Marcus Corp (MCS) 2008 Q3 法說會逐字稿

Good morning, everyone, and welcome to The Marcus Corporation third quarter earnings conference call. My name is Karma, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer question towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. Joining us today are Steve Marcus, Chairman and CEO, Greg Marcus, President, 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, and welcome everybody to our fiscal 2008 third quarter conference call. As usual, I need to begin by saying that we plan on making a number of forward-looking statements on our call today. Our forward-looking statements could include, but not be limited to statements about our 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, our expectations about the future trends in the business group and leisure industry, and our markets, our expectations and plans regarding growth and number and type of our properties and facilities, our expectations regarding various net 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, or 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 could be obtained from the SEC or the company. We will also post all Regulation G disclosures, when applicable, on our Web site at www.marcuscorp.com.

So with that behind us, let's talk about our fiscal 2008 third quarter and first three quarters results. As we look at the reported results after a relatively modest growth in operating income during our last quarter due primarily to an underperforming slate of movies, it was certainly very encouraging to report a $4.4 million, 238% increase in operating income doing our fiscal 2008 third quarter. With one quarter to go on our fiscal year, our year-to-date revenues are now up nearly 20% and our year-to-date operating income is up nearly 22%, which isn't bad given a couple of the unusual items we've had in our hotel division results and the aforementioned second quarter movie performance. Before I get into the operating results, let me first address the variations in the line items below operating income versus last year, as they continue to have significant impact on our bottom line results.

We once again as expected had unfavorable comparisons to last year on the investment income and interest expense line. As in the past two quarters, these variations on these two lines can be traced directly to our purchase of the 11 CEC theaters in late April. Prior to that purchase, we had been carrying some excess cash that has been originally been generated from our Baymont sale a couple of years earlier, and that cash was generating some modest investment income for us. We of course believe the cash is now providing even greater returns in our operating income. While midway through the fourth quarter we will lap this event and the comparisons in this line will become more in line.

Meanwhile as expected, our interest expense is up over last year, again due to the fact that we added to our borrowings in order to finance the theater acquisition. The increase is not as significant as this quarter due primarily to lower interest rates on our variable rate debt. I will tell you that we are currently expecting to close on $60 million in seven and ten-year private placement senior notes bearing interest from 5.89% to 6.55% next month, which will have the effect of slightly increasing our interest expense in future periods, after we use proceeds from our notes to pay down existing from our revolving credit agreement. Our perspective is long-term focused, and with a large amount of long-term assets on our balance sheet we believe it's appropriate to occasionally free up capacity in our bank facility for future growth by obtaining fixed long-term debt at reasonable rates. I certainly hope you agree we've been able to do that with this upcoming private placement.

Now while I'm on the subject I'll point out that we also expect to extend our current bank revolving credit agreement in April, adding another five years under similar terms and increasing our facility from $125 million to $175 million, further adding to our financial flexibility. Our overall debt to capitalization ratio at the end of the quarter was still a very strong 43.6%, down from 44.5% at our May year end. Continuing down the earnings page, we now come to a very large difference in this year's results compared to last year, that we certainly tried to highlight in our press release. While we've had relatively little activity this particular quarter or year for that matter on our gains from disposition line, last year during the third quarter, we reported a large gain from the sale of condo units at the Platinum Las Vegas property. Add that to the gains reported during the second quarter last year, again from the condo sales as well as the significant gain from the sale of a former theater property, and we have a large negative comparison to last year. These were obviously unusually large amounts last year and not reflective of average real estate activity for our company.

That's not to say we wouldn't continue to have periodic gains from the sale of real estate as we move forward. We will. We reported a small gain this quarter from the sale of one of our two remaining Baymont Inn ventures and we have other noncore real estate that will likely be sold in the future, including another former theater property near to the one I referred to a moment ago, that could generate a significant gain. Finally, while most of you know this, for those of you who may have recently starting following our company, the other reason our net earnings again declined this quarter compared to last year was due to a significant larger income tax charge. This of course was not unexpected, and is everything to do with last year and very little to do with this year.

