Marcus Corp (MCS) 2009 Q2 法說會逐字稿

Good morning everyone, and welcome to the Marcus Corporation second quarter earnings conference call. My name is Nakita, and I will be your operator for today. (Operator Instructions)

Joining us today are Greg Marcus, President and Doug Neis, Chief Financial Officer of the Marcus corporation.

At this time I would to turn the program over to Mr. Neis for opening remarks. Please go ahead sir.

Thank you very much. Welcome everybody to our 2009 -- fiscal 2009 second quarter conference call.

As usual, I need to begin by stating 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 revenues 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, our expectations about the future 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 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 post all Regulation G disclosures when applicable on our website at www.MarcusCorp.com.

So, that behind us, let's talk about our fiscal 2009, second quarter and first-half results. We are certainly living in very interesting and turbulent times, so I guess it's only fitting that we report an interesting set of results for you this quarter. As Steve notes in our press release, if not for several one-time nonoperating adjustments recorded this quarter, that are a direct result of this challenging market, we would be sitting here talking about a quarter with net earnings essentially equal to last year's same quarter. In this environment, that is no small feat, and as noted is the direct result of a very strong quarter in our theater division. Before I get into the operating results, let me first briefly address the significant variations in the line items below operating income versus last year.

As you can see, the largest variation versus last year occurs on our investment income and loss line. Two one-time adjustments totaling approximately $2.2 million pre-tax accounted for the investment loss reported this quarter. As noted in our foot notes to our financial statements, any available for sale securities held by the Company are typically stated at fair market value on our balance-sheet, with any unrealized gains and losses reported as a component of shareholders' equity. Having said that, we regularly evaluate these securities for, as the accountants call them, other than temporary declines in value. While our investments in securities are very limited, the drop in the markets has been significant enough that we have chosen to report the decline in value in these securities versus our original cost as an investment loss during the quarter. I can say with all confidence that you can view this as a one-time adjustment as the remaining value of these securities on our balance-sheet is insignificant.

In addition, an investment loss was also reported this quarter on loans to and investments in a former Baymont joint venture. In this particular joint venture, as a result of a 1031 transaction it now owns a piece of land in seven operating hotels. Given the current state of real estate values for raw land, we felt it was prudent to increase our reserve on our investment in and loans to this particular venture.

The second significant nonoperating, below-the-line variation this quarter is found on our gains and losses from disposition of property, equipment and other assets line. What you're looking at here is a $1.1 million pre-tax adjustment of the prior gains that we recorded on the sale of condominium units at our Platinum Hotel and Spa in Las Vegas. Prior gains were recorded on a percentage of completion method based upon our estimated total proceeds once all 255 units were sold. Essentially what happened here is that, based upon the impact the current environment has had on Las Vegas real estate prices, we have lowered our estimate of expected proceeds that we'll ultimately receive when we sell the remaining 16 units that we are still carrying on our balance-sheet. These units are generating cash flow as part of our nightly rental inventory, so we are in no hurry to sell them at the current distressed pricing, but we still, once again, felt it would be prudent and conservative to reduce our estimated final selling prices on these units.

As we note in our release, these aforementioned items, which negatively impacted our pretax earnings by over $3.3 million, represent approximately $0.07 per share, based upon our year-to-date income tax rate of just over 39%. The remaining items below operating income did not change significantly compared to last year's second quarter, other than interest expense once again running slightly less than last year due to the relatively low capital spending and lower average interest rates. Our overall debt to capitalization ratio at the end of the quarter was a very strong 44.9% down from 47.3% at the end of our May year-end. With cash on our balance-sheet, and over $114 million in available credit lines, we also remain in an enviable liquidity position as well. Finally, our effective income tax rate for the first-half of fiscal 2009 was 39.2% with our quarterly rate slightly higher due to a small adjustment to our estimated full-year rate.

Shifting gears, our total capital expenditures during the first-half of fiscal 2009 now total approximately $14.5 million, compared to just over $10 million last year. Nearly $11 million of this year's amount occurred in our theater division, and relates primarily to land purchases, construction costs on our latest UltraScreen in Orland Park, Illinois, the purchase of 3-D digital projectors and a food and beverage project at a theater in Minnesota.

Before I turn the call over to Greg, let me provide a few additional financial comments on our operations for the second quarter and first-half beginning with theaters. Our box-office revenues were up 26% during the second quarter, with our year-to-date box-office now up 18.8% compared to last year at this time. Concession revenues were up 27.9% for the quarter, and are now up 20.4% for the year. Of course these numbers were impacted by the seven newly acquired Nebraska theaters. So, if you exclude the seven Douglas theaters, our box-office concession revenues were still actually up 8.6% and 9.2% respectively during the quarter. Year-to-date, excluding these same theaters, our box-office revenues are now up 1.8%, and concession revenues are up approximately 2.4%.

