Marcus Corp (MCS) 2007 Q1 法說會逐字稿

Good day everyone, and welcome to The Marcus Corporation first quarter fiscal 2007 earnings conference call. Today's call is being recorded. At this time I would now like the turn the call over to Chief Financial Officer, Mr. Doug Neis. Please go ahead, sir.

Thanks very much and welcome, everybody, to our fiscal 2007 first quarter conference call. Let me begin by offering apologies from Steve Marcus, that he will not be able to join us today. He is actually currently in California attending NATO board meetings. That's not the National Association of the -- National Atlantic Treaty Organization but instead actually, the National Association of Theater Owners, and the Board meetings are occurring this week, and we hoped to be able to handle the logistics and have him join us for the call today. He was not able to do that. That's certainly pass on his apologies for not making it today. I will try to field all your questions as best I can today.

Before we begin, as usual, I do need to begin by stating that we plan on making a number of forward-looking statements on our call. Our forward-looking statements could include but not be limited to statements about 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 product expected to be made available to us in the future, expectations about the future trends in the business group and leisure travel industry and in our markets, expectations and plans regarding growth in a number and type of our properties and facilities, expectations regarding various non-operating line items on our earnings statement and expectations regarding future capital expenditures, and 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 10-K and 10-Q filings which can be obtained from the SEC or the Company. We'll also post all regulation G disclosures when applicable on our website at www.marcuscorp.com.

So with that behind us, let's talk about our fiscal 2007 first quarter results. We're pleased to be reporting our fifth straight quarter with increased earnings from continuing operations, and our fourth straight quarter with an overall increase in operating income. Before I get into the operating results, let me first address the basis for the presentation on the numbers and several variations in below the operating income line items versus last year.

First important item that I want to remind you of we are not classifying our former time share business as discontinued operations due to our sale of that business during this first quarter. In particular we sold the remaining inventory of the Marcus Vacation Club ownership development that is on the ground at the Grand Geneva resort. As we indicated on our last call, our hotels and resorts division will continue to provide management services for this property, and we also continue to hold notes receivable from prior buyers of time share units.

I should also point out for the first time our operating results include costs associated with the expensing of stock options in accordance with recent accounting pronouncements. We have adopted FASB 123-R using what's called the modified perspective method meaning that prior year results have not been restated. As the press release indicated, we expect that our full-year fiscal 2007 results will be negatively impacted by about $0.02 per share as a result of this adoption. This impact is consistent with the pro forma impact that has been noted in the footnotes to our financial statements in prior years.

So with that let's talk about the below the line items first. By gnaw you know our reported investment income will continue to be significantly less than the prior year and each of the first three quarters of fiscal 2007 due to the payment of our $7 special dividend on February 24th of 2006, the first day of our fiscal 2006 fourth quarter. Interest expense also continues to track down from the prior year as we pay the current maturities of our senior notes without significantly adding to our overall debt position. As you can see on our balance sheet we ended the first quarter with approximately $46 million in cash. Given our previously announced planned capital expenditures for fiscal 2007, we may start to see this cash balance decline as the year goes on. Our overall debt to capitalization ratio at the end of the quarter was approximately 37%, the same as it was last quarter and still substantially below our historical levels.

Moving on our first quarter was one of those quarters where we have a significant difference between the gain on disposition of property and equipment reported this year versus the prior year. You have heard me say many times a large amount of real estate and other fixed assets in this company, it is not unusual for us to sell assets most often for a net gain. The timing of these periodic sales, however, can vary from quarter to quarter often resulting in noticeable swings in the line item of our earnings statement. This particular quarter, the swing was very noticeable due to the fact that last year we sold several pieces of real estate during the first quarter, resulting in significant gains of approximately $0.06 per share after tax. Now, we're actively attempting to sell additional non-core property and equipment including those two valuable theater parcels in conjunction with -- that will be able to be disposed of after we open the nearby replacement theater in Brookfield, Wisconsin.

As a result we expect to report significant gains again this year. But they'll likely occur in later quarter this is time around. In fact, we expect by the end of fiscal 2007, our gains from disposition of property and equipment will likely exceed last year's amounts. Net equity losses from unconsolidated joint ventures did not change significantly from the prior year and consists primarily of our share of preopening expenses from our Las Vegas hotel joint venture. As we point out in our 10-K and our most recent conference call, once the Platinum hotel opens as expected during our second quarter, we will close on condominium sales and report any development profit or our share of any development profit resulting from this transaction on this same line.