As a reminder, last year's effective income tax rate was significantly reduced by the one time historic tax credits that were generated by our Skirvin Hilton Hotel project in Oklahoma city. With those credits behind us, our effective rate is now back to normal. Our first three quarters effective tax rate of 40.4% represents our current best estimate of what our full year fiscal 2008 rate might be, based upon our estimate of all the usual factors that go into calculating our effective rate. We will of course have to deal with this unfavorable comparison to last year in income taxes for one more quarter before I can stop mentioning this on our call.

Shifting gears, our total capital expenditures during the first three quarters of fiscal 2008 totaled approximately $18 million, compared to just over 68 million last year. Last year of course we had built three new theaters and undertook a major renovation in the Skirvin Hilton Hotel. Our total capital fiscal 2008 capital expenditures will certainly ends up less than last year's total of $187 million, which included the CEC acquisition. Excluding any acquisitions in either of our businesses before the end of the year, I am currently estimating that total capital expenditures for fiscal 2008 will probably not exceed the $30 million range. The actual timing of the various projects currently underway or proposed will certainly impact our final capital expenditure numbers.

Now before I turn the call over to Steve let me provide a few additional financial comments on our operations for the third quarter and first three quarters beginning with theaters. Our box office revenues were up 25.6% during the third quarter, with our year-to-date box office now up 22.8% compared to last year at this time. Conception revenues were up 23% for the quarter and now up 21.4% for the year. Of course, these numbers were impacted significantly by the 11 new acquired theaters. If you exclude the 11 CECs theaters as well as two theaters opened last year that were subsequently closed and not replaced, our box office revenues were still up approximately 1.9%, and our concession revenues were flat during the quarter. Year-to-date, excluding the same theaters, our box office revenues are up 0.5% and concession revenues are up approximately 0.6%.

Our 53 week year last year continues to cause some comparability issues as this year's third quarter did not include the Thanksgiving day weekend and last year's results did. Total attendance increased 18.5% for the third quarter and is now up 18% year-to-date, but again, that includes the CEC theaters. Excluding the acquired theaters and two closed theaters, our attendance was actually down 5.5% for the quarter and 5% year-to-date. From a comparability perspective, I remind you that the current quarter attendance decline can be attributed primarily to the lack of that Thanksgiving weakened in this year's third quarter. As our first quarter and year-to-date attendance was negatively impacted by the lack of the Memorial Day weekend.

Box office revenues for these comparable theaters were favorably impacted by an increase in our average admission price for these theaters of 7.8% for the quarter and 5.9% year-to-date. Similarly, concession revenues per person for these same theaters increased 5.6% for the quarter and are now up 5.9% for the first three quarters of fiscal 2008. As I shared with you previously while just one theater in the overall mix, our new Majestic Cinema contributed to these increases due to premium pricing in our popular ultra screens with VIP seating and our expanded food and beverage offerings. We believe our average ticket price for the quarter was also helped by the premium pricing related to the three-week run of the Hannah Montana 3D concert that played at our two 3D-enabled theaters. Our year-to-date operating margins from this division have declined slightly to 20.8% compared to 22.5% last year, which can be attributed to the negatively impacted of the slightly reduced attendance at the same theaters and increased fixed costs related to the new theaters added last year. In addition, I do want to point out that those of you in the Midwest know we've had a near record snowfall and our snow removal costs are up over $300,000 year-to-date now.

Looking ahead to our fourth quarter, I want to remind you once again that last year was a 53 week year and our theater division benefited the most by the extra week. Last year we estimated that the additional week of operations, which included the Memorial Day holiday weekend, contributed approximately $5.3 million in revenues and $2.1 million in operating income. Obviously, that will have a negative impact on our comparisons to last year when we report this year's fourth quarter and year end results. Now shifting to our hotel and resort division our old hotel revenues were up 19% during the third quarter compared to the same period last year and are now up 17.4% year-to-date. Total revenues benefits and the new revenues from the Skirvin Hilton which was not open last year during the reported period. Skirvin Hilton opened last year on the first day of our fourth quarter. Conversely the Columbus Westin was a company-owned hotel last year at this time and now it's a joint venture, so its revenues are no longer in our consolidated results. So that's negatively impacted our comparison. Our press release noted that our total RevPAR for owned hotels, excluding the Skirvin Hilton increased a solid 9.2% for the third quarter and 6.9% year-to-date.

