Marcus Corp (MCS) 2007 Q4 法說會逐字稿

Good afternoon, everyone. And welcome to the Marcus Corporation Fourth 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'd like to turn the program over to Mr. Neis. Please go ahead, sir.

Well, thank you very much, everybody. And welcome to our Fiscal 2007 Fourth Quarter and Year-End 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 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 the number and type of our properties and facilities; expectations regarding various nonoperating line items on our earnings statement, and our expectations regarding future capital expenditure.

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 fourth quarter and year-end results. We're pleased to be reporting our eighth straight quarter with increased earnings from continuing operations. In fact, we're up nearly 150% versus last year's fourth quarter on this all-important line. And we ended up 51% ahead of last year for the year.

Operating income was up for both the quarter and the year-to-date. 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 variations compared to the prior year, as well as I want to discuss some of the possibilities for some of these items during our upcoming fiscal 2008.

As I noted would happen during our last call, our fourth quarter investment income is now much more comparable to the prior year, now that we've passed the date last year when we've paid our $7 special dividend. We still expect our investment income to be down compared to the prior year for most of fiscal 2008, however, as we were still carrying a larger average cash balance during the first three quarters of fiscal 2007 than we're likely to carry in future periods.

In addition, part of our investment income is related to old timeshare notes receivable that are slowly being paid off. As you know, we're no longer in the timeshare sales business. And thus we are not adding to this notes-receivable balance.

Interest expense increased during the fourth quarter due to the additional debt added during the quarter to finance the theater acquisition. The extra 53rd week this quarter also added an extra $300,000 to this total.

Now while our actual capital expenditures and cash proceeds from asset sales can and will impact where our fiscal 2008 interest expense will actually end up, we certainly would expect our interest expense to go up, possibly by as much as $2.5 million to $3 million during fiscal 2008 due to the increased debt levels.

Now overall debt-to-capitalization ratio at the end of the year, while increased, is still less than 45%, compared to the 37% reported last year at year end. Due to favorable interest rates on several loans related to our Hilton Skirvin project, our average interest rate at year end on our current debt portfolio was approximately 6.3%.

We had a favorable year-over-year fourth quarter swing in our gains from disposition of property, equipment and other assets, primarily because of over $1.5 million of writeoffs reported last year during this quarter in our hotel division. For the year, of course, gains on disposition had a significant impact on our fiscal 2007 bottom line.

In addition to the significant gains reported on condo sales [at] the Platinum Hotel and the sale of one of our -- of the two theaters that were replaced by our new Majestic Theater, we also sold during the year four formal restaurant properties, several parcels of land, and the Westin Columbus Hotel to a joint venture that we have a 15% interest in.

During the fourth quarter, we did reduce our total estimated development gain, once all units had sold from the Platinum, to approximately $6.3 million due to additional costs on the project. We reported $5.9 million of this estimated total gain during fiscal 2007, based upon the fact that we had closed on the sale of approximately 92% of the units as of year end.

Now as of today, we still have 16 units left to sell. And while the Las Vegas condo market has certainly softened a little bit, carrying costs in these units are not significant. And we believe patience is the proper course at this time.

We currently expect to report additional gains during fiscal 2008 on this and other real estate sales. We also still have a second valuable former theater parcel in Brookfield, Wisconsin that when sold will likely result in a substantial gain. Of course, as I've said in the past, the actual timing of our periodic sales of real estate can vary from quarter to quarter, resulting in noticeable swings in this line item of our earning statement.

During our fiscal 2007 fourth quarter, we also experienced a favorable comparison in earnings and losses from unconsolidated joint ventures that will carry over into fiscal 2008. Last year at this time, we were reporting pre-opening expenses from what then was a 50%-owned Las Vegas joint venture, and our share of those operating losses from a former investment in a cinema screen advertising company as well. Now that we own 100% of the public space at the Platinum, we are consolidating the results on our financial statement. And we no longer have an investment in the aforementioned screen advertising company. Thus in the future, this line item will only include our 15% share of any earnings or losses from our two hotel joint ventures in Madison and Columbus, pending any additional joint ventures that we might add at a future date.

And finally, as I've pointed out each quarter this year, probably the most significant variation in our fiscal 2007 results compared to a year ago can be found on our income tax line. On that line, while our fourth quarter actually had a slightly higher effective tax rate compared to last year, due to an adjustment to the rate last year, our results were obviously favorably impacted by a much lower effective income tax rate from continuing operations during fiscal 2007. Our full-year effective income tax rate was 22% compared to just under 32% last year.

As we've discussed, the reason for the significant decrease in rate is due to the impact of federal and state in-store tax credits that were generated by our Oklahoma City Skirvin Hilton project. In fiscal 2008, we would expect our effective tax rate to likely return to our historical 39 to 40% range, which means you'll have to get used to me reminding everyone each quarter next year why we have unfavorable comparisons on that line.

The good news is that for the last time, you'll have to hear me point out that in comparing our fiscal 2007 results for last year, this year's operating results included the costs associated with expensing stock options, in accordance with recent accounting pronouncements. We adopted FASB 123R using the modified prospective method, meaning that prior-year results have not been restated. As previously noted, our full-year fiscal 2007 results were negatively impacted by about $0.02 a share as a result of this adoption.

