Marcus Corp (MCS) 2008 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Marcus Corporation fourth-quarter earnings conference call. My name is Lakisha and I will be your operator for today.

(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 of the Marcus Corporation. At this time, I would like to turn the program over to Mr. Neis for his opening remarks. Please go ahead, sir.

Thank you and welcome, everybody, to our fiscal 2008 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. 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; 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; the expectations and plans regarding growth in the number and type of our property and facilities; expectations regarding various nonoperating line items on our earnings statement; and our expectations regarding future capital expenditures.

Of course, our actual results could differ materially from those projected or suggested by our forward-looking statements. Factors, risks and uncertainties which could impact our ability to achieve our expectations are included in the risk factors section of our 10-K and 10-Q filings, which can be obtained from the SEC or the Company. We will also post all Regulation G disclosures, when applicable, on our Web site at www.MarcusCorp.com.

So with that behind us, let's talk about our fiscal 2008 fourth-quarter and year-end results. As the press release notes, given that our fiscal year-end results last year included an extra week of operations, we are certainly pleased to be reporting double-digit increases in revenues and operating income for the year.

Before we get into the some of the specifics of our quarter and year-end operating results, however, let me once again first address the variations in the line items below operating income versus last year, as they obviously were the reason our fiscal year net earnings were less than the prior year.

We once again, as expected, had an unfavorable comparison to last year on the investment income line. As in prior quarters this year, the variation of this line can be traced directly to our purchase of the 11 CEC theaters in late April last year. Prior to that purchase, we had been carrying some remaining excess cash that was originally generated from our Baymont sale a couple of years earlier. That cash was generating some modest investment income. We of course believe the cache is now providing even greater returns in our operating income. As we look ahead to next year, we would now expect the comparison in this line to become more in line with possibly only a slight decline due to the fact that part of our investment income is related to old time share notes receivable that are slowly being paid off. As you know, we are no longer in the timeshare sales business. Thus, we are not adding to this notes receivable balance.

Meanwhile, our interest expense is actually down for the quarter, although our year-end expense is up, as expected, over last year, again due to the fact that we added to our borrowings in order to advance the theater acquisitions. The fact that we had a decrease in expense this quarter is attributable to the extra week last year, further aided by lower interest rates on our variable rate debt. While our actual capital expenditures and cash proceeds from asset sales can and will impact where our fiscal 2009 interest expense will actually end up, we certainly would expect our interest expense to go up, possibly as much as -- by as much as $1.5 million to $2 million during fiscal 2009, due to the increased debt levels.

Now, as the press release notes, I do mention and I have mentioned in prior calls, we did close on $60 million in 'seven and ten-year private-placement senior notes during the quarter and redid our bank facility, 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 47%, down from 44.5% at our May year end, or actually up slightly from that number. Due to favorable interest rates on the recent senior notes and the lower short-term interest rates, our average interest rate at year-end on our current debt portfolio was approximately 5.3% compared to 6.3% at this time last year.

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 have tried to highlight in our press release. While he had relatively little activity this particular quarter in either year on our gains from disposition line, as you know by now, last year's full-year results included the very large gain from sale of the condo units at the Platinum Las Vegas property as well as significant gains in the sale of a former theater property, resulting in a large negative comparison this year. These were obviously unusually large amounts last year and not reflective of average real estate activity for our company.

That is not to say we won't continue to have periodic gains on the sale of real estate as we move forward. We will. We have other non-core real estate that we will likely be sold in the future, including another former theater property near the one I referred to a minute ago that could generate a significant gain. We also recently announced plans to relocate our Eastgate Madison theatre and sell our existing theatre for land value. If these plans move ahead as we hope, the sale of the old theatre would also generate a significant gain at some point in the future. Of course, as I have 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 in our earnings statement.

Although there was not any significant change in the following items during the fourth quarter, we also experienced a favorable comparison in earnings and losses from unconsolidated joint ventures during fiscal 2008 compared to the prior year. During the first half of last year, we were reporting preopening expenses from our then 50%-owned Las Vegas joint venture. Now that we own 100% of the public space at the Platinum, we are consolidating the results in our financial statement. In the last few quarters and 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 and our 50% share of our last remaining Baymont joint venture, pending any additional joint ventures that we might add at a future date.

