Marcus Corp (MCS) 2007 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to The Marcus Corporation third quarter earnings release conference call. Today's call is being recorded.

Joining us today are Steve Marcus, Chairman and CEO, and Doug Neis, Chief Financial Officer.

At this time, I would like to turn the program over to Mr. Neis. Please go ahead, sir.

Thank you, very much, and welcome everybody to our fiscal 2007 third quarter conference call.

As usual, I need to begin by stating that we plan on making a number of forward-looking statements in our call today. Our forward-looking statements could include but not be limited to statements about our future revenues and earnings expectations, our future RevPar occupancy rates and room rate expectations for our Hotels and Resorts division, our expectations about the quality, quantity and 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 the number and type of our properties and facilities, expectations regarding various non-operating line items on our earnings statement, 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 10-K and 10-Q filings, which can be obtained from the SEC or the Company. We will also post all Regulation G disclosures when applicable on our website at www.marcuscorp.com.

So with that behind us, let's talk about our fiscal 2007 third quarter results. We're pleased to be reporting our seventh straight quarter with increased earnings from continuing operations, despite a decrease in operating income this particular quarter. Before I get into the operating results, however, let me first address the various line items below operating income on our earnings statement as there were significant verifications compared to the prior year.

For likely the last time, I will remind you that our reported investment income continues to be significantly less than the prior year due to the payment of our $7 special dividend on February 24th, 2006, which was the first day of our fiscal 2006 fourth quarter. As a result, this should be the last quarter with a significant variation on this line item.

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 third quarter with approximately $23 million in cash with another $18 million in cash being held by intermediaries. The increase in our cash balances since the last quarter is directly related to the receipt of Platinum Hotel condo sales proceeds received in excess of the construction loans related to the same project.

If you recall, at the end of the second quarter we noted that our current maturities of long-term debt included approximately $64 million of outstanding Platinum construction loans that were consolidated on our balance sheet as a result of the fact that we had acquired a 90% interest in the Platinum joint venture. As expected, those loans were completely paid off during our third quarter and the excess proceeds have slightly inflated our cash balances.

Our overall debt excluding these Platinum construction loans actually increased slightly during the quarter due to the funding of several loans related to the Skirvin Hilton project. Our overall debt-to-capitalization ratio at the end of the quarter increased to a still very low 38.5%, compared to 37% reported last May year end.

The Platinum was obviously the reason for another large variation in our gains on disposition of property, equipment and other assets this quarter. As noted in our release, we reported another $4.9 million of prorated development gain related to the Las Vegas Platinum this quarter.

Consistent with previous disclosures, we're currently estimating that we will report a total development gain from this project of approximately $7 million by the time we have closed on all 255 condo units. As of February 22nd, 2007, we had closed on approximately 90% of these units. A few more units have closed early in our fiscal 2007 fourth quarter, and we are actively marketing the remaining handful of units that did not close with the original buyers.

We may still own a small number of units at year end, but based upon the sales history of these types of unit thus far in Las Vegas, we are currently confident that we will be able to sell these remaining units in a relatively short period of time, possibly at price levels higher than what they were originally contracted for.

Yet another significant variation in our fiscal 2007 results to date compared to a year ago, can be found once again on our income tax line. On that line you will see that both the quarter and year to date have been favorably impacted by a much lower effective income tax rate for continuing operations during fiscal 2007. Our first three quarters effected income tax rate was just under 23%, compared to approximately 33% last year for the same period.

As we discussed last quarter, the reason for the significant decrease in rate is due to the anticipated impact of federal and state historic tax credits that will generated by our Oklahoma City Skirvin Hilton project. The effective tax rate used during our first three quarters reflects our current estimated rate for the full year, including the credits that are expected to be generated by the opening of the hotel early in our fourth quarter, just happened.

Our actual final fiscal 2007 effective income tax rate could still be different from this estimated rate depending upon many factors including our actual final pretax income and the actual value of the historic tax credits recognized. And next fiscal year we would expect our effective tax rate to likely return to our historical 39% to 40% average. Then you will have to put up with me reminding you every quarter why we have unfavorable comparisons on this particular line.