Shifting gears -- our total capital expenditures, excluding the theater acquisition during fiscal 2007, totaled approximately $111 million, compared to $76 million last year, with approximately $41 million spent in our theater division -- primarily in the three new theaters built during the year -- and $66 million spent in our hotel division, with the Oklahoma City and Intercontinental Milwaukee Hotels, as well as projects at the Pfister in Grand Geneva, accounting for the majority of that spend. Last year's cap ex included the Wyndham Milwaukee acquisition.

If you add the nearly $76 million theater acquisition and investments that we made in joint ventures, we invested nearly $200 million in our businesses during fiscal 2007.

As we look towards capital expenditures for fiscal 2008, we are currently estimating that our fiscal 2008 capital expenditures may be in the $60 million to $80 million range, with approximately $25 million to $35 million estimated for our theater division and up to $35 million to $45 million estimated for our Hotels and Resorts division.

A substantial portion of this capital budget, however, is either yet to be approved by our investment committee or is for unidentified projects. So our actual fiscal 2008 capital expenditures certainly could vary from this preliminary estimate. Steve will go into a little more detail regarding our projected capital spending in a few moments.

Now before I turn the call over to Steve, let me provide a few additional financial comments on our operations for the fourth quarter and fiscal year.

Overall, as you know, thanks to the calendar and our last Thursday and May year end, our fourth quarter and fiscal year had an extra week this year. This extra week particularly benefitted our theater division, as it encompassed the traditionally strong Memorial Day weekend. The week that encompasses Memorial Day is actually not a particularly strong time for our hotel division, but it still added revenues and operating income to our results. The margin on this extra week of revenues is higher than average, due to the fact that only incremental variable costs are added. Fixed costs are already annualized over 12 periods during the year. The result is a fairly sizeable favorable impact to our fourth quarter results as a result of this extra week.

While determining the impact of one week on our operating results is not an exact science, we currently do estimate that this additional week added approximately $9.5 million to our consolidated revenues and $2.9 million to our consolidated operating income.

Now just real brief comments about our divisions -- in the theater division, our box office and concession revenues were up nearly 34% each during the fourth quarter, meaning our fiscal year-end box office ended up over 5% and fiscal year concession revenues were up nearly 8%.

Other revenues in the theater division increased this quarter and year due primarily to increases in pre-show and lobby advertising, as well as due to a one-time fee reported at the end of the year related to the termination of our management contract for three city theaters in Chicago. Two of those theaters closed on the last day of our year, and we are managing the third theater under a temporary contract that will expire shortly.

Total attendance increased over 29% for the fourth quarter and approximately 5% for the year. But those totals include the recently acquired CEC Theaters. Attendance at comparable theaters increased approximately 1.3% for the fiscal year after being down all year, thanks to the improved film lineup in May and the impact of the extra week.

Our average admission price increased 3.5% during our fourth quarter compared to the same quarter last year, but was up only 0.2% for the fiscal year due to selected regional price promotions and film mix. Our average concession revenues per person were up 2.4% for both the quarter and fiscal 2007 year.

As I noted earlier, the 53rd week had a favorable impact on our theater operations, adding approximately $5.3 million of revenues and $2.1 million of operating income to our fiscal 2007 theater results, excluding the CEC Theaters. The six weeks of operating the newly acquired CEC theaters also helped our comparisons the last year, adding approximately $3.5 million of revenues and $650,000 of operating income, including the 53rd week.

Thanks to the higher-margin extra week, our fiscal 2007 theater operating margin was essentially even with last year, despite approximately $800,000 of pre-opening expenses related primarily to the opening of a Majestic Theater during the quarter.

In our Hotels and Resorts division, our overall hotel revenues from continuing operations were up over 38% during the quarter compared to the same period last year. Now our results are made up of comparable hotels except for the Westin Columbus, which we acquired last May and sold to a joint venture this April; the Platinum Las Vegas, which opened at the end of October; and the Intercontinental Milwaukee, which underwent a complete renovation and a repositioning during the year. Our results from both years exclude the now-sold Marcus Vacation Club.

Our press release noted that total revpar for comparable properties increased 5.2% for the year, including a 0.6% increase during our fourth quarter that was hampered by difficult comparisons at a couple of our hotels and the lack of citywide conventions in Milwaukee. Revpar increases have come primarily from increases in our average daily rate, or ADR, which was up 5.4% for the year. Our overall occupancy rate for comparable properties was essentially even with last year.

The 53rd week added approximately $3.2 million to our fourth quarter and fiscal year revenues in this division, and just under $600,000 to our operating income during those same two periods. The increased overall revenues during the quarter would have translated into increased fourth quarter operating income and a much larger increase in our fiscal year operating income, if not for the significant amount of pre-opening expenses and start-up losses of approximately $3 million during the fourth quarter and $7 million during our full year.

We would expect to have favorable comparisons during fiscal 2008 at the three hotels that generated these pre-opening expenses and start-up losses. Our operating margins have obviously been impacted by these significant one-time costs. I'll let Steve comment specifically on each of these new properties. But we expect all the new hotels to contribute positively to future operating results as they mature.

So with that, I'll turn the call over to Steve. Thanks very much, Doug.

I'll start my remarks where Doug left off, which was discussing our Hotels and Resorts division.

