Marcus Corp (MCS) 2009 Q1 法說會逐字稿

Welcome to the Marcus Corporation first quarter Earnings Conference Call. My name is Ahmed and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

Joining us today are 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 2009 first quarter conference call.

As usual, I need to begin by stating 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, 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 of trends in the business group and leisure travel industry and in our markets, our 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 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'll also post all Regulation G disclosures, when applicable, on our website at www.marcuscorp.com.

That behind us, let's talk about our fiscal 2009 first quarter results. We're certainly pleased to be reporting increase in net earnings and record theater results in the midst of these turbulent times. Yet, as we noted in our press release, weak August film product and challenges in the group business market, segment for our hotel and resort division tempered the performance of what started out to be a very strong quarter.

But before I get into the operating results, let me first briefly address the relatively small variations in the line items below operating income versus last year. As you can see, investment income did not change very much from the last year nor do I expect it to vary significantly for the remainder of the year. Conversely, even though we expect total interest expense for fiscal 2009 to be ultimately higher than last year, it was actually lower than last year during the first quarter thanks to a lower average interest rate. As you know, during the summer, we're at our peak for our cash inflows, while at the same time we generally refrain from significant capital spending. So as in the past, we'll see our debt levels and interest expense rise in future periods now that the summer is behind us.

Our overall debt to capitalization ratio at the end of the quarter was a very strong 44.4%, down from 47.3% at our recent May year end due to the aforementioned strong cashflow summer for us.

Continuing down the earnings page, we had relatively little activity this particular quarter this year and last year on our gains and disposition line. I think it is possible that we'll report some level of gains from sales during the remainder of fiscal 2009, but as always, the timing of such gains is always difficult to pinpoint. We did not report any significant gains or losses last year during any of our four quarters.

And finally, our effective income tax rate this quarter was 38.9%, which is slightly lower than normal due to a decrease in the amount of unrecognized tax benefits as a result of a lapse of the applicable statute of limitations. I currently expect our tax rate for the remainder of the year to be around 40% give or take a tenth or two.

Shifting gears, our total capital expenditures during the first quarter of fiscal 2009 totaled approximately $9 million, compared to just under $4 million last year. Over $7 million of this year's amount occurred in our theatre division and relates primarily to a land purchase in Omaha, Nebraska, construction costs on our latest UltraScreen in Orland Park, Illinois, and the purchase of 3D digital projectors. At this early stage of our fiscal year, I have no reason to adjust our previous estimate for capital expenditures for fiscal 2009 of an amount in the $60 million to $80 million range. We're still finalizing the scope of our planned renovations at the Grand Geneva and Milwaukee Hilton, and several addition projects which would need to be approved in order for us to end up at the higher end of that range. The actual timing of the various projects currently underway or proposed will certainly impact our final capital expenditures number, as will any currently unidentified projects that could develop during our fiscal year.

Now, before I turn the call over to Greg, let me provide a few additional financial comments on our operations for the first quarter beginning with theatres. Our box office revenues were up 14.7% during the first quarter, with concession revenues up 16.2%. Of course, these numbers were impacted by the seven newly acquired Nebraska theatres. If you exclude the seven Douglas theatres, our box office and concession revenues were actually down approximately 1.8% and 1.4%, respectively, during the quarter. Total attendance increased 10.9% for the first quarter but again that includes the Douglas theatres. Excluding the acquired theatres, our attendance was actually down 5.6% for the quarter.

The entire comparable theatre decrease in revenues, and virtually all of the same store decrease in attendance, occurred in August, offsetting some very nice comparable theatre revenue increases during the first two months of the year. The impact of August attendance decrease was partially offset by an increase in our average admission price for these theatres of 4% for the quarter and an increase in our average concession revenues per person of 4.2%. Our operating margins in this division decreased to 25.2% compared to 26.6% last year. Not to belabor the point, but our margins in this division were actually 0.7 of a percentage point higher than last year after the first two months of the summer. But again, August results dropped our margin below last year.

Shifting to our hotel and resort division, our overall hotel revenues were down 1.4% and total RevPAR was down 1% during the quarter compared to the same period last year. But as we noted in the release, this was really not an across the board decrease. In fact, we had more properties with increased RevPARs than those with decreases including a couple of properties with double digit increases. Unfortunately, as you know, a couple of our larger properties are more dependent on the group business segment, and their results brought our overall numbers down. Our fiscal 2009 first quarter overall RevPAR decrease was primarily the result of an overall occupancy rate decrease of 0.9 percentage points as our average daily rate remained virtually unchanged at actually plus 0.1%.