Finally, as I have pointed out each quarter this year, the other reason our net earnings declined in fiscal 2008 compared to last year was due to a significantly larger income tax charge this year. As you know, this was because last year's effective income tax rate was significantly reduced by historic tax credits that were generated by our Skirvin Hilton hotel project in Oklahoma City. Our effective income tax rate during fiscal 2008 returned to our historical 39% to 40% range, actually ending up at 39.2% compared to 22% last year. At this point, we would expect our effective rate to remain at the same historical level during fiscal 2009 as well.

Shifting gears, our total capital expenditures during fiscal 2008, excluding the $40.5 million Douglas Theatres acquisition, totaled approximately $24 million, compared to approximately $111 million last year, also excluding the acquisition last year, the CEC Theatre acquisition. Last year of course we had built three new theatres and undertook a major renovation of the Skirvin Hilton hotel. This year, we spent approximately $16 million in our Hotels and Resorts division, including costs associated with the guest room, meeting and banquet space and parking garage renovation at the Pfister Hotel. The remaining $8 million was spent in the theatre division and included items such as our newest UltraScreen at one of our Columbus, Ohio theatres.

As we look towards capital expenditures for fiscal 2009, we are currently estimating that our fiscal 2009 capital expenditures may again be in the $60 million to $80 million range with approximately $25 million to $35 million estimated for our Theatre division and $35 million to $45 million estimated for our Hotels and Resorts division. A substantial portion of this capital budget is either yet to be approved by our investment committee or is for unidentified projects, however, so our actual fiscal 2009 capital expenditures certainly could vary from this preliminary estimate, just as they did this past year. Greg will go into a little more detail regarding our projected capital spending in a few moments.

Now, before I turn to call over to Greg, let me provide a few additional financial comments on our operations for the fourth quarter and fiscal year, beginning with our Theatre division. Our box office and concession revenues were actually up slightly during our fourth quarter, compared to the prior year, thanks to our newly acquired CEC and Douglas Theatres. But clearly, the 53rd week last year impacted our Theatre division comparisons the most. Having said that, it was not a particularly strong quarter for film product with March and April particularly weak and tough comparisons to last year's May blockbuster film lineup, further impacting our results. For the full fiscal year, however, both box office and concession revenues were up over 16% compared to last year, once again thanks primarily to the acquired theatres.

Now, if you exclude our acquired theatres, the two theatres that opened -- the two theatres that were open last year that were subsequently closed and not replaced and last year's 53rd week, our box office revenues were actually up approximately 2.8% and our concession revenues were up 3.1% for the year.

Now, breaking that down a little bit further, our total attendance increased 13.1% for the fiscal year, but again, that number is helped by the acquired theatres and hurt by the comparison to a 53-week year. So again, trying to equalize things here by excluding the acquired theatres and the two close theatres and last year's extra week, our attendance was actually down 2.1% for the year.

Our box office and concession revenue increases for these same comparable theatres for the full fiscal year, and excluding last year's extra week, were the result of an increase in our average admission price for these comparable theatres of 4.9% and an increase in our concession revenues per person for these same theatres of 5.2%. Selective price increases, film product mix and specific items such as our premium pricing for our popular UltraScreens with VIP seating and our expanded food and beverage offering at the Majestic, as well as premium pricing related to the 3D attractions, all contributed to the increases in revenue per person.

Now, I also want to point out that other revenues from the Theatre division, which include items such as preshow and lobby advertising, were up again for the year but were actually down during our fiscal 2008 fourth quarter due to the fact that last year's revenue included a one-time fee related to the termination of our management contract for three city theatres in Chicago. Our year-end operating margins in this division have declined slightly to 19.5% compared to 22.1% last year, and can be attributed primarily to the negative impact of the slightly reduced attendance, increased fixed costs related to the new theatres added during the past 18 months, and the impact last year of the extra week of operations.

Shifting to our Hotel and Resort division, our overall hotel revenues were down slightly during the fourth quarter compared to the same period last year, again due to that extra week last year, but ended up nearly up nearly 11% for the year. Total revenues for the year benefited from new revenues from the Skirvin Hilton, which was not open until the fourth quarter last year. Conversely, the Columbus Westin was a company-owned hotel last year for most of the year, and now that it is a joint venture, its revenues are no longer in our consolidated totals, so that negatively impacted our comparisons. Increased management fees also contributed to our overall revenue increase in this division.