Our theme for our Fiscal 2007 Annual Report will be momentum. That term certainly applies to our hotel division. Fiscal 2007 was a year of significant growth for Marcus Hotels and Resorts. We increased our rooms under management by nearly 45% during the year and made significant investments that are designed to increase shareholder value over the long term.

As I've said in the past, our perspective has always been on the long term. And we're willing to absorb one-time costs, like the ones that Doug talked about earlier, in order to position this division for that long run. And using the numbers that Doug shared for pre-opening expenses and start-up losses for the three new properties noted in our release, the rest of our Hotels and Resorts division reported an increase of over 40% in operating income. Thus there's no question that our fiscal 2008 performance will depend in part on how these new properties perform after those sizeable investments.

Let me briefly take you through each one. I'll start with the Platinum in Las Vegas.

Our fiscal fourth quarter was really the first full quarter where we were operating with all units available to us. As a general rule, we weren't able to rent many of the units until after the sale of them was closed, so we really don't have a -- didn't have a near-full complement of rooms available until late in the third quarter. That made staffing a challenge for many areas of the hotel, since we needed to fully staffed, yet didn't have our full potential for revenue available to us. As a result, we had to absorb some typical start-up operating losses from this hotel during the year.

We're now focused on marketing this nonsmoking, non-gaming hotel near, but not on the strip, to our customer base. Our fourth quarter revenue was on pace with our projections, and the customer response to the hotel has been fabulous. As I understand it, we're already one of the top two- or three-rated hotels in Las Vegas as ranked by customers on TripAdvisor.com. As is always the case with a new hotel, we'll need to get our costs under control as the property begins to mature. But we're on the right track, and we know we have got a good track record for getting those costs in line in fairly short order.

Moving on, we consider the Intercontinental Milwaukee essentially a new hotel that opened midway through our third quarter. Like any new hotel, we incurred a fair amount of pre-opening expenses in conjunction with the renovation and repositioning of this hotel from the Wyndham brand to the luxury Intercontinental brand.

And also like a brand new hotel, we would expect a ramp-up time will occur, as we market this sophisticated hotel with a higher average rate to the appropriate customer base. We've already made substantial progress toward that end. When we bought this hotel about two years ago, it was achieving a revpar market penetration rate of only about 82 to 83%. But I'm happy to tell you that we've already raised that penetration to about 100%. And we think we can improve from there. The hotel looks great, and we look forward to successfully completing this repositioning in the marketplace.

The Skirvin Hilton had the largest negative impact to our fiscal 2007 operating results, due to the significant pre-opening expenses associated with opening a hotel like that. But while it's still early, the long-term prospects for this historic hotel appear to be very promising.

This hotel has opened much stronger than a typical new hotel would, but this is not a typical new hotel. This historic hotel meant an awful lot to Oklahoma City, and they have embraced its reopening.

We don't disclose individual hotel performance. But I will tell you that we're getting the rate we had hoped for, and the booking pace has been very strong. As you know, this was a very complicated project to complete, and it required a great deal of patience. I'm very proud of our Hotel and Resorts team in getting to the end result, and look forward to the long-term value that should be created by this wonderful property.

We also made several significant investments in existing hotels during fiscal 2007. And that trend will continue during fiscal 2008. We opened a very popular new restaurant, the Mason Street Grill, at the Pfister, during our third quarter and opened a new spa and salon at the same hotel during our fourth quarter. We also added approximately 12,000 square feet of conference space at the Grand Geneva earlier in the year, and that space is contributing to improved group bookings at that resort.

During fiscal 2008, we have initiated a major renovation of the parking garage, meeting and banquet space, and guestrooms at the Pfister. And plans are being developed for a significant room renovation and pool and spa update at Grand Geneva. When you add to all of this the six new management contracts open -- and I noted in our press release -- all of which will have a greater impact on our fiscal 2008 results than they did during this past partial year -- you can see why word "momentum" applies to that division.

We've had a lot to absorb over a very short period of time. But I'm excited about the progress we've made in executing our strategies for Marcus Hotels and Resorts. The key to our success in obtaining the new contracts is our proven ability to work with a variety of hotel brands, concepts and financing arrangements. We can also bring branded amenities to a project, such as our very popular WELL Spa; and various restaurant concepts, such as our Chophouses and Mason Street Grill.

Our pipeline of other potential new hotel projects remains quite active. A portion of the capital budget Doug mentioned earlier is earmarked for additional equity investments in new projects if they should arise during the year. As you know, after indicating that we would consider selling the Columbus Westin Hotel into a joint venture at some point, we did just that in our fourth quarter, converting that recent addition into our preferred structure for future growth. As we mentioned in the release, the fact that we established several relationships during fiscal 2007 with Equity Partners was a very important step for us as well.

The overall hotel operating environment remains very stable. The fact that our fiscal 2007 revpar increase came almost exclusively from increased rate was consistent with what was happening throughout our industry market segment. For the time being, overall supply growth remains minimal, despite an overall increase in the number of proposed projects in many markets.

Our summer's off to a very good start in this division. And our advanced bookings would suggest that overall, same-hotel results should continue to improve in the near term. We look forward to the weeks and months ahead, as we continue to grow this business.