With that, I'm going to turn the call over to Greg.

Thanks, Doug. Before I make a few comments about the first quarter and each of our divisions, let me first tell you that Steve Marcus sends his regrets that he couldn't join us today for this call. He and Bruce Olson, our theater division president, are out of town at an annual meeting of the National Association of Theatre Owners. We know it as NATO. I'm certain they're actively discussing the many issues and strategies theater operators are dealing with today like digital cinema, 3D, alternate programming, Windows and piracy. As you may remember, Steve has previously served as president of this organization and we obviously think it is important to remain active in this industry association.

With that, why don't I begin my remarks with our theatre division. When we were last with you for our year end conference call in July, we were coming off a very strong June film line-up. And the "Dark Knight" had just opened. As I'm sure you could tell, we were in a really good mood. So we correctly noted the first quarter was shaping up to be a very good one. Well, as you've now seen, it was, in fact, a record quarter for this division thanks in large part to our recent acquisitions. Having said that, I will be the first to admit that we ended up wondering what could have been had the August film line-up held up its end of the bargain.

This year's late summer films, "X Files," "Stepbrothers," the latest "Mummy" sequel, "Pineapple Express" and "Tropic Thunder" did not perform as hoped and were no match for last year's "Simpsons" movie, "Bourne Ultimatum," "Rush Hour Three" and "Super Bad." Add to that the tremendous public interest this year in the Olympics and the political party conventions that followed and you have a much weaker month at the box office compared to the prior year. That unfortunately offset much of what we had gained during the first two months.

But you know what? While it may add to our collective gray hairs at times, or a lack thereof in my case, that's what makes this business so interesting. Every Friday, a new set of films open up with a new opportunity to entertain our customers. Every film won't be a blockbuster but over time we trust that Hollywood will get it right enough times to keep our customers coming for a night out at the movies. Every once in a while, a special film like the "Dark Knight" comes out that can really make a quarter for us.

As we look ahead, while we may not see another "Dark Knight" on the immediate horizon, there is a good quantity of films scheduled for release in October and November, some of which we highlighted in our press release.

But we're not sitting back and waiting for that next hit to show up on our screens. We also continue to execute on the many strategies we highlighted in our recent annual report and prior communications with you. Our press release mentioned several of these. We have another UltraScreen under construction, and just announced plans for our 13th such screen at our North Shore Cinema in Mequon, Wisconsin. We introduced digital 3D to 14 screens in our circuit in time for "Journey to the Center of the Earth" this summer with a strong pipeline of three films in the works, as well.

We're preparing for another successful season of alternate programming beginning next week with the Metropolitan Opera. We recently introduced our successful ice cream and coffee concept from the Majestic Cinema into our new theatre in Racine, Wisconsin. And we announced plans to add another of our successful Zaffiro's pizza restaurants at the same Mequon theatre I mentioned a minute ago. And we have yet another food and beverage concept, this time more like a food court, under construction in our Oakdale Cinema in the Minneapolis market. Add to that the new projects under development in Madison, Wisconsin and Omaha, Nebraska, as well as the additional land we've been acquiring for future growth, and you can see that we have a lot on our plate right now.

The one thing that still remains in a holding pattern for the moment is a broader roll-out of digital cinema beyond the 3D locations I mentioned earlier. On that front, we continue to test several systems in our theatres, and we also continue to patiently wait for the financial models to come together to make a full-scale roll-out possible. As I mentioned earlier, I'm sure this is one of the hot topics at the NATO meeting.

So, as I wrap up my comments on this division, I think it is pretty clear that this remains an exciting time for the theatre industry. I think at least so far, the premise that the theatre business can perform quite well during challenging economic times has once again been proven to be accurate.

Which provides a pretty good transition to our second division, hotels and resorts. As I noted at the conclusion of our press release, it is times like these that make us appreciate the diversification we have in our business. I'm not telling you something you don't already know when I say there is much more near-term uncertainty surrounding our hotel and resort division in this current economic climate. As you saw in our release, and heard amplified by Doug in his remarks, this was actually a very interesting quarter for us. It really is a microcosm for what's happening right now.