While we don't usually like to single out individual hotels and I certainly do want to point out that the results were again helped by continued strong hotels from our Intercontinental Milwaukee that was just coming out of significant renovation last year and converted to the Intercontinental brand early in the third quarter last year. Our fiscal 2008 third quarter RevPAR increase was driven by four percentage point increase in our overall occupancy rate and a 0.9% increase in our average daily rate, or ADR. Our year-to-date RevPAR increase is the result much a two-point increase in our occupancy rate and a 3.7% increase in our ADR. Our division operating income increased 91.8% during the quarter and is now 29.4% ahead of last year, despite the one time negative comparisons that we've referred to previously at the Pfister and Platinum hotels due to renovation and first year start up losses respectively. And significant real estate tax adjustment at our Four Points property in Chicago last quarter that we talked about previously.

As our press release notes, the significant increase in operating income can be attributed to the aforementioned RevPAR increases at our comparable properties, and the fact that last year during the third quarter we had approximately $1.9 million of preopening expenses related to our new or newly renovated properties. Last year during our fourth quarter, we incurred another $1.6 million of these one time preopening expenses. So I would expect our fiscal 2008 fourth quarter to benefit from that favorable comparison to last year as well.

Conversely this division also benefited from the 53rd week last year, albeit not to the same degree as our theater division. We estimated last year that the extra week contributed approximately $3.2 million for revenues and $570,000 for operating income during the quarter. With that, I'm now going to it were the call over to Steve.

Thanks very much. I'll start my remarks where Doug left off when he was discussing our hotel and resorts division. As you heard, we had a very good quarter in this division particularly when compared to last year's results. As the press release noted, we can thank solid year over year improvement at both existing properties and our new properties for the improved operating results. Let me make a few brief comments on each.

Starting with comparable properties, I first reminds that you given our strong Midwestern presence our fiscal third quarter is historically our weakest quarter for this division. Having said that, only one of our hotels had flat revenues compared to last year and all the rest experienced solid improvement with particularly strong year over year improvement noted at our Intercontinental Milwaukee hotel as well as a nice winter season at our Grand Geneva Resort and Spa. Many of us who live in this area got a little tired of our near record snow levels but we certainly couldn't complain about how it helped our ski business at Grand Geneva. Doug has already pointed out the year over year benefit we experienced at our newest properties with particular mention going to our Skirvin Hilton hotel. Not only do we no longer have significant preopening expenses to contend with there, but we continue to be particularly pleased with how quickly this new hotel has ramped up from a revenue perspective. In its first year of operation, the Skirvin Hilton has established itself as the hotel in Oklahoma City.

Our other newest property, the Platinum Las Vegas, had improved operating results compared to last year, but probably not surprising given the difference in the two markets and the market position of the respective hotels. This hotel will take a little longer to mature. Room revenues are steadily improving and we believe we have properly positioned the hotel in the marketplace as the nongaming all suite sanctuary for small groups and transient business travelers who need to be in Las Vegas but who are looking for an escape from everything that goes with being in one of the Strip hotels. We look for continued improvement from this property in future periods.

You've heard me say before that one of the core strengths of our company is has always been our focus on maintaining our assets and certainly our hotels and resorts division has plenty of recent evidence of that as well. As you know, we have made a significant reinvestment in the Pfister in the past 15 months, and that continued during our third quarter with the completion of our parking structure and a complete rooms renovation in the original Pfister building. In the coming year, we expect to undertake significant rooms renovations at both our Milwaukee Hilton and Grand Geneva properties. We have long-term assets and we are willing to make long-term investments in those assets in order to enhance and preserve their value for the years ahead.