And I just want to add parenthetically that all of the growth that has occurred during not only the fourth quarter but the entire year is a result of some very hard work by very talented people.

With that, I'll move on to the theater business. At the risk of overusing the word, "momentum" certainly applies to this division also. Since we last talked, we announced and closed on an acquisition that added 122 quality screens to our circuit. In several adjacent markets, we've opened our new flagship Majestic Theater to a fabulous customer response, and we had three blockbuster pictures open within a three-week span in May. Let me talk briefly to each of these three topics.

The 11 CEC Theaters acquired in late April expand our Midwest presence and were easily integrated into our chain. These are state-of-the-art theaters, with a strong real estate component that will require relatively little additional capital, as many were recently renovated. In fact, two of the screens in that group of theaters are UltraScreens that we had previously licensed CEC to develop. We believe we've paid a fair price and expect this acquisition to be accretive to our earnings. Thus far, the theaters have performed just as we had expected.

Another highlight of our fourth quarter and fiscal year was the May 3rd opening of the Marcus Majestic Cinema in Brookfield, Wisconsin, which is a suburb of Milwaukee for those who are not familiar with it. This totally new theater concept leverages the investment in the theater box to create a neighborhood entertainment destination that's much more than a traditional movie theater. The Majestic is really our incubator for this new paradigm.

In addition to creating showcases to maximize the best films that Hollywood has to offer through venues like our two UltraScreens with VIP seating, and our cabaret-style multipurpose entertainment venue that we call the AT&T Palladium, our strategy includes increasing ancillary revenues by offering a broader variety of food and beverage options.

We've already learned an awful lot from our first three months of operation. We've earmarked dollars in our fiscal 2008 capital budget in order to duplicate and/or expand on some of these food and beverage concepts in several of our existing theaters. The Majestic is the talk of the town, and we look forward to seeing where it may lead us.

The third topic I referenced above is the one we always talk about, and the one that ultimately we just don't have any control over. And that's the quantity and quality of the film product shown in our theaters. Last quarter, we were talking about the lack of blockbusters during the holiday time period. This quarter, the studios, in their infinite wisdom, released three major sequels in one month. It's periods like this that should remind everyone why we always talk about having a long-term focus when it comes to this industry as well.

I think overall, there were several things to take away from this past year when it comes to film. First, and very important, is that film quantity is up. We played 214 films in our theaters during fiscal 2007, compared to 189 and 188 during the previous two years. This is primarily due to an increase in the number of film distributors in independent films and is a trend that we hope will continue.

Based upon projected film availability, we are currently estimating that we will show a similar number of films during fiscal 2008 as we did during this past year. Generally, an increase in the quantity of films increases the potential for more blockbusters in any given year.

Quality of films is a much harder concept to get your arms around. Certainly, the distributors have been heavily reliant on the so-called franchise pictures. And I would personally love to see a little more originality come out of Hollywood. Having said that, these pictures have a proven track record. And although their box office total tend to drop off rather quickly after the first week, they can be very profitable for us, as long as we have new pictures to open every week.

As we noted in the press release, this summer has seen several notable film releases. And if not for the fact that we won't have the Memorial Day weekend in our first quarter like we did last year, we would currently be exceeding last year's strong summer for comparable theaters.

With a couple of strong sequels scheduled for release in the next few weeks, we have a chance to finish with a stronger August than last year. Our overall results will of course benefit from the added CEC screens.

Like our Hotels and Resorts division, we will of course continue to take a long-term focused approach to our theater business. We plan to build on the momentum created by our investments in the last quarter, and we'll make additional investments in 2008, including adding three more UltraScreens at existing locations, continuing with our previously described Project 2010 renovations, and further expanding our food and beverage options in those theaters.

Before I open the call up for questions, I would be remiss if I didn't briefly address the -- well, I want to just step back for one second to -- we had an awful lot going on in our theater division this year, as we did in our hotel division. Once again -- and I've said this many times in the past -- this all relies on people. It doesn't happen with smoke; it doesn't happen with mirrors. And the people in our theater division proved their ability to get things done and deal with innovative concepts. And that growth -- the fact that we were able to do the CEC acquisition is a testament to the fact that our people were ready and able to handle it.

Now before I open the call for questions, I'd be remiss if I didn't briefly address the fact that we can, of course, also seek opportunities to enhance shareholder value with corporate strategies, including strategies related to dividend policies, share repurchases and asset divestitures. And we've increased our regular quarterly dividend by 36% and 13% in the last two years, and view our dividend as an important component to our shareholder value equation. We repurchased some of our shares in the open market during our fourth quarter, bringing our total fiscal 2007 shares repurchased to 411,000, after purchasing 313,000 during fiscal 2006.

Early in our fiscal 2007 first quarter, we sold the remaining inventory of real estate associated with our Vacation ownership development adjacent to the Grand Geneva Resort at a small gain, exiting a business that had contributed to operating losses during each of the last two years. We'll also continue to evaluate opportunities to sell additional real estate when it's appropriate.

Our balance sheet remains in outstanding condition even after our recent acquisition, giving us a great deal of flexibility as we refine and execute our various strategies going forward. As always, we appreciate the continued support of our shareholders during this past fiscal year, and we look forward to the many challenges and opportunities that lie ahead.

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

(OPERATOR INSTRUCTIONS) David Loeb with Baird.