And finally, in comparing our fiscal 2007 results to last year, I'll point out once again that this year's operating results include costs associated with the expensing of stock options. We have adopted FAS 123R using the modified perspective method, meaning that the prior year's results have not been restated. So as previously noted, we expect our full-year 2007 results will be negatively impacted by about $0.02 a share as a result of this adoption.

Shifting gears, our total capital expenditures during the first three quarters of fiscal 2007 totaled approximately $68 million, compared to $47 million last year. With approximately $19 million spent in our Theater division, primarily on the two new theaters in Green Bay and Racine, and $49 million spent in our Hotel division with the Oklahoma City and Intercontinental Milwaukee Hotels as well as the Pfister and Grand Geneva projects that we have talked about in the past accounting for the majority of that spend. Last year's capital expenditures included the Wyndham Milwaukee acquisition.

Now, with one quarter to go in our fiscal year, I have no reason to adjust our previous estimate for capital expenditures for fiscal 2007 of an amount in the $100 million range. Due to a specific funding mechanism the majority of the spend related to the Majestic Theater will be reported during our fourth quarter.

Additional remaining dollars for the Skirvin Hotel and the Pfister projects will also contribute to fourth quarter capital expenditures. The actual timing of the expenditures on the various projects currently underway will certainly impact our final capital expenditure number as will any currently unidentified projects that could develop during the remainder of our year.

I also want to, again, remind everyone that our fourth quarter will have an extra week this year as we conclude our 53-week year. This extra week will particularly benefit our Theater division as it encompasses the traditionally strong Memorial Day Weekend.

The last time this happened, which was in fiscal 2001, the Theater revenues from that extra week were roughly 50% higher than an average week for the year. In 2001, the extra week for hotels was much closer to an average revenue week.

Now, in prior years the margin on this extra week of revenues was typically higher than the average due to the fact that only incremental variable costs are added, fixed costs have already been annualized. The result of the fairly sizable favorable impact to our fourth quarter results as a result of this extra week.

Before I turn the call over to Steve, let me provide a few additional financial comments on each division. First in the Theaters. Our box office revenues, as you saw, were down 7.6% during the quarter, meaning our year-to-date box office is now down 2.8%. Concession revenues were down 7.1% for the quarter but remain up slightly for the year. Other revenues from the Theater division actually increased this quarter and are up nearly 14% for the year due primarily to increases in preshow and lobby advertising.

As noted in the release as expected, this year's third quarter film lineup couldn't complete with last year's third quarter slate, which included the two best performing films we had for the entire year last year. Interestingly though, the two biggest weeks of the quarter and, for that matter, generally of the year, the weeks that include Christmas and New Year's, actually were better this year than last year. This was likely due in part to the fact that the holidays fell on Mondays this year, which was less disruptive to our normal weekend business.

And while there were no major blockbusters this year like last year, there was a good quantity of films that people wanted to see, which is always good. Total attendance decreased 7.4% for the third quarter, but is now down 1.7% for the year.

Our average admission price was actually down 0.3% and 1.1% for the third quarter and first three quarters, respectively, due to selective regional price promotions and film mix. Our average concession revenues per person were up 0.7% for the quarter and 2.0% for the first three quarters, respectively. Pricing and movie mix are the two primary factors that impact our concession per capita numbers and last year's movie mix during the third quarter was much more concession-friendly, for lack of a better term.

As it would be expected given the reduced attendance, our operating margins are down slightly during fiscal 2007. On a year-to-date basis our overall operation margins in this division is still a very healthy 22.5%, compared to 23% last year during the first three quarters. With a strong fourth quarter film lineup and the benefit of an extra week in this fiscal year, it's still possible that our overall Theater division operating margin for fiscal 2007 could meet or exceed last year's final margin.

In our Hotel and Resort division, our overall Hotel revenues from continuing operations were up 13.8% during the quarter compared to the same period last year. Our results are made up of comparable Hotels except for the Westin Columbus acquired last May, the Platinum Las Vegas, which opened at the end of October and the Intercontinental Milwaukee, which underwent a complete renovation and repositioning.

Our results from both years exclude the now sold Marcus Vacation Club. Our press release noted that the total RevPAR for comparable properties increased 1.3% for the third quarter and is still up 7.1% for the year. As we noted in our press release, the fiscal third quarter is always our weakest quarter due to our predominantly Midwestern located properties.