We also continue to recognize the benefits of our increase in managed properties through increased outside management fees during our third quarter. Included in our results this quarter was a development fee of nearly $900,000 that we received in conjunction with our contribution to a transaction that one of our existing partners pursued, whereby they purchased a hotel and then immediately sold it for a profit. Not necessarily an every day occurrence but it certainly reflects the benefits of some of the relationships we developed during the past 15 to 18 months. We continue to seek additional opportunities to expand this portion of our business and despite the current present situation that many developers are facing, our pipeline of potential projects remains quite full.

Finally, let me briefly comment on what we are seeing for the future based upon a limited visibility that we have through advanced bookings. Right now our overall booking pace has been largely unchanged. Group business for our fourth quarter and summer first quarter looks pretty solid, but given the limited lead times in most bookings these days, it gets a little harder to predict after that. We are hearing reports from some softness from the transient business and leisure customer in selected markets but frankly, we haven't really seen that yet in most of our markets. We are placing a lot of our emphasis on our corporate sales and group business and believe we have an excellent infrastructure to pursue those efforts. We certainly are watching the trends very closely and we will continue to so.

With that I'd like to make a couple comments about our theater business before we open the call for questions. Doug has already gone over the numbers for you and our press release highlighted many of the films we have recently played or will be playing in the near future so I won't repeat what you already have seen or heard. This was a pretty good quarter for us and would have provided an even better year over year comparison if not for the Thanksgiving weekend calendar anomaly that Doug referred to. The two weeks that included the Christmas and New Years holidays were record weeks for us.

Having said that I would like to spend a couple of minutes talking about the bigger picture, if you will pardon the pun. Greg Marcus and I are just back from attending Show West the largest industry convention of the year, so you can guess that we heard a lot about the future of the movie theater business. All in all the mood was very upbeat. Nationally, the industry ended calendar 2007 with a small uptick in attendance. While the well documented fall weakness of films play kept the final numbers from being up as much as we had hoped, and for several years of attendance declines it was encouraging to see the trends reverse and improve.

Another very positive development in 2007 was the fact that the window between a movie release and a DVD release which had gotten smaller for eight straight years not only didn't shrink again but actually increased by about a week. The film studios are now clearly recognizing the importance of the theatrical distribution window and the role we play in the marketing of their film so this is a very encouraging development. Without a doubt the number one topic of discussion last week at the conference was digital cinema, and even more specifically, digital 3D technology. We've all seen the potential benefits of 3D and several heavy hitters in Hollywood are lining up behind this technology.

There are currently four 3D releases scheduled for calendar 2008, and eight to ten are in the pipeline for 2009. Now in order to make 3D a reality, you need the underlying digital technology first. Thus there is an increased urgency to resolve the remaining issues both technological and financial in order to enable a broader roll-out of digital cinema in our theaters as well as the rest of the country. As part of our continued testing process that already included two digital 3D locations, we recently announced the beta test of a digital cinema system at seven of our screens at our new theater in Sturtevant, Wisconsin and we're about ready to test a competing system at our Majestic Cinema in Brookfield, Wisconsin. We remain on a timetable that will hopefully result in decisions being made on a stage roll-out to additional theaters in our circuit later this year and beyond.

Another topic that was discussed at Show West was the continued fight against movie theft, and here again the news was generally positive. Protection of intellectual property rights remains a key issue for our industry, but government agencies have made a concerted effort to combat this problem, there have been a growing number of arrests made worldwide for movie theft, as they call it piracy, which I tend to feel over romances the notion of what is happening out there and doesn't properly reflect, it doesn't properly reflect theft. In another topic that has certainly warranted a fair amount of discussion is the growing importance of alternate programming in our theaters. While today the impact is relatively small compared to a blockbuster film, we've seen firsthand that there's a market for certain concerts, live sporting events and other live performances such as opera.