Hi. I've got a couple.

Let's start with the balance sheet. Doug, you referenced the debt-to-book cap ratio, and where that is now. My back-of-the-envelope calculations suggest that you've got about $62 million of additional capacity today, let alone what you generate from free cash flow, depreciation, that kind of thing -- retained earnings. Given what you've said the capital budget is likely to be, will you then be closer to that 50% debt-to-book by the end of this current fiscal year?

No. Actually, David, as we're looking at -- as I put my budget together and take a look at asset proceeds, cap ex, increases in earnings, et cetera; I've come up with the conclusion that we could very well end up at a very similar debt-cap at the end of next year. So --

So a lot of dry powder for acquisitions --

Certainly. And I certainly would point out that the 50% that you must be doing your math towards -- I mean, that's kind of a self-imposed number. Certainly, our debt agreements would allow us to go a little higher than that. But as you know, we believe in keeping a pretty conservative balance sheet. So that's kind of a number that we've always thrown out there as our own self-imposed.

And given how much some of your assets are depreciated, it seems like an extremely conservative target.

I don't disagree with that comment.

I think we all respect that.

We also did some fancy math trying to allocate the start-up and pre-opening expenses. And you did us a big favor by going through how those numbers allocate by division. I wonder if you could just refine a little bit. Because I'm thinking that maybe you rounded in the $3 million for hotels in the fourth quarter and the $800,000 for theaters in the fourth quarter. Because I believe in the press release, you said it was $2.7 million -- I'm sorry, it was --

Think we said $3.8 million.

-- $3.5 million.

Well, okay, I'm sorry. A portion of that $800,000 occurred heading into the third quarter. So that's correct. $3.5 million was the fourth quarter impact. And when we mentioned the $800,000 just now in the theater division, there was a small portion of that that occurred prior to the fourth quarter.

Okay, so it was basically $3 million for hotels --

And $500,000 for theaters in the fourth quarter, of which -- and then the $800,000 I mentioned before was just stuff that occurred earlier.

Yes. And the $800,000 was pretty much all related to the Majestic?

Pretty much so.

Pretty much.

Yes. I mean, remember, we had two other theaters that we opened up in the second quarter. So there were some costs. And that's probably -- I mean, certainly a part of that $300,000 that I referred to would have been related to those two theaters.

Okay. Great.

One more, I think -- Steve talked about the revpar penetration for the Intercontinental. I would assume that your competitive set includes at least one, maybe two, of your other hotels. As you ramp the Intercontinental above 100% penetration, what does that say about the penetration for your other hotels that are in that competitive set, or at least in downtown Milwaukee? You think that those also have market share gains to be had?

Well, there are two very different types of hotels. I'll comment first -- when I indicated that -- digging into that a little bit deeper -- certainly, where we've accomplished that is primarily in rate, although I will tell you that in our fourth quarter we were pretty pleased with our occupancy as well. The Wyndham was previously -- in achieving that 82 to 83%, the Wyndham was kind of a high-occupancy, low-rate hotel. We've pushed the rate. And it's probably [the] number two in the city now.

Is the Pfister a part of that set? Certainly, it would be part of that competitive set. But so are others. And so the Pfister is -- you know we've been making some pretty big investments in that property. And we think that'll be just fine as well.

So Pfister must be number one in the city?

Absolutely. Has been for quite some time.

Yes. And I think the Mason Street Grill and the spa look terrific, for my two cents.

On to the film question in the theater business -- when you have these big opening sequels that drop off pretty quickly, what does that do to film costs?

Films really basically are no longer sold on the old formulas. They're sold on what they call aggregates formulas. Many of them are based on how they do nationally, so that if a picture turns out to be a huge -- let's say a $100 million-plus picture in the national marketplace, you'll pay a fixed percentage for your entire run. So you don't get this jockeying anymore about, how do we get -- the implication of your question is that previously, films were sold, by and large, with a higher percentage of film cost in the early weeks. And then later, as the -- the longer the film played, the less your percentage cost of film was. But at the end of the day, it all worked out into some kind of an aggregate anyway.

And so, increasingly the industry has been going more and more to aggregates, where you pay a fixed percentage based upon how the picture performs on a national basis.

I guess also, Steve, just looking at the theater admissions -- theater operations expense number from last year, it looks like the expenses were growing faster than the revenues. And presumably, that is film cost. Does that reflect the fact that you had higher-expectation films in the fourth quarter, and therefore they were more expensive to run?

Yes.

A little bit, yes.

Yes.

Okay.

That's all for me. I think my associates will ask some more. Thanks.

Thanks, David.

Rob Dameron with 21st Century Equity.

Good afternoon.

Hey, Rob.

Afternoon.

I wanted to -- Doug, maybe you could give us a little more insight into what you expect for pre-opening expenses as we go into fiscal '08. And then along with that, the expectation for other real estate gains, as we go into '08. Where else -- what other properties are up for sale over the next 12 months?

Right.

First question is a lot easier to answer than the second one, Rob. The first one is that we -- with what I know today, I don't have expectations of very much in pre-opening expenses at all in fiscal 2008. Obviously that could change if something comes along. Steve referenced the fact that we're looking at expanding some food and beverage options in some of our existing theaters. There might be a little bit of pre-opening associated with that. But those are existing theaters. And it certainly wouldn't be on the same scale one could see with a new theater like the Majestic.