Now, our press release noted that our total RevPAR for our eight owned hotels, including the Skirvin Hilton, increased a solid 9.6% for the fourth quarter. For the full fiscal year, our total RevPAR for seven comparable owned hotels, now excluding the Skirvin because it wasn't open for most of last year, increased 7.2%. While we don't usually single out individual hotels, the Skirvin certainly helped our fourth-quarter RevPAR comparisons, and our results were again helped by continued strong performance from our InterContinental Milwaukee hotel that was coming out of a significant renovation last year and converted to the InterContinental brand early in our fiscal third quarter last year.

Our fiscal 2008 fourth-quarter RevPAR increase was driven by a 1.3 percentage point increase in our overall occupancy rate and a 7.4% increase in our average daily rate, or ADR. Our fiscal 2008 full-year RevPAR increase is the result of a 2.5 point increase in our occupancy rate and a 4.9% increase in our ADR. RevPAR increased at all seven of our comparable-owned hotels and resorts during fiscal 2008.

Our division operating income increased 68.2% during the quarter and ended the year 36.5% ahead of last year, despite the one-time negative comparison that we have referred to previously at the Pfister due to the renovations, a significant real estate tax adjustment at our Chicago Four Points property that we discussed earlier in the year, and the comparisons to a 53-week year. These significant increases in operating income can be attributed to the aforementioned RevPAR increases at our comparable properties and the fact that, last year during the fourth quarter, we had approximately $1.6 million of preopening expenses related to our new or newly renovated properties and our full fiscal 2007 had proximately $4.5 million of these preopening expenses.

With that, I will now turn the call over to Greg Marcus.

Thanks, Doug. I will begin my remarks where Doug left off, which was discussing our Hotels and Resorts division.

As you have heard and seen, we had a very good quarter in this division, particularly when compared to last year's results. As Doug noted, we can mostly thank significant year-over-year improvement at our newest properties for the improved operating results. But we certainly were pleased with some of the RevPAR increases we saw at our existing properties as well. Let me make a few brief comments on each.

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, 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, it has clearly established itself as the market leader in Oklahoma City. We also continue to be pleased with the bottom-line improvement we have experienced at our InterContinental Milwaukee hotel as we renovated and repositioned this property last year.

It is no secret that our other newest property, the Platinum Las Vegas, has been a drag on our earnings in this first year and a half and will take a little longer to mature. Having said that, I am pleased to note this hotel performed much better during the fourth quarter, breaking even for the first time. Even though Las Vegas as the hotel market has probably seen as much or more distress than any of our other markets, we hope to see continued improvement from this property in the next two quarters as, quite frankly, our comps during the first couple of quarters this past year were not particularly strong.

While I am talking about the Platinum, I will point out that we continue to still own 16 of the 255 condo units at this hotel. Given the current real estate market in Las Vegas, we don't expect to sell very many, if any, of these units in the near term. From our perspective, patience is a virtue right now, and we will continue to rent those units in the meantime and keep 100% of the room revenue.

We also continue to make significant investments in existing hotels during our fiscal 2008, and that trend will continue during fiscal 2009. You heard my father say before that one of our core strengths of our company has always been our focus on maintaining our assets, and certainly our Hotels and Resorts division has plenty of recent evidence of that. As you know, we've made a significant reinvestment in the Pfister Hotel in the past 18 months, and that continued during fiscal 2008 with a major renovation of meeting and banquet space and parking garage and a complete rooms renovation of our original Pfister building. Our fiscal 2008 operating results for this hotel were negatively impacted, but it was the right long-term thing to do.

In the coming year, we expect to undertake significant room renovations at both our Milwaukee Hilton and Grand Geneva properties. We have long-term assets and we're willing to make long-term investments in these 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 fiscal 2008. Our press release highlighted our fiscal 2008 activity in this area, and we continue to seek additional opportunities to expand this portion of our business.

Despite the current credit situation that many developers are facing, we are pleased with our pipeline of potential projects. We also keep a close eye on how the current and projected economic environment impacts other hotels. We have always been a very opportunistic company and it could be that there may be projects that might interest us in the future that become available as a result of the economic uncertainty.

Finally, let me briefly comment on what we are seeing for the future based upon the limited visibility that we have through advanced bookings. Right now, our greatest concern lies in group business. Locally, our Milwaukee hotels have benefited from the upcoming Harley Davidson 105th Anniversary Celebration. But overall, we are seeing a slower booking pace for group business, as well as a greater attrition rate for booked business. Our properties that rely more heavily on group business, such as the Grand Geneva and Hilton Milwaukee, could be challenged in the months ahead.