A few moments ago, I pointed out our fiscal 2007 first quarter comparisons to last year were negatively impacted by a significant change in the gains from disposition of property and equipment. I would be remiss then to not point out that the negative impact of that line item was essentially offset by a significantly favorable impact resulting from a much lower effective income tax rate for continuing operations during fiscal 2007. Our first quarter effective income tax rate was under 26% during the quarter, compared to over 36% last year for the same period.

As we have pointed out in the past, our effective tax rate has been running lower because of our investments in federal tax exempt short-term financial instruments. While we still have cash invested in tax free instruments, it is clearly not as much as last year and under normal circumstances, you would actually expect that our effective tax rate would begin return to go a number closer to our historical average of approximately 39 to 40%. The reason it hasn't and in fact gone down even more is due to the anticipated impact of federal and state historic tax credits that will be generated by our Oklahoma City Skirvin Hilton project.

The effective tax rate used during the first quarter reflects our current estimated rate for the full year including the credits that are expected to be generated upon the scheduled opening of the hotel in February of 2007. Our actual fiscal 2007 effective income tax rate could be different from this estimated first quarter rate depending upon many factors including our actual final pretax income, the actual amount of tax free interest recognized during the year, and the actual value of historic tax credits recognized.

Shifting gears, our total capital expenditures during the first quarter of fiscal 2007 totaled approximately $12.5 million, compared to $31 million last year. With previously described projects noted in our press release accounting for this year's expenditures. Last year's capital expenditure number included the Wyndham Milwaukee acquisition. At this early stage of our fiscal year I have no reason to adjust our previous estimate for capital expenditures for fiscal 2007 of an amount that may exceed $100 million. The actual timing of the various projects currently underway will certainly impact our final capital expenditure number as will any currently unidentified projects that could develop during our fiscal year.

So now let's talk about briefly each about our operating divisions beginning with theaters. Our box office revenues were up 4.2% during the first quarter with concession revenues up 9.1%. While the quarter had its usual up and down weeks compared to the prior year, the highlight was early July when Pirates of the Caribbean 2 was released, sending attendance and revenues soaring. Total attendance increased 6.3% for the first quarter. Our average admission price was actually down 1.9% for the quarter due to selected regional price promotions and film mix. Our average concession revenues per person were up 2.7%.

Pricing and movie mix are the two primary factors that impact our concessions per capita numbers. Our operating margins were even with last year at 26.4%, as higher film costs as a percentage of box office offset efficiencies gained elsewhere from the increased tenants. Division operating income increased compared to the prior year for the third straight quarter after well documented five straight quarters of decreased results. As Steve noted in our year end conference call less than two months ago, while the industry continues to face many old and new challenges the likes of which we've discussed in previous calls, there is a sense of cautious optimism once again prevailing in our industry. I am sure as we that right as we speak Steve is at this moment probably discussing many of these challenges with others at the national theater owner meetings.

In the meantime, we've ben quite active on several fronts I would like to update you on. As noted in our release, construction continues to our three new theaters currently being developed in the Sturtevant, Racine, and Brookfield/Waukesha markets of Wisconsin. The first two theaters should open in time for the upcoming holiday season, and we remain on track to open up the flagship Majestic Theater in the Brookfield area and we'll you about it later next spring. Needless to say we're quite excited about all three of these theaters and particularly look forward to working with the exciting new features that will be part of the Majestic theater and were highlighted in our press release.

As we reported in our last call, we continue to test digital cinema hardware and software in some of our theaters. We learned a lot during this process and the conclusions thus far remains as same as Steve previously shared with you. Digital cinema is coming, but there is much to be worked out before any widespread roll out will be possible. Not only are there still many technical issue that is must be resolved in order to make the entire process work seamlessly, but many details are yet to be decided related to the best financial model for our rollout. We still expect testing to continue during a good portion of fiscal 2007.

Thus as you've heard we'll continue to focus on the things we can control, but as always our future performance requires consistent quality and quantity of film product. Based upon the current information available to us, the quantity of films to be released in the coming months appears to be very good be released in the coming months appears to be very good and likely ahead of last year. The quality of films and how appealing they are to our audience is much harder to measure until after the fact.

