earnings from continuing operations and our second straight quarter with an overall increase in our operating income. Before I get into the operating results, however, let me first address the variations in some of the below the operating income line type items 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 $292 million continued to be invested in the short-term tax-free instruments throughout the quarter. Which also accounts for our lower than usual effective income tax rate for the quarter and the first three quarters of the year. As you know, we paid out our $7 special cash dividend on Friday, February 24, which is the first day of our fourth quarter. The total distribution was approximately $214 million so while we will still have investment income from the remaining cash during our fourth quarter, it will clearly be less than the third quarter and it will be less than last year's fourth quarter. Based upon projected capital spending, and known maturities of existing debt during the fourth quarter, I am currently estimating that we will still have approximately 40 to $50 million of cash on our balance sheet at the end of our fiscal year in May.

Our effective income tax rate for the full fiscal 2006 year will likely remain at or possibly even below our current 33.5% range that you see in our year-to-date basis right now. At this point, it also appears that our effective tax rate in fiscal 2007 will also remain much lower than our historical 39 to 40% range. Due to the fact that we may continue to have the remaining excess cash invested in tax-free instruments and more significantly we currently expect to benefit during fiscal 2007 from federal and state historic tax credits related to our Oklahoma City hotel project.

Interest expense continues to be down slightly from the prior year as we pay the current maturities of our Senior Notes. Partially offset by the interest expense on our Chicago hotel loan. We would expect our interest expense to continue to decrease during the fourth quarter of fiscal 2006 and into the start of fiscal 2007 as a result of the additional payments of scheduled current maturities of our long-term debt.

One other note on that topic is that you will see that our current maturities on our balance sheet total approximately $50 million. Which is significantly higher than our normal levels. The reason for that is 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 entire approximately $25 million balance being due in our fiscal 2007 first quarter. We currently anticipate extending the maturity date of this note which would put that amount back on a long-term debt line.

Our overall debt-to-capitalization ratio at the end of the quarter was approximate 27%. After taking into consideration the special dividend paid the next day, this percentage increase was just under 39% which is still quite a bit below our historical levels.

Moving on, we did not have any significant gains on disposition of property, equipment and investment in joint ventures for our continuing operations during this quarter. Year-to-date, we still continue to benefit from this item compared to last year. We are actively attempting to sell additional noncore property and equipment plus the two Brookfield, Wisconsin area theaters that will ultimately be replaced by the one new flagship theater that is referenced in our press release. As a result, we believe that additional gains may still be recognized during the remainder of this fiscal year and the upcoming full year fiscal 2007.

Shifting gears, our total capital expenditures during the first three quarters of fiscal 2006 including our $23.5 million acquisition of the Wyndham Milwaukee Center at the beginning of the year, totaled approximately $47 million compared to about 40 million last year at this time. In addition to the Wyndham acquisition, approximately $17 million of that total was incurred in our hotel division. With the largest amounts related to completion of our new Chicago Four Points Hotel, the start of construction on the Oklahoma City Hilton Skirvin and several projects at our Grand Geneva Resort. Miscellaneous theater division projects made up the bulk of the remaining capital expenditures during the first three quarters of the year. With one quarter to go, I'm estimating total capital expenditures for fiscal 2006 to be in the 75 to $80 million range, including the Wyndham and the recently announced Westin Columbus acquisitions.

Approximately 8 to $10 million of that total will likely come from our theater division and will include initial construction costs on our new Racine and Green Bay theaters, both of which are starting in the next few weeks. In addition to the planned Columbus hotel acquisition that was just announced and continued work on the Hilton Skirvin, the start of our renovation of the Wyndham hotel and a project that will significantly expand our conference center space at the Grand Geneva Resort will contribute to our additional fourth quarter capital expenditures for the hotel division. We will of course monitor our capital expenditures closely and 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. First, the theaters, as you see our box office revenues were up 1.6% during the quarter with concession revenues up 7.7%. The strength of the quarter was a four-week stretch beginning in late December when our box office averaged doubled digit increases compared to the prior year. February box office was even with last year so overall, the calendar year is off to a much improved start compared to last year.

We're pleased to report that overall total attendance increased 1% for the third quarter. Our average admission price was up 0.7% for the quarter and our average concession revenues per person were up 6.4% compared to last year during the same quarter. Due in large part to the fact that this year's top films were more kid and family friendly. Pricing and movie mix of course are the two primary factors that impact our concessions per capita numbers. On a year-to-date basis our attendance remains down 6.7% compared to last year thanks to the very disappointing summer with our average admission price up 2.5% and our average concession revenues per person up 4.6%.