Total attendance increased 20.6% for the second quarter, and is now up 14.4% year-to-date. But again, that includes the Douglas theaters. Excluding the acquired theaters, our same store attendance was actually up 3.3% for the quarter. It is now down only 2.4% year-to-date. If you recall, most of the same-store decrease in year-to-date attendance occurred in August, in our first quarter.

Box-office revenues for these comparable theaters were favorably impacted by an increase in our average admission price for these theaters of 5.1% for the quarter and 4.5% year-to-date. Similarly, concession revenues per person for these same theaters increased 5.8% for the quarter, and are now up 4.9% for the first-half of the fiscal 2009. With this strong box-office performance, our operating margins from this division during the quarter increased from 12.9% to 14.1%. Year-to-date, our margins have decreased slightly to 20.9% compared to 21.6% last year.

Shifting to our hotel and resort division, our overall hotel revenues were down 7.7%, and are now down 4.4% year-to-date. Total RevPAR, as the press release notes, was down 6.8% during the quarter compared to the same period last year, and has declined by 3.7% year-to-date. As we noted in this release, it has not been an across-the-board decrease. In fact, as noted we had three properties with increased RevPAR during the quarter, this is of our eight owned hotels, and we still have more properties with increased RevPAR's year-to-date than those with decreases. By the time we get to the end of the fiscal year, we may not be able to make that same statement, but it does demonstrate that there is some variation in performance by a geographic market.

Our fiscal 2009 second quarter overall RevPAR decrease was a result of an overall occupancy rate decrease of 5.3 percentage points, as we managed to hold our average daily rate during the period. In fact, our ADR actually increased by 0.7% during the second quarter. Year-to-date, our overall occupancy rate has declined by 3.1 percentage points, and our ADR has remained virtually unchanged at plus 0.4%. With that, I will now turn the call over to Steve -- to Greg actually.

Thanks, Doug. I will begin my remarks with our Theatre division.

You know, I have read a series of articles in recent weeks debating whether the movie business is recession proof. You have probably all heard the statistics and arguments. Box-office results increased during five of the last seven recessions. Going to the movies is an escape from the challenges of daily life. People are traveling less, but they still want to get out of the house. Going to the movies is an inexpensive form of entertainment compared to other out-of-home options. The list goes on and on.

I'm not here to say I definitively know whether there is a business that is ever really completely recession proof, but certainly our results this quarter speak volumes about the recession resistant nature of the theater business. It seems that, once again, despite economic turmoil that most of us have never seen before, consumers demonstrated that they are willing and able to allocate a portion of their busy schedules and stress pocket books to a night out at the movies, provided that Hollywood does their part by producing compelling films that people want to see. Only time will tell whether we will be able to look back on this recession and change our industry's recession busting its statistics to six out of the last eight. We certainly are pleased with our results so far.

While the external influences of things like the state of the economy or the weather, or here in Wisconsin the success or failure of the Packers can have a significant bearing on the performance of our theaters. At the end of the day, it's the product that matters. During the last three months the product was very good particularly in October and November. We have listed the top films of the quarter in our press release, as well as some of the films already released or scheduled for release during this Holiday season and our fiscal third quarter. Despite the national box-office taking it on the chin this past weekend compared to last year, when two of the top three films of the season, Alvin and the Chipmunks and I Am Legend opened, the slated films to be released tomorrow and next week offer a great variety and high hopes for some very successful weeks ahead. As you may know, the week between Christmas and New Years is the traditionally the busiest movie going week of the year, and we are fortunate that the calendar is in our favor this year with both Christmas and New Years falling on Thursdays, extending both weekends. With theaters based in the Midwest, we of course will also be hoping for good weather during this very important time-frame.

Enough about the elements of our business we can't control, such as film product and the weather. We also continue to execute on the many strategies we have highlighted for you in the past. Our press release mentioned several of these. We opened our 12th UltraScreen on the second last day of the quarter, and we began construction on our 13th such screen at our North Shore Cinema in Mequon, Wisconsin. We previously introduced digital 3-D to 14 screens in our circuit, and showed our second feature film, Disney's Bolt, on those screens during the quarter. While the overall box-office from this film was slightly under initial expectations the theaters with 3-D presentation performed much better than 2-D, further demonstrating the appeal of this format. The pipeline of 3-D films scheduled for release over the next couple of years seems to be growing daily, which is very encouraging.