Look for continued emphasis on the part of theater operators like us to continue the transformation from being just a movie theater to an entertainment destination that offers a variety of out of home experiences for our guests. We'll continue to focus on all these areas in addition to other previously described strategies that include expanding our food and beverage offerings. We opened another of our signature ultra screens during the quarter and have at least two more on the drawing board. We announced a letter of intent to built build a new location in a Chicago suburb and will continue to pursue additional new build opportunities as well as acquisition opportunities as they arise.

There also have been several articles recently that will highlight the historical fact that the movie theater business has traditionally performed quite well during challenging economic times. So while for our hotels' sake we hope we are not entering a prolonged downturn in the economy, it's comforting to recognize that this portion of our business is very resilient during such times. Before we turn the call over to your questions I'd be remiss if I didn't point out that as the press release notes we continue to repurchase some of our shares during the quarter and have now repurchased over 800,000 shares in fiscal 2008. Any additional repurchases would be expected to be executed on the open market or in privately negotiated transactions, depending upon a number of factors including prevailing market conditions. We are certainly optimistic about our future and about our ability to leverage all of our strategies and to increase value for our shareholders. To help us accomplish that, the board recently elected Greg Marcus as our present and I'm happy to have him join our call today. Many of you already know Greg, who is my eldest son. Greg has a well rounded base of experience in many aspects of our business. He joined the company in 1992, buying real estate for our restaurants and movie theaters. He then moved into our Woodfield Suites operation and ultimately served as Chief Operating Officer of the former Baymont Inns and Suites division. Most recently, Greg has been actively involved in our real estate program, searching as Senior Vice President of Corporate Development and Chairman of the Corporate Investment Committee.

I'd like to turn the call over to Greg for a couple of closing remarks before our question and answer session. Greg?

Thanks, Dad, and good morning. I wanted to just take a minute to introduce myself and share a little of my background. I joined the company 16 years ago for several reasons. Most significantly, I wanted to come back to live and raise a family in Wisconsin where I could work with my dad and have a role in the growth of the company that my grandfather started more than 70 years ago. I was raised in this business. I grew up at the Pfister Hotel, and Marks Big Boy, the restaurant chain we used to own, was my mother's kitchen. However it was only over the last 16 years that I finally drew a paycheck. I was introduced to this business at the dinner table and I learned the details of the business by working side by side with, as you all know, an extremely talented group that intends my father, Bruce Olson, Bill Ado, Tom Kissinger, Doug Neis and the rest of our management team. I'm looking forward to my new role, which today includes opening today's call for questions. Doug, my dad and I would be happy to entertain any questions that you may have at this time.

(OPERATOR INSTRUCTIONS). The first question comes from the line of David Loeb from Robert W. Baird. Please proceed.

Gentlemen, can I start with the hotel business? I was very impressed with the same store RevPAR numbers and, Steve, I appreciate your comments about the Intercontinental and the Grand Geneva but given the importance of the Pfister and the Hilton, you must have had very good results there, too. What was really driving that and what's your outlook for the downtown Milwaukee market given the national trends?

Well, we continue to make reinvestment in our properties, not only Milwaukee but all of them for purposes of hopefully seeing us through the ups and downs in the marketplace and so that the impacts are somewhat muted. As we go into the future, and I hate to talk about specific markets, David, we tended not to do that. This may perhaps for perhaps for competitive reasons. But the markets looked okay right now. As I indicated in my earlier remarks we don't get a very long look at our business, we certainly have a very underlying bit of conventions that are in place. But right now the business is pretty solid and we look forward to it continuing that way but it doesn't mean that there won't be some dips as we go along.

I guess given your concentration in downtown Milwaukee you are a very large part of that market, almost the whole market so that's why I asked. The ballroom was back in service. Was it back the entire fourth quarter?

It was back in service, yes, I think we are talking the third quarter.

Third quarter, actually, yeah.

It did go back in service I think right at the beginning of the quarter or maybe at the end of the second quarter even.

And the parking garage was early in the third quarter. There were a few late delays that we had but in pretty much got going again right the beginning of the quarter as well.

And the $900,000 fee, in the segment results, that shows up in hotel EBITDA?