And this year's year-over-year third quarter comparison was further hindered by specific factors at selected hotels. As just one example, the unusually warm and snowless winter weather during the Holidays and throughout January significantly impacted our ski-related business at our Grand Geneva Resort.

Our RevPAR increases have come primarily from significant increases in our average daily rate or ADR, which was up 3.5% during the quarter and 7.5% year to date. Our overall occupancy rate for comparable properties was actually down slightly 1.1 percentage point in the third quarter and 0.2 percentage points for the first three quarters of the year.

Our Chicago Four Points Hotel continues to provide a significant contribution to our year-over-year improvement. The increased overall revenues during the quarter would have translated into increased third quarter operating income and a much larger increase in our year-to-date operating income if not for the significant increase in preopening expenses and startup costs noted in our release.

Our operating margins have obviously been impacted by the significant one-time costs. With the Skirvin Hilton's actual open date in the first week of our fiscal fourth quarter, we'll still likely incur some additional level of related preopening expenses and startup losses this next quarter as well, but the dollar impact is not expected to be anywhere near as significant as it was during our third quarter.

I'll let Steve comment specifically on each of the new properties, but we obviously expect all of the new hotels to contribute positively to future operating results as they mature.

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

Thanks very much, Doug.

I'll begin my remarks where Doug left off, which was discussing our Hotels and Resorts division. As you know, we have been quite busy in this division, which, I guess, is both good news and bad news, depending on our your perspective.

If your perspective is short-term, our growth activity can be considered bad news as we will occasionally experience a quarter like our third quarter that's so heavily impacted by one-time preopening expenses and typical new hotel startup losses. We laid the numbers out for you in our press release so that you can see the impact, but they are what they are. It makes for a tough comparison if you just focus in on the quarter.

As you know, however, our perspective has always been on the long-term impact of the investments we make and we've always been willing to absorb one-time costs like these in order to increase shareholder value over the long haul, and that's where the good news is. We believe our fiscal 2007 was another great quarter for us when looked at through a long-term lens.

Let me make a few brief comments about some of our recent investments and our growth opportunities. I'll start with the Platinum in Las Vegas. This was our first full quarter operating this hotel, but the reality is that we were still not operating on all cylinders during the third quarter.

As you saw in our release, we went from approximately 20% units sold and closed at the end of our second quarter to 90% sold and closed by the end of our third quarter. As a general rule, we weren't able to rent many of these units until after the sale was closed, so we really didn't have a near full complement of rooms available until late in the quarter. On top of that, December is historically the slowest month of the year in Las Vegas, so we had that working against us as well. As a result, we had to absorb some start-up operating losses from this hotel this quarter.

Now that we have the majority of the units sold and closed, we look forward to developing this hotel in this unique and thriving market. As a non-gaming condo hotel, near but not on the Strip, our job is to market and exploit the customer base that is looking for a high-end condominium type accommodation without the noise and distraction that goes with a typical casino hotel.

This will include small groups and individual business travelers, for example. Slowly but surely we are making progress. I stayed at the hotel myself the last several days -- several days last week while attending Show West, which is the Theater industry's largest convention and trade show, and I can tell you that at the end of a long day of meetings and walking the trade show floors, it was a pleasure to get into the somewhat more quiet atmosphere of the -- of Platinum, and it was actually only a block off the Strip.

Moving on, I consider the InterContinental Milwaukee, essentially a new hotel that opened in mid May of the third -- in the -- midway in the third quarter. Taking on three floors at a time, we completed the complete rooms division during the quarter and introduced Milwaukee to the rebranded luxury InterContinental brand in time for New Years.

Like any new hotel, we incurred a fair amount of preopening expenses in conjunction with this repositioning. And also like a brand new hotel, we would expect that a ramp-up time will occur as we market this sophisticated hotel with a higher average rate to the appropriate customer base. The hotel looks great, and we look forward to successfully completing this repositioning in the market place.

While opening a new restaurant isn't the same thing as opening a new hotel, I would be remiss if I didn't mention the fact that the Pfister opened its new restaurant, The Mason Street Grill, during the quarter and the public reaction to it has been nothing short of fantastic. Preopening costs from this restaurant also negatively impacted us during the quarter.