As I hope you gleaned from some of the numbers that Doug shared with you, performance was not uniformly negative. This actually was a pretty good quarter for quite a few of our properties in this division, which may not have been your initial conclusion in reviewing our results. As Doug noted, the majority of our owned hotels reported improved results over last year. The problem was the properties that did not do as well, without naming names, included a couple of our larger properties that rely more heavily on group business. As we shared with you in July, group business remains the customer segment that is showing the most weakness at this time. We, of course, are not just sitting on our hands. In those cases, we're adjusting our sales focus accordingly and closely monitoring our costs as needed. As you know, the group business segment is a customer segment that provides us with the most lead times.

The leisure segments and the corporate transient segments of our customer base generally book their rooms on much shorter notice and it is very difficult to look out beyond the next couple of weeks. Right now, we maybe have seen just a little softening in the corporate market, and the leisure segment is beginning to become more price sensitive than it was previously.

Now, while we would certainly prefer to see business even stronger right now, most of you know us well enough and recognize that we generally take a long-term view of the world. And with this long-term perspective, we continue to emphasize the importance of reinvesting in our properties. Thus, as fall turns into the slower winter season for us shortly, this will be an excellent time to undertake a couple of significant renovation projects at our Grand Geneva and Milwaukee Hilton properties in order to maintain their leading positions in each of their respective markets.

Finally, while financing challenges have put some hotel developers, investors on the sidelines for the moment, we continue to seek additional opportunities to expand the management portion of our business. And we're actively working on several potential opportunities, as we speak.

With that, at this time, Doug and I would be happy to open the call up for any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to David Loeb of Baird. Please proceed.

Hi. Question about theatre margins. Greg, I think you mentioned that margins were actually doing well through August until the August monthly numbers came in. I guess I would have expected better margins even with the weaker August just given that typically don't you usually get really solid margins when you have such a successful movie as "Dark Knight"?

Well, conversely though, David, we had a lot of new investment including the acquisitions. And so our fixed cost number is higher than what it was traditionally. And so that probably tempered it a little bit. Thinking about our operating costs, I don't think there were any significant variations. We're seeing increases in utilities, as you know. And film costs will come and go a little bit, depending on the films that are playing. But I would attribute it more to the fixed nut that we've got to get over because of some of the new investment, David.

Given that new investment, are you expecting that you're going to be able to do some cost rationalization, or are there margin improvement opportunities regardless of the film line-up from these recently-acquired theatres?

Well, again, I mean I would say as we've projected [out], as we do our budgets, with the right film product there, and again, we ended up down a little bit for the quarter because of what happened in August. So we were on track to have better margins prior to that. So, it would be our expectation that we could ultimately have better margins if the overall product was there. And again, we were down a little bit, so it was not.

Got it. In terms of group, Greg, I want to be respectful of your not wanting to name names but it seems pretty obvious that the biggest group hazards are the Hilton and probably secondary the Pfister, maybe the Grand Geneva. Are there others that are really important to your group business?

I'll answer it first and then let Greg jump in. But certainly, yes, the Hilton is a convention hotel. We've always said the Grand Geneva is very strong from a group business. I would probably -- I think about group business and again, we've talked about this. The results were not across the board. We certainly like group business in Madison but Madison has been a decent market and has hung in there pretty well.

Chicago's an interesting market. As you can see all of the national numbers. I'm not telling you anything out of school here, Chicago has been down. And while our hotel is not necessarily a group hotel, compression in the market helps that hotel, and so if group business is down at other group hotels, then the whole rising tide and lowering tide in Chicago can be impacted by it. And Chicago certainly is a group city to a large extent. Those are the ones that would come to mind.

The Pfister, David, is a little more of the corporate transient business. They have small groups, small events. But you know, the big events, not as reliant.

Well, then it does seem like you picked a really good year to be doing rooms renovations at the Hilton and Grand Geneva.

We wouldn't disagree with that.

So, I guess I'm not sure the right way to say this but the dislocation may mask some of the group weakness, or you may have less dislocation because there's less business that you're worried about dislocating.

Well, I mean the timing during the year is the key, as well, obviously. I mean for those two particular hotels, you know, the winter is the slower time period. So, it is an efficient time to do it regardless of the business climate because we can take -- you can take floors out of commission at a time, and be efficient about how you do that.

I see. Great. I may have some more. I'll come back into the queue.

All right.

Your next question comes from the line of Andrew Whitman with Baird. Please proceed.

Good morning, gentlemen.

Andrew, how are you doing?