Conversely, for the most part, our hotels are less reliant on group business and depend more on the transient business traveler -- have so far -- (inaudible) have so far not been impacted as much by the current environment. We are placing a lot of our emphasis on our corporate sales and believe we have an excellent infrastructure to pursue those efforts.

As usual, we'll be watching our cost controls very closely in the months ahead. We certainly are watching the trends very closely and will continue to do so.

With that, I would like to make a couple of comments about our theatre business before we open the call for questions. We certainly couldn't have picked a better week to talk to you, coming on the heels of an all-time record box office week. Doug has already gone over the numbers for you, so I won't repeat what you have already seen or heard.

The fourth quarter was not a particularly good quarter for us in this division, but as you know, in this business, we have a very short memory. We are already having a pretty good summer, driven by a very strong June film lineup. But this past weekend, driven obviously by the record performance of The Dark Knight, which I will say I saw last night and is a great movie -- certainly put us in a position to have a very good first quarter. And with X-Files and Step Brothers set to open tomorrow and the next Mummy sequel opening next week, there is no reason not to believe that we have at least another two good weeks ahead of us before the Olympics and back-to-school activities bring an effective end to the big summer movie season.

With films such as the next Harry Potter movie and another Bond film slated for release in November, there certainly is some cautious optimism that the rest of calendar 2008 could be pretty good as well. Obviously, while we continue to ride the roller coaster of film product, the lesson learned once again for us is that we need to focus on the aspects of our business that we can control, because we clearly cannot control the quantity or quality of movies distributed by Hollywood. So with that in mind, let me briefly talk about a couple of elements of our strategy for this business.

From a growth perspective, as you know, for the second straight year, we were able to successfully purchase and integrate a neighboring theatre circuit with good assets and strong market position at a competitive price that should prove accretive to our long-term results. Our CEC theatres were the biggest reason for our fiscal 2008 Theatre division operating improvement. Our new Douglas Theatres have thus far performed exactly as we had hoped they would.

In addition, recent announcements have highlighted opportunities we will have two build new state-of-the-art theaters in the future, including a possible next-generation entertainment destination in Madison and a unique upscale theatre and entertainment complex that we will manage for another owner in Omaha, Nebraska.

Another focus you have heard us talk about relates to the expansion of our food and beverage offerings in our existing theatres. We have learned a lot from our first year of operation at the Majestic and we are now taking steps to duplicate or expand on some of the most successful elements of the Majestic. We are currently preparing to add locally branded products such as Zaffiro's pizza, Stone Creek Coffee and a Chocolate Shoppe Ice Cream to several of our theatres in a couple of different ways, including using our existing concession counter in one location and building a separate kitchen and hot zone area in another.

A second generation version of our dinner theatre concept is also in the works.

Since we last spoke, we were also convinced that the time was right for an investment in digital 3D technology. As our press release noted, we are now able to present digital 3D films in 14 different auditoriums in our circuit. With up to eight to ten 3D digital films slated for calendar 2009, many in our industry believe digital 3D may have a significant positive impact on future moviegoing.

Now, in order to make 3D a reality, you need the underlying digital cinema technology first. Thus, there remains an increased urgency to resolve the remaining issues, both technologically and financially, in order to enable a broader rollout of digital cinema in our theatres, as well as the rest of the country. We continue to beta test competing digital cinema systems at a couple of our theatres, and we remain on a timetable that hopefully will result in decisions being made on a staged rollout to additional theatres in our circuit in 2009.

Yet another strategy that was implemented in fiscal 2008 was the new focus on ultimate programming in our theaters. While today the impact of this programming is relatively small compared to a blockbuster film, we are pleased with our first year of providing this alternate programming and believe that the opportunity to broadcast concerts, live sporting events, and other live performances such as opera will only grow in the future. This strategy in particular is consistent with our belief that our business is undergoing a transformation once again that will take us long-term from being just a movie theatre to an entertainment destination that offers a variety of out-of-home experiences for our guests.

I ended my comments on the Hotel division by talking about the current economic climate. So it is probably appropriate that I do the same with my Theatre comments. This could be one of those times where we once again appreciate the fact that we have two distinct businesses within The Marcus Corporation. It is a well-documented fact that, historically, the movie theatre business has, more often than not, performed quite well during challenging economic times. There could be many reasons for this and of course one of them could be that people are traveling less, which of course is not necessarily good for our hotels, but it is comforting to recognize this portion of our business is very resilient during such times.