We also recently introduced our latest food and beverage concept dubbed the Hollywood Cafe to our Oakdale Cinema in the Minneapolis market. To add to that, the new projects under development in Madison, Wisconsin and Omaha, Nebraska, as well as the additional land we have been acquiring for future growth, and you can see 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 rollout of digital cinema beyond the 3-D locations I mentioned earlier. On that front, we continue to test several systems in our theaters and have been pretty pleased with the results from an operational standpoint. As many of you may know, although the industry financial model to fund a full-scale roll-out has now been agreed to with many of the studios, the turmoil in the credit markets may once again delay the broader roll-out.

So, as I wrap up my comments on this division, I think that it's pretty clear that this remains an exciting time for the theater industry. Having said that, we have been in the business too long to take anything for granted, so you can rest assured that we are poised to make the adjustments necessary in order to fulfill our mission of creating magical movie memories for our guests.

Transitioning to our second division, hotels and resorts, I think it's safe to say that there won't be any articles written suggesting that the hotel business is recession proof. In fact, there is historically a very strong correlation between GDP and hotel revenues. Since we last spoke with you in September, conditions have changed considerably, and not for the better as you well know. Our second quarter results clearly reflect that with each month generally worse than the prior one.

During our first quarter you heard us focus primarily on the decline in group business at several of our properties. As the second quarter unfolded, group business certainly didn't improve but we began to see rapidly declining occupancies from our corporate transient and leisure customer segments. In fact, right now declines in non-group business exceed those of group business. This dynamic only adds to the uncertainty facing those of us in the hotel industry as the booking lead time for non-group business has historically always been shorter than that of group business. In other words, it is very difficult to have a lot of visibility into the future right now. I'm sure that is one of the reasons why whatever guidance anyone has given has either been pulled or changed so frequently.

You may also note, in our second quarter results that our food and beverage revenues declined to a slightly higher percentage than the room revenues. This is not an unexpected byproduct of times like these. Besides, an unexpected decline in restaurant revenues you often find groups spending less at your hotel while they are there. As companies tighten their collective belts, they may still have their meeting or conference but they might send fewer attendees and they will cut back on their food and beverage spend as well. Another example would be what we are seeing in the current month of December where holiday parties have been scaled back or in some cases even canceled.

Now, as Doug noted the situation is not all doom and gloom. Some markets are doing better than others, and in many cases we are fortunate enough to be in markets where the highs may not be as high, but the lows are not as low. Markets like Oklahoma City, Houston, Madison and even Milwaukee have held up better than others. Conversely, the Chicago market has been weaker than many and has impacted a couple of our properties. Another bright spot in the numbers Doug shared with you was the fact that, at least thus far, we have been able to hold our average rate, something we were also fairly successful at during the post 9/11 downturn in the industry.

The bottom-line is that we really don't know for sure how long or how deep this recession will be. We are preparing for significant head winds for all of 2009, but I don't think anyone really knows just how strong those head winds will be. Obviously, cost controls become very important during times like this, and we are challenging all of our costs very aggressively. The key of course is to do this while not negatively impacting the guest experience. This will require all of our years of experience to walk this fine line.

It's not just about reducing cost. We have actually increased our sales efforts at several of our hotels with some favorable results thus far. This can be a time when we can strengthen our already leading market shares at many of our properties, and if there is another silver lining in this otherwise dark cloud supply growth, which had been out-pacing demand growth, is now expected to subside due to lack of financing, which is not necessarily a bad thing for owners of existing properties like us. We continue to seek additional opportunities to expand the management portion of our business, and we are actively working on several potential opportunities as we speak.

Now, before we open up the call for questions, I also want update you on our plans for capital expenditures during the fiscal year. As you may know, we had previously estimated capital expenditures for fiscal 2009 in the $60 million to $80 million range. While noting that there was a fair amount of flexibility in those numbers. In the face of this current environment, where maintaining a strong balance-sheet becomes even more important, we have taken a hard look at our planned spending for the year. As a result of this review, we now expect our fiscal 2009 capital expenditures will more likely end up in the $30 million to $40 million range, depending upon the ultimate timing of some of the expenditures. We are proceeding with our planned renovation projects at our Grand Geneva and Milwaukee Hilton properties with the scope of the projects for fiscal 2009 has been reduced by breaking the projects into multiple phases.