It does.

Okay.

It happens to be kind of a large one time kind of a thing and so that's why we highlighted it, but it's just, when we received technical and development fees all the time on other projects that we are working on and this happened to be kind of an unusual one and I thought we should highlight.

Appreciate the calling it out. It makes actually a lot of sense. As you look at the buy back program can you talk a little bit about what your appetite is, how price sensitive you are? You clearly have the resources especially with this private placement coming. Do you have any, I guess this is one way that you are looking to more fully lever your balance sheet, so what are your thoughts about that going forward?

David, I'll just say that I don't think anything is really changed from the way we've approached this this year or in the past. We are going to be opportunistic. We are going to go in and out of the market at times based on a variety of factors as we see them at the time. Obviously market conditions themselves are going to be important but our balance sheet, our view of the world from a capital expenditure perspective and opportunity that might present themselves, they all kind of go into the pot and so we will, we've, we've been in and out of the market throughout this entire year, and sometimes we are in and sometimes we are not and so we, during the quarter we didn't mention it in the release but it's been previously mentioned or I think we did mention in the release the board gave us another 2 million shares to work with as well. So we think we have a lot of flexibility. Both in our balance sheet and in the authorization to kind of be opportunistic and to try to weigh all the factors and really it hasn't changed our proposal hasn't changed versus how it's been the last year.

One more if I can. Just on the margins in the theater business, clearly with commodity prices rising, that's got to hurt the food costs on the concession side. What's the outlook for margins? What have the trends been in terms of film costs, and was there any impact from the CEC acquisition on your margins?

There was some impact on our margins on concessions from the CEC transaction, mainly because their pricing structure there was so much lower than ours tended to be, but we are confident that we've already seen some evidence of this, that with the remerchandising of the concession stands that we are putting in place gradually there, that those pricing levels are moving up and the margins will eventually settle in where they've been. Now that does not address the issue of most recently, I've been reading about the cost of the corn for the popcorn but I'm guessing in the scheme of thing the most expensive part of the popcorn is the box itself so how much that will show up and what we might do in terms of some selective price increases here and there hopefully will mute the impact of that if not eliminate it all together.

I guess the same is true is the cup in the soda versus the corn syrup in the sweetener.

I'm sorry, David, I got distracted for a second.

Just thinking about the same thing with food costs, corn syrup costs versus the cost of the soda as well, probably the same thing.

Well, but more so the corn because of the application, because of the fact that it's competing against making ethanol.

Right. How about film costs.

Film costs have remained fairly stable.

Okay. And is there, do you have hopes that you will be lowering your film costs with your increased buying power?

Hope springs eternal. Yes, that's an area that we always work at very, very hard, probably our primary interest is to make sure that our film costs stay in line and hopefully it will although the net addition of screens in the total scheme of things is not quite that great.

Great. Thanks.

The next question comes from the line of Rob Damron from 21st Century Equities. Please proceed.

Good morning, guys. I wanted to ask about the roll-out of the digital technology. I guess the first question would be, how many theaters are offering digital technology now out of your circuit? How many theaters would you expect to have implemented digital technology if we look out 12 months or so? And then in terms of this cost of this digital technology, who is paying and if you're paying part of it, what's the, I guess the incremental CapEx, associated with this roll-out?

Well, I'll let, I am going to let Greg handle the second part of it in terms of the financial part of it but the first part of it, ultimately the industry is headed towards trying to convert all screens, there's only about 4,000 screens nationally right now, Rob, and our perspective, we've been in and out of the tests so we've tested at several locations. Right now we have the two digital tests going on with the 3D added, and plus the seven screens at Sturtevant plus the again some additional screens that will be tested shortly at the Majestic. The next step for us probably will be again kind of a slow roll-out, we are certainly, there's another 3D film for example coming out in July, "Journey To The Center of the Earth". So we would certainly like to have some more 3D locations by that time if possible.

That doesn't constitute a broad roll-out, that's one screen in selective locations but that could be the next thing that happens. And but as far as any more specific in terms of how many screens, how quickly, that's what everyone is looking at right now and there's really no answer to that yet.