Before we turn the call over to your questions, I would just direct your attention to the conclusion of our press release, where we once again highlighted our strong balance sheet. We were able to repurchase over 800,000 of our own shares during fiscal 2008 and execute on another theatre acquisition and still keep our balance sheet in a very strong position.

With each of our divisions' revenue derived principally from consumer cash purchases and availability of $104 million of unused credit lines as of our fiscal 2008 year-end, we think our balance sheet is an excellent position to not only weather any storms on the horizon, but also allow us to continue to invest in our business to foster long-term growth.

With that, Doug, our CEO, Steve Marcus, and I would be happy to entertain any questions you may have at this point.

(Operator Instructions). David Loeb, Baird.

Doug and Greg, you both talked about the RevPAR increase. It sounds like a big piece of that was improvements in Las Vegas as well as Oklahoma City in the InterContinental. Can you give us some flavor on how the stabilized hotels did and were those rate increases across the board?

First of all, to clarify, David, Las Vegas would not be included in there because it is not a company-owned hotel per se. It is a management contract, so that is not part of the numbers. It is just the eight -- for the fourth quarter, it is the eight owned hotels only. For the year-to-date numbers, it was just seven hotels, excluding the Skirvin. So as I did indicate, all seven of them were up for the year.

In general, while we are not going to single out any other individual hotels, I gave some information as it relates to -- I mean, most of it was rate but as I indicated, on a year-to-date basis, we were off -- I think I said 2-plus points in occupancy as well on the year-to-date. So it was spread fairly decently.

What I would say is that the group-type hotels, as we got later in the year, probably did not quite keep up.

Even at the Pfister, where you completed the renovations, I guess it is really too early to see if that is going to help with rate.

Yes. I mean, I think -- we didn't really have -- we missed all of the summer and the early part of the fall with all of the banquet business and meeting space. So yes, if you look at the Pfister and singled them out, they clearly, you know, they negatively impacted the results overall.

Right, but it sounds like they bounced back in the second half and particularly in this quarter. It was really quite an impressive number in the fourth quarter. It does sound like the two newer hotels contributed a lot to that, but it sounds like it was broader than that. Is that fair?

Sure, it is fair. It was not -- not all eight hotels were up, but I think all but one or two were.

Okay. The $60 million to $80 million of CapEx that you mentioned, does that include potential acquisitions?

No. I mean, if you are referring to what we have done in the last couple of years, which would be the theatre acquisitions, we do have some unidentified dollars in there, like we do every year, for hotel growth that can come in a variety of different forms. So we could participate in hotel ownership, for example, and things like that, but if there was any acquisition like we have done in the last two years, it would not be in those numbers.

Maybe for Greg or Steve, can you talk about other potential theatre companies that might be for sale? Are you seeing a continuation of this trend of kind of a generational changeover and openness to sell in other regional theatre chains?

I think we are not seeing a tremendous amount of activity right now. I think the stock prices are down. Multiples are down. So, I would say there is not a lot of activity right at the moment.

But you're optimistic that you can continue this streak of buying one or so a year?

We didn't say that, David. I can go back and look at the script here, but I don't think I said that.

I think what Greg said was the second consecutive year.

Well, that's historical. What we will say is, David, is that we have been in this business for a long time, as you know. We continue to monitor the markets. We have relationships, obviously, as you know, with the exhibition community. It is our hope that, as opportunities present themselves, we participate in those opportunities and we continue to monitor and mind that.

One kind of housekeeping number, Doug -- what was the absolute increase in attendance, including all theatres, in the fourth quarter?

The absolute increase in the fourth quarter -- I gave the year-to-date number of 13%. I do not have that at my fingertips, the fourth-quarter absolute number. Actually, I may. Bear with me one second here. I should have that.

For the fourth quarter, well, it was basically flat. Fourth-quarter attendance was flat, on an absolute basis, but that is comparing apples and oranges with the extra week.

Right, extra week and more theatres.

And everything else, but if you roll it all together, we were flat.

(Operator Instructions). Thank you. At this time, it appears there are no other questions. I would like to turn to call back to Mr. Doug Neis for additional, any additional closing comments.

Thank you. We certainly want to thank all of you for once again joining us today. Please join us again in September when we release our fiscal 2009 first-quarter results. Go see a movie this weekend. Thank you and have a great day.

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