We also have several capital projects underway, or being prepared in our theater division including the previously announced renovations at our North Shore Cinema in Mequon, Wisconsin, that will add an UltraScreen and a separate Zaffiro's Pizza restaurant. The actual timing of the various projects currently underway or proposed will certainly impact our final capital expenditure number, as will any currently unidentified projects that could develop during our fiscal year. Of course we can maintain a meaningful capital expenditure program while keeping ourselves in a position to take advantage of any potential growth opportunities that could arise during these turbulent times because of the strong balance-sheet and liquidity position Doug referenced earlier.

Over the years, there has been many a time when we have been told that we are too conservative, that we should leverage the Company more. Well, the fact is that our board and management built our Company to withstand times like these. Our foundation is solid, and we are confident when the economic environment improves -- and it will improve, we will be standing on the other side as strong as ever and poised to continue to create value for our shareholders, customers and associates.

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

Thank you. (Operator Instructions) Please standby for your first question.

Our first question comes from the line of Eric Palm with Baird. You may proceed.

Hi guys, how are you doing?

Fine, thank you.

I have a couple of questions for you. You obviously have capacity to take advantage of others' distress, either on the hotel or theater side. What is your appetite to utilize your balance-sheet for distressed acquisition opportunities on either side of the business?

Eric, it's a tough call. We are watching it very carefully. Let me break it into two parts.

On the theater side, you're not seeing a lot of distress. The only distress you will see on theaters, we think, will be potentially from financial sponsors that may have some economic problems. But the property themselves are operating fairly robustly right now. The hotel side, as you are well aware, is a different story. We continue to evaluate these opportunities regularly, we're monitoring the markets. We have maintained our balance sheet just for these kinds of opportunities. Our history shows that we do take advantage of these, going all the way back to the acquisition of the Pfister, which was essentially a purchase out of bankruptcy. We will utilize our balance-sheet, but as usual be conservative in our approach and cognizant of the times. We don't want to cause ourselves any problems in these great times of uncertainty.

If there is no too much distress on the theater side, does that mean there is not a lot of pricing change from a per screen basis from last year or the year before?

I don't think -- the only transactions in the last couple of years have been ours. There really haven't been many theater transactions to even benchmark it with.

Because obviously that contrasts with the hotel side where there has obviously been a lot of contraction in pricing.

I think, look at the multiples for the theater stocks, you will see some contraction in the stock -- in those multiples across the board in almost every industry.

Okay. What sort of steps are you taking at your hotels to rein in costs? I mean are you closing floors? Are you cutting staffing? What sort of steps are you taking?

Eric, I mean, as Greg said in his prepared remarks, first of all, there is no stone that has been left unturned. And again, trying to find that balance, because we don't want to cut into muscle here, but are we watching our staffing very closely? Yes. Are we, from a hiring perspective, I don't know any hotel companies are hiring, so most people have gone into more of a freeze from a hiring perspective. We have certainly, through attrition -- we have certainly had some cutbacks because of that. And frankly, we've had to look very hard at overall staffing at all of our hotels. In some cases there have been small cuts. Small relatively so, but to the people involved it's a big deal.

So, it's been a tough time in that regard. But we are looking at every type of expense and just saying how can we be efficient? How can we be smarter, and how can -- what can we do without ultimately impacting the guest? That's the challenge.

If I could add to that, Doug. To the point of where we are in our markets, we are in the Midwestern markets we tend to not see the highs and the lows, although we are all being impacted, as our numbers indicate, but I don't think we have, at this point, come to the point to close floors. But we are, in terms of operationally, we've had to curtail hours at our some of our restaurant outlets, so we are watching for things on the margins, as Doug pointed out. Where can we be as efficient as we possibly can be?

Great. Then I have one last one. On the Platinum, you took an adjustment of $1.1 million in the current quarter, and you are still holding you said to 16 units. What's the likelihood that, given the downturn in Las Vegas residential real estate market, that you're going to have to take additional write downs on your stake in that?

My answer is that, I look at it today -- would be slim to none because we would have -- from our best view of the world right now we would have taken that now if that was the case Eric. We took the $1.1 million kind of adjustment, and that puts us at a level that we are very comfortable with given our stated intention to not sell at the best price. There basically aren't any transactions occurring other than a few distressed sales, and we are not motivated to do that. We have cash flow coming in from these properties -- these assets, and so we are motivated to be patient and so with that perspective, we are comfortable with where our carrying cost is now.

Okay. That's great. Thanks a lot, guys.

(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 closing comments.

Once again, we would like to thank you for joining us today. We look forward to talking to you again in March when we release our third quarter fiscal 2009 results. Thank you. We hope you have a very wonderful Holiday season and a happy New Year.

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