But this investment is poised to perform very well for us in future periods. Construction is also almost complete on our new Spa and Salon at the Pfister as well, which should open by early April and give us an important new weapon in the competitive hotel war zone in downtown Milwaukee.

The Skirvin Hilton had the largest negative impact to our third quarter results, but, again, the long-term prospects for this historic hotel appear promising. I was in Oklahoma City for the grand opening ceremony at the end of February, and the City's response to that hotel was overwhelming.

I compare this hotel to the Pfister in Milwaukee, both in terms of its style and feel, as well as the emotional and historical impact of the City itself. As you know, this was a very complicated project to complete and required a great deal of patience. I'm so proud of the end result and I look forward to the long-term value that should be created by this wonderful property.

When you add to all of this, three new management contracts noted in our press release, none of which had any impact on our third quarter results, you can see that some of our previously stated growth strategies are starting to gain traction. We've had a lot to absorb over a very short period of time. But I'm excited about the progress we have made this quarter.

Our pipeline of other potential new hotel projects remains quite active. We also continue to entertain the possibility of adding an equity partner to one or more of our existing hotels, while maintaining management. We have previously indicated that this was an option for our recently acquired Westin -- Columbus Westin Hotel.

The overall hotel operating environment remains strong. For the time being overall supply growth remains somewhat minimal, although the number of proposed projects seems to be increasing in many markets. Our advanced bookings would suggest that overall same-hotel results should continue to improve in the near term.

As you can see, it has been a very busy but exciting period for our Hotels and Resorts division and we look forward to the weeks and months ahead as we continue to grow this business.

With that I'll move on to the Theater business. While we're disappointed in the Theater results this quarter, I can't say that were really surprised, nor I suspect were any of you. If anything, we were surprised in a favorable way by how well those two critical weeks around the Holidays did despite the lack of a franchise picture like Harry Potter or Narnia.

We were disappointed in the lack of strong films in January and February, however. The good news in this business is that every week you open a new product and you have a chance to reclaim that missing customer, and that's exactly what we have seen in the last 2.5 weeks.

Our fourth quarter is off to a better-than-expected starts thanks to strong performances from films such as "Wild Hogs" and "300", and I won't restate the upcoming films for you again. We listed a number of the pictures in our release and you heard us talk about the blockbuster May lineup for sometime now.

As I noted earlier, I just returned from Show West, and needless to say, the entire industry is anxiously awaiting the coming months. Time will tell whether the reality will match the hype, but on paper it sure does look good. So while we wait for that next film to open, we continue to do the things necessary to position us to capitalize when that next blockbuster does come.

We're pleased with the initial results from our two newest theaters in Green Bay and the Sturtevant/Racine markets of Wisconsin. These state-of-the-art theaters have solidified our position in those markets and should significantly outperform the theaters they replaced.

And construction continues on our flagship Majestic Theater in Brookfield, Wisconsin with a grand opening currently scheduled for the first week in May, just in time for Spiderman III. My feelings have only strengthened since the last time we talked that this will be a very, very important step for us as we add a significant food and beverage component to a theater.

We expect to learn a lot from this new theater as we continue to focus on creating an entertainment destination for the future. I look forward to giving you a report on the response to the Majestic the next time we talk.

Like our Hotels and Resorts division we will, of course, continue to take a long-term focused approach to our Movie Theater business. We will continue to look for opportunities to invest for the long term in the Theater business, and we look forward to the challenges and the opportunities that lie ahead.

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

Thank you.

[OPERATOR INSTRUCTIONS]

We'll go first to Andy [Whitman] of Baird.

Please proceed.

Good afternoon, guys.

Hi.

Hi, Andy.

My interest is piqued on the hotel comment from Steve talking about an active pipeline.

Is that referring to more management contracts? Or is there stuff where you are looking at equity interest or even wholly owned interest?

Both.

Yes, I would agree with that comment.

I think that it probably skews towards management, but-- but generally there's some equity interest in several of the projects that are in that pipeline.