I had a couple of questions on the report of the Madison hotel happening. In the past, you've liked to develop hotels with partners. I'm thinking in today's credit environment, the credit quality and the balance sheet you guys bring to the table, I'm thinking this might be something that you might have to go at alone. Can you just talk about your ability and you desire to develop a hotel, maybe the one in Madison on the balance sheet?

Andrew, we haven't decided how we're going to -- how we would finance that yet. We've always been prudent stewards of our balance sheet and our capital so that in times when others may have overextended themselves, we're in a position to take advantage of opportunities that come our way. So, when it comes time to make those decisions, we will look for the best way to finance it, and if it is something that makes sense for our balance sheet, as you know, we certainly have the capacity to do that. But as yet we haven't made a decision.

Ok. That makes sense. I'll jump back in the queue if I have any other questions from here. Thanks.

Your next question is a follow-up from David Loeb with Baird. Please proceed.

I didn't mention we're double-teaming you. I guess in terms of the competitive landscape and the potential for acquisitions, are there other regional theatre chains in your basic geography, like Douglas and CEC, that are of a size that might interest you over the next several years?

There are certainly other ones that we find interesting that we've watched and we have long-term relationships with. Are they necessarily contiguous? They may not be contiguous. But some are contiguous. Some are not. Nothing too far afield. But we continue to look -- we look in many markets and we continue to maintain the relationships.

I think when we look at the ledger to make a decision on acquisition, obviously location, as it relates to our current operating base is important and it weighs in but it is not the only issue. Size, quality of the assets, ownership of the assets -- those are other things we look at because we like to own real estate. So, if an opportunity presents itself that is not contiguous but that is still in a position that we feel we can manage it effectively, we'll take that opportunity.

Sounds like you then have a pretty good opportunity set out there then.

You know what, David, it is so hard to predict. It really just depends on -- I will tell you that it is very hard to predict when something is going to show up. There's not -- the transaction volume, you can see there's not a lot of transaction volume in that space. So, if the opportunity presents itself, we will analyze it and potentially go with it but we have to just look at them when they come about. I can't tell you we've got something teed up right this second.

Got it. In terms of building new theatres from the ground up, like you did with the Majestic, like you're doing with other stuff now, and you've got the land for future development, what kind of hurdle rate are you looking for on those investments?

You know, we've been pretty consistent with the screens that we've been putting our investments through for a long time now, David. We look at it a couple of different ways. We'll do an IRR type calculation. We typically -- I've shared this before -- we'll typically look for 18% to 20% IRRs after tax, assuming 50% leverage. That's a pretty common one that we've used in the past and continue to put it through that. But we'll put that up against an EVA type calculation as well. We'll compare it -- we'll do some comparisons against our cost of capital, as well. Most of these measures tend to kind of triangulate and have been consistent for the years now in terms of what we've been looking through.

I see. And one final. Any appetite for acquisitions of distressed water park operators or owners? [ LAUGHTER ]

You have anything in mind you're talking about, David? Or what?

Oh, you know, this and that. Various wild endangered species, things like that.

Do you have any other questions for us, David? [ LAUGHTER ]

Generally speaking, is the water park segment one that you monitor? I know you own one and operate another -- or operate one or two others, I guess. Is that something that you are looking at to expand in?

Well, you know, we own one. We have another one that, you know, the condo hotel that is a unique ownership. But I mean, it is right on our property. It is like it is ours. And, as you know, there is the one that we announced in Providence, Rhode Island that we will manage for somebody else. That one is not in the ground yet. But you know, he's working and pulling all of his financing together. We hope that gets started soon. So, it is certainly on our radar screen and certainly something that we think, you know, with two, going on three, it certainly makes us an expert in the industry. It is pretty fragmented.

But it's not something you put up on every corner. So, it is a very unique space. It's very high capital requirements. And we keep close tabs on it. No question about it.

That's a very good answer. Better than just diplomatic. I appreciate that. That's it for me. Thank you.

(OPERATOR INSTRUCTIONS) At this time, it appears there are no other questions. I would like to turn the call back to Mr. Neis for any additional or closing comments.

We certainly want to thank you again for joining us today. We hope to see some of you at our annual meeting on Tuesday, October 7th at the Intercontinental Milwaukee Hotel. For those of you who cannot attend, we do plan on web casting the meeting, as well. We also look forward to talking to you once again in December when we release our second quarter fiscal 2009 results. Thank you and have a great day!