There's still fairly significant negotiations going on around this issue about the cost sharing and there's lots of aspects to that. It's not only the initial investment in the hardware but it's also the software and it's the ongoing licensing fees and the ongoing maintenance fees and then another complicating factor is that we all into intuitively have a sense that what we are putting in today might have a life span of eight to ten years, whereas the projectors that is we are using in our theaters now have an unlimited life span if they are well taken care of, which we do, and so we are trying to factor in what the impacts of that might be.

The initial -- and let me just say this. What's kind of got us a little bit in a holding pattern right now is that there's a consortium led by the three largest theater companies that are currently, I think it's called the Digital Cinema, DCIP is the acronym for it, has set up a company that is involved in becoming what's called an integrator who will be a middleman and make a deal with all the studios for what are called virtual print fees which will in effect pay for most if not all of the cost of this conversion. After all, the only party that's going to save money here in this whole process are the studios because they will no longer have to make prints.

Theater operators are by and large pretty happy with using film, but the only benefit being that in the third and fourth week of the picture, perhaps a digital print will look better than a film print just because there's no degradation from its running through a projector over and over again. Aside from that, theater owners are happy with the use of film. And have no, there's no financial gain from making a switch out to digital. Now having said that going to digital allows us to do the 3D, whereas we can't really do it without being digital. It also allows us to do life sporting events and concerts and a whole raft of alternate programming. So the tussle right now is who shares what cost and since the major circuits are still in a negotiating phase over this, we are watching to see how that all comes out. And that will drive what a lot of the rest of the industry does.

All right. Just knowing how would you normally put your numbers together, Rob, I will just tell you this. We don't have any significant amount in our fiscal '09 capital budget earmarked for this unless, unless we would again, we believe the majority if not all the cost recovered by the studios, whether we decide to do get ahead of the game a little bit in order to enable the 3D, that would just be a timing issue where we could potentially put some additional digital in with the prospects of it ultimately being paid for after the fact with these virtual print fees. So we are wrestling with that issue right now but we don't see it as being a major issue in our capital expenditures budget.

Okay. That's helpful. Then I investment trust have a few other very quick questions. Q4, fiscal Q4, will that have Memorial Day or will it not have Memorial Day this year?

It will have Memorial Day.

Okay. And last year?

Last year it did as well. The problem was in the first quarter of this year where we had a lack of comparability because that's when we swung over with the 53rd week. So last year, I mean when I was comparing my first quarter to the year before, I was comparing a quarter that did not have Memorial Day to a quarter that did.

Okay. So we actually get Memorial Day twice this year. Is that correct?

No, we get it once.

We get it once, okay.

We got it twice last year.

We got it twice last year. Okay. But we will have it in Q4 of this full year.

That's correct.

Okay.

And the Memorial Day picture is going to be Indiana in a Jones I believe is the main picture coming out in that time period.

Two other quick ones. Preopening expenses, expectation in fiscal Q4?

From this year's perspective very limited if any. As I think about it, it could be that there's some dollars that trickle in from something we've done previously, but essentially for all intents and purposes, nothing.

And lastly, how about real estate gains, I guess you still have one property to sell in Brookfield, how is that moving along?

We recently have been working with the community. They've been doing a review of the zoning out there and that's I think about a conclusion and it looks favorable so that property will be on the market. How fast, it is a great piece of property. But I don't know what the credit markets impact will have on that in the short term, but in the long-term we are not worried about that.

It actually has not been listed, is that correct?

It's been listed but because of what's been going on with the zoning out there I would say that it's been marketed, it's been impacted negatively.

But now it has been rezoned and you can be more aggressive selling it. Would that be correct?

That's correct, yes.

Okay. Okay. That's all I have. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS). The next question comes from the line of Dan Stockenberg from Wachovia Securities, please proceed.