And on the hotel side, we don't have any company-owned properties slated to be opening up in fiscal 2008. And that's primarily what drove the numbers this year. I mean, the theater division -- think you just saw, we had about $5.3 million of pre-opening expenses in fiscal 2007. And about $4.5 million of that was in hotels. And those were really owned properties. So I have very little budgeted for pre-opening. It's a very small number in fiscal 2008.

As it relates to real estate -- tougher. Obviously, the big one that's out there, that we just don't know what the timing's going to be on, is that extra theater parcel that was related to a theater that got replaced by the Majestic. As you know, we reported a significant gain selling the first theater, the Westown Theater. And the second one -- it was called the West Point -- is sitting there, and is on a very valuable piece of property, and certainly could be sold in fiscal 2008. And if it was, it would be at a significant gain as well. We just don't know if that'll happen or not. Currently the town that it sits in has a short moratorium on that area, because there's a couple of parcels that are going to be available. And so they're taking a look at that whole region.

Having said that, we've got a good relationship with the town. And we certainly expect that that moratorium will be lifted soon, and we'll be able to actively market it. Just don't know if that'll happen.

Once we get beyond that, what you're looking at, Rob, is you're looking at some out-parcels that we have available. When we opened the two new theaters in Racine Sturtevant and Green Bay, we did what we always do, which is we buy more land than what we need. And some of that we hang onto for expansion, and some of that we will sell off, especially the parcels in the front. We had one or two of those in fiscal 2007; we could have more of that in '08. We still have a handful of nonoperating-type pieces of real estate as well, where there could be a couple of former restaurant properties and some things like that as well.

So year in and year out, I always -- and I'm never quite sure where it's going to come from -- but year in and year out, I tend to have, as you've seen, a certain level of gains that come out of that part of our business, our real estate business.

Okay, that's helpful.

And then, maybe one question for Steve as well -- maybe Steve could talk a little bit about the evolution toward digital cinema; where we are in this whole process. And have there been any decisions made in the industry with regard to who's going to pay for this?

Interesting question. They're making haste slowly on that issue. There's a whole range of issues, not the least of which is making sure that when these systems go up, and they occupy eight or 10 or 12 screens in a larger complex, that they are able to integrate with one another, they're able to integrate back to the box offices and to the full range of theater management. And we haven't seen any yet that have that full operating capability.

Most of the installations to date, I believe, have been sort of -- you run your movie with them, just like you did a movie projector. But you're not getting the full advantage of what digital cinema ought to be providing.

We ourselves are running a couple of major tests during this coming year. And we'll be also doing one in 3D. And we want to see how 3D operates. From what we're able to learn, it does give a significant impact to the grosses in the movies where -- in the theaters where a movie plays in 3D. The problem is in justifying the cost of the 3D installation, when you only have two or three pictures a year that are done in 3D.

But we're very actively watching that whole process. Our IT people are very involved in the industry organizations that are moving it forward. And you can expect that we will be there as everybody else moves there.

The sense is that the film companies -- that the producers and distributors of the movies will be essentially paying for most of the cost of the installations in the initial years. But the -- and because of the ability of a theater to use digital technology to exhibit things other than motion pictures -- gives rise to the -- first of all, the need for theater owners then to participate in the cost of digital.

And ultimately, though, when it comes -- after the first round of replacing film with digital projectors, at some point in their lives, the digital projectors will become obsolete, and there will have to be reinvestment. And the issue is, well, who pays for it then, since the cost of these systems tends to be far greater than the cost of film projectors?

And remember that the film projectors that many theaters are using today are 20 and 30 and 35 years old. And I would bet that there's no piece of digital gear in the world that's more than 10 years old. And so that will become an issue down the line.

Okay. Thank you for your insights on that.

Sure.

Herb Buchbinder with Wachovia Securities.

Hi, there. I got a couple of quick questions.

Just back to the 3D -- do you know how many screens actually showed like Harry Potter in 3D around the country, this time around?

Yes, I'm not certain of that number. I think it's somewhere -- 250 maybe; something like that.

And -- so none of your screens would be able to show that on 3D, is that correct? Your UltraScreens would not be able to do that?

UltraScreens?

Mean, any of your screens. You were not able to show --

No.

-- Harry Potter in 3D in any of your locations, is that correct?

That's correct.

That is correct. As Steve indicated, we have a particular 3D test coming up very shortly at one of our locations. But we did not have it for Harry Potter.

Okay. I mean, obviously, there's -- I mean, they do charge a premium for that. At this point, do you think the premium charge will result in you doing more of this going forward?

The premium that has been charged up until now has been -- but has caused us to hesitate, because our feeling was that the cost of the installation was higher than two or three pictures a year would justify. The cost of that now is coming down. Our installation will cost less than what the previous cost has been. And that's the benefit of advancing technology and things of that sort -- little more competition in that field. And along with it, it appears that there are going to be far more pictures made in the next couple of years. In other words, in the next couple years, they're going to start making more pictures that are going to be in 3D, which will help justify whatever added cost there is.

What they're doing now is just taking like 15, 20 minutes of certain movies and putting it in 3D. It's obviously very costly for the studios to put the whole movie in 3D, unless more theaters can show it?