September, which is historically the slowest box office month of the year, has been underwhelming. As we look into October and November, however, the film lineup improves. We've noted some of the fall films we expect to perform well on our press release. We will undoubtedly have some tough comparisons when we go up against the release of Harry Potter and the Chronicles of Narnia in mid-November and December, seeing that those two pictures were our top performing films last year.

We haven't seen most of the holiday pictures yet, but on paper, films such as Mel Gibson's Apocalypto, Eragon, Night at the Museum, Charlotte's Web and Dream Girls have potential to do well. As we're going through those five straight quarters of decreased operating income you heard Steve continue to say we'll resist riding the roller coaster and drawing any macro conclusions about our business just because of a tough stretch of business. To be consistent, we say the same thing after three straight up quarters. We'll continue to take a long-term focused approach to our business and deal with the challenges and opportunity that lie ahead both tomorrow and in the months and years ahead.

Now let's turn our attention to our hotel and resort division. Our overall hotel revenues from continuing operations were up 11.9% during the quarter compared to the same period last year. Since we added the Wyndham Milwaukee and the Four Points Chicago during the first days of our first quarter last year, our results are made up of comparable hotels except for the recently acquired Westin Columbus. As I noted earlier, the results from both years exclude the now-sold Marcus Vacation Club.

Our press release noted the total RevPAR for comparable properties increased a solid 7.2% for the period after increasing 6.8% during the fiscal 2006 fourth quarter. Our fiscal 2007 first quarter RevPAR increase was driven by a very healthy 9.7% increase in our average daily rate or ADR. Our overall occupancy rate was actually down slightly 1.8 percentage points, due in part to a reduction in the number of citywide conventions in Milwaukee during this particular summer compared to the prior year.

As noted in our press release, the highlight of our fiscal 2007 first quarter was a significant increase in revenues and resulting operating profits from our Chicago hotel which continues to exceed our expectations. The increased overall revenues during the quarter translated into significantly increased first quarter operating income due to the impact of our new hotels and strong cost controls. Our operating margin increased from 20.7% last year to 23.7 this year with a similar level of preopening expenses negatively impacting our results in each year. Last year it was Chicago, this year the Oklahoma City Hilton Skirvin. The Skirvin will continue to negatively impact our operating results during fiscal year 2007, prior to its planned opening for our final quarter. Once completed, we expect this hotel to contribute positively to fiscal 2008 operating results.

As I indicated, our first quarter RevPAR was impacted a little by a couple of tough group business comparisons at two of our hotels and another hotel was impacted slightly by new competition that recently opened, but overall, we're very pleased with the start in fiscal 2007. For the time being, overall supply growth remains minimal, allowing for some reasonable expansion in ADR which as you saw was a very positive development for our overall operating margins. Our advance bookings would suggest that overall same hotel results should continue to improve in the near term.

As our press release notes, we have several capital projects under way at our existing hotels that should enhance the long-term value of these properties. Our renovation of Milwaukee Wyndham is going well. The renovated lobby, ball room, restaurant and bar should open in October and the complete room renovation should be done in November. Business has been impacted slightly because of the renovation but the operating staff has done a good job of minimizing the disruption.

The conference center expansion at the Grand Geneva is also progressing nicely and should open in October. We're adding approximately 12,000 square feet of usable space to the resort, and we already booked a significant amount of new business into the facility. The Grand Geneva had a very solid first quarter with nice improvements over the prior year and we believe that this new meeting space may provide a further catalyst for this property. The Pfister should open its new the Mason Street Grill as well as a new spa and salon in November.

As our press release notes, progress continues on our two newest hotels under development, the Las Vegas Platinum hotel and the Oklahoma City Skirvin Hilton. The Platinum construction nears completion and we're currently working with the city of Las Vegas to obtain our temporary occupancy permit. Construction remains on schedule for the Skirvin. We're looking forward to adding both of these fine hotels to our active portfolio.

Our pipeline of other potential new hotel products remains quite active. We're very close to adding a couple of new management contracts, and we continue to pursue other management only or management plus some equity investment deals. We also continue to entertain the possibility of adding equity partner to one or more existing hotels while maintaining management. We previously indicated that this was an option for our recently acquired Columbus Westin. All in all the outlook for our hotels and resorts division continues to appear very promising.

So with that at this time I would be happy to entertain any questions you may have.