Our operating margins were even during the quarter but remain down versus last year on a year-to-date basis as would be expected given the reduced overall attendance. On a year-to-date basis, our overall operating margin for this division was still a very healthy 23% but that compares to 24.6% last year during the first three quarters with the impact of our fixed expenses on our decreased revenues accounting for the entire change. Film cost as a percentage of box office continued to be down compared to the prior year as might be expected.

In our hotel and resort division, our overall hotel revenues from continuing operations were up 24.2% during the quarter and 19.6% for the year compared to the same period last year. These increases, of course, include our two newest hotels, the Wyndham and the Four Points Chicago, and exclude the now sold Miramonte Resort. Our press release noted the total RevPAR for comparable properties increased a very robust 15.6% for the quarter and is now up 8.8% for the year. Our RevPAR increases have come from both increased occupancy, which was up 5 percentage points in the third quarter and 3.4 percentage points year-to-date. And from increase in average daily rates or ADR which was up 4.4% during the quarter and 3.4% year-to-date.

Now the overall increased revenues during the quarter did not translate into reduced third quarter operating losses due to the impact of our new hotels and the hotels under development. Expected winter season operating losses at our Milwaukee Wyndham and Chicago Four Points hotels compared to no activity last year when we didn't have the properties, as well as startup costs at our hotel project in Oklahoma City, the Hilton Skirvin offset over $1 million of operating income improvement at our 5 comparable properties. Our year-to-date operating income is still up 9% over the prior year. Despite $400,000 of preopening expenses and the other various startup costs associated with our newest ventures.

Finally let's turn our attention to discontinued operations for a moment. We reported another gain on sale during the quarter; this time as a result of selling the last four remaining Baymont locations that previously had proceeds held in escrow pending completion of additional customary transfer requirements. All we have left now are two remaining Baymont joint ventures that are still operating for the time being. With that, I will turn the call over to Steve.

Thanks very much, Doug. I will start my remarks by commenting on our theater division. Our press release and Doug's comments should have given you a pretty good indication of what our third quarter was like. It is certainly encouraging to report increased operating income for this division after a well-documented five straight quarters of decreased results. And while one quarter does not make a trend, if nothing else the results certainly showed once again that when offered a good variety of quality movies the customer will respond. There still is nothing like the magic of seeing a picture like Harry Potter, Narnia, or King Kong, on the big screen in a packed auditorium. It's an experience that cannot be duplicated and as you may have heard several prominent people say during the recent academy award ceremonies, it is the way movies as an art form were meant to be seen.

I just returned from the movie theater industry's biggest event of the year, ShoWest. I must tell you that while the industry continues to face many old and new challenges, the likes of which we've discussed in previous calls, there was a sense of cautious optimism among the many attendees from both theater owners and our film distributor partners. The two most talked about topics at the conference should not surprise you. They are digital cinema and the DVD release window.

Digital cinema continues to gain momentum and calendar 2006 will see the beginnings of what will likely be a multiyear rollout throughout the industry. For most theater chains 2006 will be a beta testing year and we will be no exception. We anticipate testing multiple pieces of hardware and software perhaps as early as this May in time for the upcoming summer season. The industry seems to be settling in on a financial model that will result in distributors paying for the most of the new equipment via a virtual print fee. But there are many details to be agreed upon. We have taken a very active role in the overall digital cinema initiative with two of the seven members of the national theater owner's organization, digital subcommittee, Digital Cinemas subcommittee, working for the Marcus Corporation including our Chief Financial Officer, Jane Durment. We will proceed cautiously and as you have heard us correctly predict in the past, the industry rollout will inevitably take longer than some may have you believe, but make no mistake about it, digital cinema is on the way.

If you will pardon the pun, the picture is a little less clear when it comes to the issue of the DVD release window. It's been well-documented that the average home video release window has shrunk from about six months in 1995 to a little over four months in 2005. The question that everyone continues to debate is where does that window go from here? While I'm sure there will continue to be much discussion surrounding this topic and I have to say that the overall feeling I got from the majority of the attendees last week was that while it is likely that the studios will continue to experiment with this release window, the maintenance of a suitable release window appears to be important to both exhibitors and the studios alike.