I think that's probably the case.

Yes. Are you completely out of Chicago now? Or do you have any theaters left there?

Herb, I mean, the ones that we -- those were managed theaters in this city, in the city of Chicago --

Yes.

-- these were [many] city theaters. So we still have a large presence in the metropolitan Chicago area; all sorts of surrounding markets. But in the city of Chicago, we don't have any.

Okay. So are there any plans to -- where you have small shares, or -- either outdated facilities, where you might get out of any markets at this point in the theater business?

I believe there are two theaters remaining. We closed several during this past year, primarily lease theaters. I believe there are two additional theaters that could close; in the coming year or so, you won't even notice it. They're, again, smaller theaters, and with really an immaterial impact on our numbers.

But those theaters are in markets that you will stay in; they aren't in markets that you're abandoning?

Yes -- exactly --

Okay.

Last -- the fact that your average room rate flattened out in the fourth quarter -- in terms of the new hotels that you've started up -- and based on your advanced bookings -- what would you say about the average room rate, least going forward into the first half of this new year? Is that a concern at this point, or not?

Well, I don't think we're going to vary very much from what's going on in the industry right now. And most prognosticators that I've read have suggested that in '07, remainder of '07, and '08 -- they're all talking primarily about occupancy still being relatively stable, with rates still being up. I don't know, Steve, I've seen numbers in the 4 to 6 range. I mean -- and that's -- okay, he's --

That's correct.

-- he's nodding and saying the same thing.

So that's generally what the industry is talking about -- the 4 to 6% increases.

As these new hotels mature, will that have an impact of increasing your average room rate? Or it's not that -- won't be that significant?

You mean in our whole portfolio? Well, the properties that we added are all, I would say, higher-rated properties. I mean, the Skirvin is --

-- Skirvin --

-- the Skirvin is already -- well, there's actually a small little boutique hotel in Oklahoma City, with a handful of rooms, who claims to be the rate leader. Otherwise, we are the rate leader already in Oklahoma City. And Platinum is getting a nice, healthy rate compared to probably our overall portfolio, because it's Las Vegas. And the Intercon is certainly driving a little higher rate now, too.

So I guess that would be true -- that our overall portfolios probably would be driven up a little bit with those new properties.

Okay. So you think we'd see that in the first quarter -- an increase in the average room rate from where it was in the fourth quarter?

[No], we're [head] right now -- obviously when I talk about numbers, to make them comparable, I'm always talking about what our comparable hotels are.

Right.

But overall, yes, I think that that is true.

Okay.

All right. Thank you very much.

(OPERATOR INSTRUCTIONS) Andrew Whitman with Baird.

Good afternoon, gentlemen.

Afternoon.

Hey, Andy.

Just going a little bit more on the hotel side, and particularly on hotel management -- clearly it's becoming a growth area; an area where you've invested and added a lot of rooms. Can you help us get an idea of what the contribution of the managed-only hotels were for 2007, in terms of maybe either operating income or on the revenue line item -- what percent that might be of your overall hotel line item? Or maybe another way of approaching that would be, what was the contribution of some of the recently added properties, perhaps in Scottsdale or in St. Louis?

Well, first of all, Andy, I mean, I am going to refrain from talking about any individual properties; we just don't do that. And so I can't help you out there.

But what I would tell you is this -- is that with broad brush strokes, when we add a management contract, typical of the ones that we've added in the past -- with room count probably being the variable -- I mean, the bigger the property -- and that property in Scottsdale that you reference is a pretty big property; it has 487 units. We're going to have a larger fee at that property.

But these individual contracts tend to range from providing gross revenues on the low end of maybe -- I don't know -- $0.75 million to $300,000 a year to, on the high end, with incentive fees -- we could be pushing $1 million at the biggest properties. I mean, that's certainly on the high end. But I mean, it's a fairly big range, depending on the size.

Now I'll talk about what its contribution is. Well, that's a little tougher. Because obviously we're leveraging an infrastructure that we have, but it's not free. Every time we add properties -- and we added six this year -- we've had to increase our hotel infrastructure. You can see it if you look at our admin line. We've had to add additional -- whether it's a VP of operations or food and beverage guy at the corporate level -- things along those lines.

And so, certainly, though, in terms of -- I mean, the rule of thumb typically in this business has been that you certainly should drop -- I'm going to give you, again, kind of a broad range -- but you should be able to drop 50 to 60% or -- I mean, give or take -- okay, Steve likes my 50 better -- of whatever those gross revenues -- you should be able to drop those to the bottom line.

So, I mean, I hope that helps at least structurally, Andy, in terms of how those generally work. We added six very different types of properties. On the low end, adding the Brynwood Country Club is not anywhere like what we just talked about. And on the high end, I said, adding a property like Scottsdale is certainly -- if it does well, it could be a very profitable property for us, and certainly will help our overall margins.

The dollars, as you've now heard -- they don't compare to what one single-owned hotel can do. But there's little or no investment. And it will help our returns on equity, and ultimately help our margins.

Super. Great. Actually, that's very helpful.

If I could just keep going on the hotels side of things -- if I look at the F&B margins, those look like they may have suffered a little bit. Is that because of the pre-opening expense has hit F&B particularly hard, with the restaurant openings at the Pfister and other places?