[OPERATOR INSTRUCTIONS]. We'll go first to Andy Whitman with Robert Baird. Please go ahead.

Hi, Doug.

Hi, Andy.

Just wanted to touch base. Looked like administrative expenses were up. Is that the line item where we're seeing the options expense and can you say what the run rate may look like for the rest of the year?

That would be the line item where you would see the options expense predominantly, and administrative expenses are also going to reflect the fact that again, for example, in the hotel side, there are administrative expenses that at every new hotel you add. So from that perspective the Columbus Westin administrative expenses would be in there and they wouldn't be in there last year.

Okay.

And it is a -- in general the admin number does generally run fairly consistent quarter to quarter. You can get some unusual ups and downs really when you start talking about legal expenses and things along those lines, but in general it runs fa fairly consistent quarter to quarter.

Okay. Interesting sounded like we're hearing that one or more hotels for equity partners, are you able to say which hotels you're looking at and can you define what more is? Is that two or three?

That's not language we haven't used already in the past, Andy. The fact is we've indicated in the past that if it made sense and obviously ultimately we want to continue to manage properties, but if it made sense in any given asset, we would consider that given that that's primarily how we're seeking new deals. We specifically called out from the moment that we bought the Columbus Westin that was something that we were considering, and so that's beyond that, no, I can't really take any farther than that because it would really be an asset by asset-type decision.

Okay. Any more clarity on the Platinum Hotel? Sounds like closings are coming up pretty close. Revenue streams from that and how should we look at that in terms of the second half of the year?

Well, the -- as I indicated, we are currently very close to completing construction. We're actually working with the city right now to get our TCO, and that does take a little bit of time, and once we have that worked out, closings typically occur within a 30-day period once we give notice to the folks that have deposits down that we're ready to go, so we're very close to that point, so if you do the math, it would suggest that we're looking at in the latter half of this quarter, probably end of October give or take maybe a little bit more, and we'll get the closings done and we'll get the property open, and whether all the closings will occur this quarter or not, it is difficult for me to tell you that as I sit here today.

Okay.

But over the course of the full year, we've already previously indicated that we expect kind of a significant impact in terms of our share of the development profit.

Okay. On the cash balance, I know that the capital expenditures for the rest of the year are pretty hefty. Share buyback has been active. Any other thoughts on other uses of cash and update on the share buyback program or other options you're considering for shareholders?

No updates since the last time we talked, Andy. The share buyback is still a tool that we think is a viable tool for us. We won't be necessarily in the market every single day, but as you saw we certainly repurchased some shares during the first quarter, and we have certainly been trying to replenish our treasury stock a little bit, and it could be -- it would not be surprising to see that tool be used as the year goes on, but I have no specific timetable. We'll at our discretion go in or out of the market.

Okay. Sounds good and last question I have was 3% improvement in margins for hotels is strong. Appears flat on pretty noticeable I guess 6-plus plus percent traffic in the theaters. What's the outlook for margin expansion there and/or is it compression we should be looking for? Can you talk about the environment that the theaters are operating?

Absolutely. What I would say is first of all in the theater side of the business, film costs were up a little bit, not necessarily more reflective of the films that played and did well and over the course of a year, film cost tends to even out, and so we certainly aren't going into this year expecting that we're going to end the fiscal 2007 with increased film costs. It is certainly -- we've got a department that works very hard at that. By definition the better films , sometimes the costs will go up a little bit, and you're probably looking at a little bit of that here, but that was probably the single biggest factor that kept our margins flat even so we had increased revenues. Over the course of the year, you know, there is some room, but we run the best margins in the business frankly, and so it is not as if there is room for significant margin expansion in that segment of the business.

As you saw on the hotel side, there was significant margin expansion, and that is not any one factor, quite a few different factors, and the hotel side I can't under estimate the impact that the Chicago property had. It is -- as it lapped its first year and did so well, certainly we saw significantly better improvements there, but we stress flow-through significantly in that business. We really work hard at trying to drop incremental profits and incremental revenues, and we did a very good job of that at several of our properties this particular quarter.

Okay. Great. Thanks.

[OPERATOR INSTRUCTIONS] We'll go next to Rob Damron with Midwest Investments. Please go ahead. Hi, how are you.

First a couple questions about the renovations going on in the business. I am sure that had some impact on the revenue stream, certainly the closing of the restaurant in the fister hotel and the Wyndham Milwaukee Center renovation. Is there any way to quantify some of the lost revenue or how much revenue you would have had if you didn't close or renovate these areas of the business?