Good morning, I work with Herb Buchbinder who is not available this morning. My main question was about digital which you already covered, but I would also ask you about trends in the preshow advertising revenue, how that's doing? I know it's been fairly active nationally. Are you participating? And I also might get a little more detail on some of your alternative entertainment, concerts and that sort of thing.

Just on a number perspective it has contributed. We are up on our preshow and lobby advertising compared to last year. And the existing contract is actually being, is coming up shortly and so we are into a new negotiation on that as we speak. So I can't make a financial comment.

That's pretty accurate and we would expect a fairly sizeable gain from continuing gain from that activity as potential advertisers realize that what they get from being on our screen ahead of the movies is a captive audience. It's not likely to get up and go to the refrigerator during the commercial break. And also as gains in technology are being made so that more and more advertising can be directed at specific movies, so we expect that to be a real positive for us.

Do you represent yourself in net ad sales?

No, we do not for the most part. We are working with, there are two primary companies out there, NCM being one and Screen Vision being another that compete for that business.

And can you say which one you are affiliated with?

Well, right now we are affiliated with both of them.

Okay. And the cost per thousand, they are going up for you, that the advertisers pay?

Well, I'm not certain of that. I know in we are filling more and more of our time, though.

And the concerts and that sort of activity?

The concert activity right now is, I would call it a nascent industry. It's just beginning to bloom and, of course, probably the one that has the most notoriety out there is the, what the Metropolitan Opera has done, which is fabulous and then we have concerts like Garth Brooks and we had a NASCAR, and then Hannah Montana, I don't know whether would you call it a concert or a movie or what, it wasn't a live feed for us. It was in 3D. And it was, it did very, very well. I mean, and that is going to encourage others who might produce content, not movies but designed to be played on movie theater screens, that will encourage considerably more production. And enable us to find other uses for the screens during times when movies don't perform particularly well. And perhaps also some content for times when we don't even operate the theaters right now.

Does that require digital technology to show these events?

Yes.

So you've already invested in that?

But it doesn't necessarily require the kind of digital technology that is being talked about, that we talked about a little bit earlier, where the studios are involved and it replaces, that would replace full-length motion pictures. That's what we refer to as big D. There's a thing we refer to around here as small D, which is what is used to present the preshow advertising. That level of technology is adequate to show much of the alternate content that's out there right now.

Thanks much.

You have a follow-up question from the line of David Loeb from Robert W. Baird. Please proceed.

I just wanted to close the loop on Paramount. I gather you settled all of your differences with them, can you give us a little color on what that means for your relations with the studios generally and for film costs going forward?

Well, we does settle our differences with Paramount and we think it worked out favorably for both parties. And hopefully, I don't think it had any impact on the other studios, but I mean I think it was a dispute that it related to what was happening with Paramount, with specific pictures and I don't think it's, I don't think it has any implications beyond that.

From a distance it looked like you draw a line in the sand and said, we are not going to pay you this much for these particular films, is that fair doesn't that mean that they eventually came back down to more historic costs?

I would say that's a fair assessment of it, David. I think we are at a level now that we can live with that makes sense. And that's, and any negotiations there needs to be something for everybody and I think we both found something we can live with. There's all kinds of aspects to what goes into film costs and that relates to also the making trailer time available and standies and marketing materials in the lobbies.

Just remember that one of the things the film company's gain from having those movies on people's screens is they gain a presence in what they all call the after market or ancillary market. It helps them sell their DVDs later on. We are in favor of it. We are not, we want the film companies to make a lot of money selling their movies as DVDs or direct to video and On Demand and any other way that they can make money, because the more money there is, the more money a movie earns from all of its windows, the more production there is going to be. And the more production there is, the more movies we have, the more big hits we are going to have to choose from. It will benefit everybody.

Great. Thank you.

Thank you. At this time it appears there are no further questions. I would like to turn the call back over to Mr. Doug Neis for any additional or closing comments.

Listen, thank you everybody once again for joining us today. Please join us again in July when we release our fourth quarter and year end fiscal 2008 results. Thank you and have a very good day.

This concludes the call for today. You may disconnect your line at any time. Have a wonderful week.