Yes, for the most part. And then, on top of it, the Pfister's had its banquet space closed because it's being renovated, along with its parking structure. And you take the grossing capacity of a hotel like that off-line for a little while in that banquets, that also hurts margins.

Okay. All right.

And then I guess my final question is more bookkeeping. Just with the recent investments in theaters, is the depreciation line item -- or can you help us get at what the depreciation run rate might be on the theater side, with the Majestic opening and the CEC Theaters coming on-line? I was thinking about $3.4 million per quarter.

You were thinking about how -- no, not -- I mean, we had $27 million of depreciation -- are you talking just for theaters --

Just for theaters, yes.

Oh, I'm sorry. Just for theaters. Yes, I'd have to think about that for a second here. And that's -- we're comparing that to -- I'm going to grab my number in front of me. You might have handier than I do -- this past year was -- what was the total?

Theaters last year was $11.8 million. And the quarter was about $3.1 million, for the fourth quarter.

Yes.

Certainly -- yes, if -- I mean, to help you out with that, I guess, when you look at the quarter, we again only had six out of the 14 weeks for CEC. And with the Majestic really opening up in the month of May, it did not have a significant amount of depreciation in the quarter at all. So you might be a little bit on the low side. But it's not -- you couldn't be too far off, actually, because that's all that's changed, essentially.

Okay. That works.

Great. Thanks.

Beth Lilly with Woodland Partners.

Hello, Doug and Steve.

Hey, Beth.

Hi.

I wanted to just talk about the hotel business for a second, and just -- if you can give us a sense. As these properties come on, and you're having more managed properties, can you give us a sense of what your operating margin will be in the next year or two? Do you see it going back to maybe the 10% level? Or is it going to run at the level -- I mean, it was a 6% in this most recent quarter, and for the year was around 9.2. Do you think it can -- it'll go back over 10%?

Well, my quick answer to that is absolutely, but probably not for the reason that you just indicated. It's because of those significant costs and pre-opening expenses, and start-up losses that we had this past year. So just -- we did the same thing to this year's numbers, and added back that roughly $7 million that we just talked about. We would have been at -- let me just -- I'm doing the quick math here -- but we would have been actually at about 13%. And I'm not sure if it's fair to do that or not, but that -- by just eliminating that $7 million, that's what you end up at.

Yes.

So certainly, that will be the main driver. The secondary driver will be what you -- [we] started the conversation, which is with our management contracts. And I hope with the answer to Andy's question, that at least put some -- the dollars are smaller, but more drops to the bottom line. So that will certainly help, but not to the same extent as the lack of those start-up costs and pre-opening expenses.

Yes.

So, how -- all right -- so my question is, let's assume it's a year from now. Do you see your operating margins being 13%?

I like to see them a little higher than that. I don't know if they'll -- I mean, I'm not -- we're not in the projection business. But I certainly would -- but again, doing that same math that we did in '07 --

Yes.

-- I would like to see it at least be hitting that.

At least hitting that. So as you look at this business and --

-- that. I mean -- and that doesn't build any sort of -- that doesn't build any improvement.

Right.

So --

So in a way, Doug, is it -- if you don't add any additional properties in the coming year, and those properties that you've added this year get up to speed, then it's possible, then, that your hotel and -- your hotel resort business could be generating 14 or 13-plus, or 14%-plus operating margins?

Yes, I would say that -- yes, I certainly would agree with that comment. I think that those three properties will certainly help define how we do in this next year.

Okay. Great.

And then my other question is -- and I might have missed this -- did you buy any stock back in the quarter?

We did, actually. I didn't quantify how much we bought in the quarter, but we did quantify that for the year, that had brought us to about 411,000 total shares that we bought back during the year.

Okay. And what's left, then, on the authorization?

About 1.1 right now.

Million shares?

The one million shares, yes.

Okay. Great. Perfect.

Okay. Thanks very much.

You're welcome.

David Loeb with Baird.

So Doug, was that -- not being in the projection business -- was that a pun -- little play on the theater business?

Just a little bit. But thanks for picking it up.

Yes. I actually had a big-picture question for Steve, and a more sober one. Steve, you are healthy; you're active. This is probably the best time to ask -- what's the succession plan? What can you tell us about succession for when you decide that you want to retire?

Well, I'm Sumner Redstone, you know.

You came back for this one, David?

Somebody has to ask every once in awhile.

I guess the best succession plan you can have is lots of good people. We have a lot of good people in our company, at all levels, including all the people that I work directly with.

Does that -- I mean --

-- it were to happen to me, there are a lot of people for the Board to choose from.

So the Board hasn't had those discussions? They just are obviously aware of who's out there?

I keep them very up-to-speed on all the key executives.

Okay. But there's no plan -- there's no secret plan in an envelope, in a safe someplace.

[No] plan, no.

Okay. Thanks.

Thank you.

At this time, it appears there are no other questions. I'd like to turn the call back over to Mr. Doug Neis for any additional or closing comments.

Well, thank you.

And we certainly want to thank you all for joining us again today. And I certainly appreciate the many insightful questions, too; it was -- really appreciate that.

Will look forward to talking to you again in September, when we release our first quarter fiscal 2008 results. Until then, thank you, and have a great day.

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