Well, Rob, I would -- I don't have that at my finger tips, and I really wouldn't want to try to guess at that. I would tell you that as you indicated, the main points would have been closing Celia, the restaurant in the basement at the Pfister. That property, that restaurant was a dinner-only restaurant. At the Wyndham, you're correct. We in fact closed the restaurant. However, we did continue to serve at a makeshift setup in the lobby. We took a lot of steps to try to minimize the business. We tried to capture some of the additional business at the Pfister as well. I would say that while the answer is yes, it probably had some impact, I would say overall it was not overly material, Rob.

When was that Pfister restaurant --

November.

November. Okay. And then I want to try to get my arms around the games that are expected from the Las Vegas property, , maybe if you could ballpark that for us a little bit and also which quarters we might see that in and also from the Brookfield theaters being sold, and also the Green Bay and Racine theaters. Maybe you could give us some idea of the timing and the magnitude of those games?

Well, first of all, as far as Las Vegas is concerned, we had indicated previously in our 10-K filing that our share of the development gain could be up to approximately 5 to $7 million after all units have closed, so we haven't changed that estimate at this time. Obviously the final number will be determined once all final costs are in, and also the keyword there is after all units have closed, and so if in fact, until we get to the finish line you don't know if all units will close or not, if you don't, you have to go through a reselling process. The market in Las Vegas is still very strong, and that doesn't concern us at all, but that could affect the timing.

Probably Q2 and Q3 would be the lions share of that.

That would seem a reasonable expectation, but I could not possibly try to give you a breakdown at this point in time. How about the rest of the expected gains, Brookfield and -- The rest of the expected gains, the biggest single gains would come from the sale of the two properties, the two Brookfield properties, and one of them has been reported here locally is under contract, and they're basically waiting for us, and so that one I believe would likely be a second half. I cannot tell you specifically whether it would be -- it would not likely be second quarter. I think it will be a second half gain.

Would you give a ballpark number on that?

Multi-million, but beyond that we have not -- that's about all I've said publicly, so I really can't take it any farther than that right now, Rob.

The Green Bay and the Sturtevant and the other --

The Green Bay and Sturtevant are just gains that could occur from those properties would result from us selling outparcels, because in both situations there, again consistent with a real estate strategy we've employed in the past, we brought more land than we needed, and turned our theater comes a catalyst for development, and as we speak we are actively working at getting a couple of these under contract. I think we have a couple that are currently under contract to sell outparcels to whether it might be a small strip center or a restaurant or whatever it might be, and so there will be individual gains that can occur just like we have every year, Rob. Every year if you look at our history, we've had two to $3 million of gains just from normal transaction, real estate transactions and we've stated in the past that given the amount of and we've stated in the past that given the amount of real estate we have, we have no reason to not expect similar type gains every year.

Okay. Just a couple other questions. Preopening expenses for fiscal '07? What kind of number do you think we'll see there on that line?

Given that last year we had Chicago in there, this year we have Oklahoma City, I don't know that it would necessarily vary significantly from the prior year.

But would Las Vegas be in there as well?

No. Las Vegas is a joint venture. Oklahoma City is a fully consolidated entity, and so any expenses will show up on that line.

I see. Okay.

Las Vegas is a joint venture will show up below the line equity earnings and losses.

Okay. And then the tax rate I understand it will be lower this year, but would it move back up to a more normal rate in fiscal '08 or would you still have some tax credits that you could use in fiscal '08?

No. Our historic rate of 39 to 40% is where we have always been, where I would expect us to be in the future if not for these special items.

Okay. And lastly, the fourth quarter does have an extra week this year, and that week includes Memorial Day, is that correct?

That is correct. That traditionally has a significant impact on our results.

Okay.

For the fourth quarter.

That's all I have. Thank you very much.

Thank you.

Mr. Neis, it appears we have no further phone questions. I would like the turn the call back over to you for additional or closing remarks.

Thank you very much for joining us today. We hope to see you at the meeting at the Wyndham Milwaukee Center hotel and for those of you who cannot attend, we look forward to webcasting it as well. We look forward to talking to you in December when we release our results. Thank you for participating and have a very good day.

This does conclude today's conference. You we thank you for your participation. You may now disconnect.