Interestingly another window that hasn't received as much attention but is important nonetheless to exhibitors is the average video announcement window. We for one do not have a strong interest in continuing to show a film on one of our screens after the distributor has announced their video distribution date and the maintenance of a suitable window for these announcements will be an important factor in our continued discussions and film negotiations with the studios. Having said all this, as I said at the beginning, our future improved performance requires consistent quantity and quality of film product. And with that in mind, the outlook for film product quantity appears promising. With approximately 180 films estimated to be shown on our screens during calendar 2006 compared to only 167 during calendar 2005. Certainly the chances of catching one or two more blockbusters are improved when the overall quantity of films increases. When it comes to assessing film quality that is always a much tougher task. Our press release listed some of the films that are to be released in the months ahead, May looks like it could be very strong and our fiscal 2007 summer could get off to a great start with Pixar's next movie, Cars. This film was screened for the first time at ShoWest and the response of exhibitors was outstanding.

In the meantime, we have been busy preparing for 3 new theaters that will replace and expand on 5 existing theaters in Brookfield, Waukesha, Racine, and Green Bay, Wisconsin. We are scheduled to break ground next week on a new 13 screen theater in Sturtevant Wisconsin which will include our seventh UltraScreen, a couple of weeks after that we are scheduled to begin construction of a new 12 screen theater in Green Bay. And our much talked about new flagship theater in Brookfield is nearing the end of its design phase and we look forward to beginning construction on this theater of the future sometime this summer. Our long-term focused approach to our business has made us a leader in our markets in this industry over the past seventy years and we continue to look forward to facing the challenges and opportunities that lie ahead in the movie theater business.

Now with that let's turn our attention to the hotels and resorts division. Our hotel division and the hotel industry in general continues to experience significant improvement resulting in our increased overall results for the year. As Doug noted startup costs and noncomparable winter season losses at our two newest hotels mask another strong quarter of improvement in this division. Doug went over some of the key numbers on our comparable hotels for you. And the fact that our double-digit same hotel RevPAR increases were the result of both strong occupancy and increases in the average daily rate continues to be a very positive development.

With supply growth remaining minimal, we're now seeing some ability to impact ADR in a positive manner which should result in an overall increase in our operating margins. Business travel continues to be the engine that is driving these improved results. While March has not been a particularly strong month overall, the advance bookings for April and May of this fiscal year and the first month of fiscal 2007 are very encouraging. And we see no reason to believe that same hotel operating results won't continue to improve during this time period.

Obviously given our size, our overall division results can and will be negatively impacted in the short term by costs associated with new properties. You’ve seen that periodically in the past and we saw that again this period, and Doug shared some of those numbers with you. Having said that, we continue to be very pleased with the guest response to the Sheraton Four Points in Chicago and their results will only get better as it continues to mature and as the retail components of this development come online.

We're getting ready to begin our renovation of the Milwaukee Wyndham and have great expectations for the future of that property as well. These are investments that will contribute to the long-term growth of our hotel division. As our press release notes, progress continues on our two newest hotels under development, the Las Vegas Platinum hotel and the Oklahoma City Hotel Skirvin. Both of these hotels will continue to have some negative impact on our operating results until they open but again a small price to pay for what should be a long-term addition to shareholder value. As the press release also notes you should see the first returns from these two projects during fiscal 2007 when we recognize the development gain on the Platinum and we incorporate anticipated historic tax credits from the Skirvin into our effective income tax rate.

And the growth in this division continues with our announcement last week that we have entered into a definitive purchase agreement to acquire the historic Westin Great Southern Hotel in downtown Columbus Ohio. With the transaction scheduled to close in April, this hotel is an excellent fit for our portfolio and will represent our fifth historic downtown hotel, a clear niche for our hotel business. It is our intention to renovate the guest rooms and common areas of this fine hotel in order to further broaden the appeal of this strong performing asset. We look forward to working with Westin hotels and resorts for the first time. Westin is a well-established and highly respected brand, it is owned by Starwood hotels and resorts worldwide. We are initially purchasing this hotel for our own portfolio but it's possible that we may consider adding an equity partner to the hotel at a later date consistent with our previously stated growth strategy.

Finally, our pipeline of other potential new hotel projects remains quite active. Each one of these potential projects has its own story and timeline but we are prepared 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.