I'm thinking right now, I don't think that there are at the moment any-- all in buying entire hotel for our own portfolio. We have never ruled out that we wouldn't be opportunistic if that came along, but the pipeline is filled primarily with management with some equity.

Okay. That's interesting.

In terms of-- just on a net basis you looked at-- talking about looking at what you currently own and finding possible JV partners on that -- in terms of the pipeline, is that a net investment of-- of cash? Or do you think it's going to go the other way maybe over the course of the next year?

Andy, I mean, I would just -- we specifically even called out the Columbus Westin and we have been pretty open about that from the get-go. So we have continued to entertain opportunities, particularly for that hotel, everything else beyond that is more just a broader strategy that we have always had in place on an asset-by-asset basis.

I wouldn't be anymore specific than just to indicate we'll certainly will continue to review-- if that's an opportunity for Columbus, we wanted to do that from the beginning, so we'll keep looking at that.

Okay. Okay.

And then on the Skirvin, if you had any outlook as into the ramp in terms of bookings and the hotel just opened a few weeks ago, but if you can give us some idea of how you expect that one to ramp, I think that would be helpful.

I'll start and I'll let Steve cause he has been out there, but I will say this; it was an unusual opening because we were sold out the first night. Within a weekend after that we had the Big 12 tournament in Oklahoma City and we were again sold out which is not necessarily how you want to open up a hotel, to be honest with you.

You prefer to kind of have a little quieter opening as you are training and getting people going, but we came right out of the gate just jammed, but --- and Steve was there during the initial part of it. I guess-- from what I'm hearing, again, we're pretty pleased with all of the initial bookings.

Steve, any additional comments?

Yes. I would echo that and -- it's a little bit difficult. We had our internal projections going in to it, but then as you back away and you come right down to the opening, you are trying to deal with real numbers, and the fact that is that Hilton doesn't really open your reservation flow until very shortly before you are ready to open, and you take a look at your banquet bookings and the people at the property are saying it looks very strong.

They have had good experience in the hotel industry and also very good experience with us, so-- and the way we translate that is that it is going to be very strong, but it does take time to fill in the holes, so I can't tell you exactly what the ramp-up would be.

Just as an addendum, from what I have heard, and Steve, maybe you have heard a specific number, but I think I heard that they had-- I don't know how many weddings, but it was a significant number of weddings have already been booked for people who wanted to get into this hotel so that was really wonderful to see.

Great. Okay.

I guess my final question is just looking at the Milwaukee hotel market and proposal for-- it looks like at least two hotels are being proposed with the Kimpton Hotel and in the Loft, and I just wanted to get your thoughts on how real those might be? How they may impact you? And maybe what your long-term strategy, or if that may adjust or maybe how it could adjust?

Well, there have been lots of hotel proposed, but how many of them will actually come to fruition is another issue. The hotel business in Milwaukee right now has been relatively soft in the last-- in this current year that relates to convention bookings in the city.

They tell us that starting next year it gets a little bit stronger, and our concern-- I mean, if anybody can finance a hotel in downtown Milwaukee, then that's-- as far as we're concerned, that's great. What we continue to be concerned about is hotels that might be subsidized by the City in some form. That would give them, in our view, an unfair competitive advantage.

Although none of them look to be major convention hotels, and that is really the key to the business in the-- in the city. And so we-- it relates to as much what the Convention Bureau is doing as anything else.

Okay. Great.

But let me say this, but we remain optimistic that the market in downtown Milwaukee will continue to be strong. There's good growth in residential development downtown, and-- and in office development, and of course that all creates additional supply.

And-- I'm talking about customer supply, that -- that creates additional demand for our hotel space.

Okay.

Great. That was very helpful. Thank you.

[OPERATOR INSTRUCTIONS]

At this time, it appears there are no other questions.

I would like to turn the call back over to Mr. Doug Neis for any additional or closing comments.

Well, you guys were easy on this quarter. Thank you.

We certainly would like to thank you, once again, for joining us today. We're very excited about the upcoming quarter, and we are heading into a busy summer season. We look forward to talking to you next when we talk about our year-end results which will be reported at the end of July, thereabouts.

So, have a very good night, and we'll talk to you soon.

That concludes today's call. You may disconnect your line at anytime.