Now before I open the call up for questions, I would be remiss if I didn't briefly address the other significant event that occurred during our fiscal 2006 third quarter. I am referring, of course, to the fact that since we last talked our board of directors declared and paid a $7 per share special dividend. Since we have previously indicated that we were considering various forms of capital returns to shareholders, our decision may not have come as a major surprise to you. In evaluating the use of proceeds from the sale of our limited service lodging division we felt it was appropriate to return some of the value that we created in this business to our long-term shareholders and to provide them with added liquidity for their investment. The fact that we're able to do this in a tax efficient manner by obtaining a private letter ruling from the IRS affording the distribution capital gain treatment was an added bonus.

As Doug noted earlier an important aspect of our decision was the fact that even after the dividend our balance sheet remained in outstanding condition. We will still have a significant cash balance on our balance sheet in addition to substantial borrowing capacity. We remain committed to investing in our two divisions; we have the balance sheet to do just that. We will continue to explore additional opportunities to create value for our shareholders. One indication of our confidence in the long-term performance and growth potential of our company was the board's decision to also increase our regular quarterly dividend by 36% to $0.075 per share of common stock. This increase provides additional stability to our shareholder return and emphasizes our commitment to increasing long-term shareholder value. We appreciate your continued support of management as we worked our way through these very important decisions.

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

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

For the three new theaters in Wisconsin, noted in the release, including Brookfield, will you be adding screens net of any closings of nearby theaters?

No, those will essentially be a push, David. Give or take a couple of screens. Over time, a couple of the -- in Brookfield the two, when the new one opens up the other two will close and they are basically roughly the same number of screens. We have existing theaters in Green Bay and Racine and there is not a final determination on exactly what will happen to all those 3 theaters in those markets in total. But over time, we would expect that will be essentially a net push.

Also in theaters, can you give an update on the project 2010 remodel program you’ve talked about on past calls?

We did another one this year, we did Pinkerton; we got 15 of them done now. I think we indicated there were 27 in total and we have more scheduled in our plans for the coming years.

Great, and then in hotels and resorts, Doug, you adjusted the CapEx plan for the year at least partly related to the Columbus hotel. What is the approximate CapEx related to the acquisition of that property?

David, I can't tell you that right now; we have not closed on the transaction yet and so we have not disclosed the terms of that transaction yet. Clearly given the numbers that I have indicated, you can get a sense that it's a 186 room hotel. It is -- I will tell you that it is less than what we paid for the Wyndham and just leave it at that for the time being. Ultimately this will probably be a number that gets us closed but because we have not closed on the transaction yet I can't go any further than that.

Understood, and another question on that property and maybe you can comment at least to some extent, I believe the release on this press release noted plans to remodel the property, if you could comment on the timing and perhaps the cost of that once the acquisition is closed?

Well, the timing hasn't been determined yet, obviously there is some work that has to go into that. We have certainly taken an initial look at what we might want to do and there certainly is as the press release notes, some plans for some room renovations. It could be that out of the 186 rooms it could be that we actually might take a few rooms out of service and combine and create a few more suites so we're taking a look at that. There certainly is the common areas, the food and beverage areas are also slated, so it certainly is a multi-million dollar renovation. But again we are a little early in terms of that right now.

Understood, thank you.

(OPERATOR INSTRUCTIONS) [Dan Stoufer], Wachovia Securities.

Yes, can you hear me?

Yes we can.

You know, you still have the cash after the payment of the $7 dividend, but you're going to be losing the investment income from the money you have paid out. Could you use some of the cash that remains to buy back enough shares to offset the loss of that interest income?

I will say this. We've got a lot of options with that cash, and we have indicated that we want to continue to grow our two existing divisions as well so we're not -- we're not committing to any one particular option. I will say that we have an existing authorization to buy back shares. I think we still have about 1.9 million shares available under that existing authorization. And so buying back shares continues to be one of the things that we could do with those funds but we have lots of other options as well.

Did you buy back any in third quarter?

We did not, other than just in situations where it's related to stock option exercising, no, we did not buy in the open market third quarter.

Okay, good. Thank you.

(OPERATOR INSTRUCTIONS) Gentlemen, we have no other questions standing by. I would like to turn the call back over for any additional or closing remarks.

All right, we certainly want to thank you once again for joining us today. We look forward to reporting our fiscal 2006 fourth quarter and year-end results. That should be scheduled in late July. Thank you very much, and we will talk to you soon.

Once again, that does conclude today's conference. You may now disconnect.