Marcus Corp (MCS) 2010 Q2 法說會逐字稿

Good morning everyone welcome to the Marcus Corporation second quarter earnings conference call. My name is Anita and I'll be your operator today. At this time, all participants are in listen-only mode. We will be conducting question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference call is being recorded. Joining us today are Greg Marcus, President and Chief Executive Officer, and Doug Neis, Chief Financial Officer of Marcus Corporation.

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

Welcome everybody to our fiscal 2010 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. Forward-looking statements could include but not limited to statements about 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 available to us in the future, expectations about the future trends in the business group and leisure travel industry, and in our markets. Expectations and plans regarding growth in the number and type of our properties and facilities, expectations regarding nonoperating line items on our earnings statement. And 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 can 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 2010 second quarter results. Excluding the one time adjustment that I will address in a moment, our theater division reported another good quarter with record revenues and increased operating income. In our hotels and resorts division, while RevPAR trends improved slightly, the division continued to be impacted by a very challenging lodging demand environment, and our results were further impacted by an impairment charge. Before I get in to the operating results, let me first briefly address any variations in the line items below operating income versus last year, especially due to the fact we had a couple of unusual items last year that impacted comparisons.

As you can see, we show a significant variation in investment income this quarter, that's entirely due to an unusual adjustment last year. You may recall the last year we reported $2.2 million of pretax investment losses during the second quarter related to two items, securities held by the company and an investment in and loans to a former Baymont joint venture. This year's investment income for the second quarter and the first half are running at our expected levels, and we don't anticipate any significant variations during the remainder of the year.

Meanwhile, our interest expense was down another $950,000, during our fiscal 2010 second quarter compared to the prior year. It is now down nearly $1.8 million year to date, Due to reduced borrowings and lower short-term interest rates. Depending upon the actual timing of our future capital spending, and assuming that short-term rates remain low for the foreseeable future, we could continue to see our interest expense run lower than the prior year in future quarters. Having said that, interest rates began declining last year at about this time, I don't necessarily expect variations in the upcoming quarters to be as large as we reported over the past two years.

In addition, we will likely see our debt level rise slightly in future periods now that we are heading in to our slower cash flow month. As we noted in our release, our overall debt to capitalization ratio at the end of the quarter remains a very strong 43%, and that's down from 44% at our last May year end. Continuing down the earnings page, we have had relatively little activity this quarter or first half for that matter related to gains from disposition and equity earnings and losses lines. I think it's still possible that we will report some level of gains in sales during the remainder of fiscal 2010, we do have a couple of asset sales that we are working on but small scale. As always, the timing of such gains is difficult to pinpoint. Of course, as you can see in our reported results, we do show significant variation on this line compared to last year, as a reminder, last year during our second quarter, we reported a $1.1 million loss related to our investment in the condominium units at our Las Vegas property. More about those units in a moment, when we discuss this year's impairment charge.

Finally, our effective income tax rate for the first half of fiscal 2010 was 37%, with our quarterly rates slightly higher due to a small adjustment to our estimated full year rate. This year to date rate 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 final two quarters of the year to be closer to our historical 39 to 40% range, pending any further lapses in statute of limitations or completion of tax examinations by taxing authorities.

Shifting gears, our total capital expenditures during the first half of fiscal 2010 totaled just under $11 million. Compared to approximately $15 million last year. Approximately $9 million of this year's amount occurred in our hotel division, and relates primarily to the ongoing renovations at our Grand Geneva and Hilton Milwaukee properties. At this stage of our fiscal year, barring some sort of unforeseen growth opportunity that could still arise in the remaining six months of our fiscal year, I think it's safe to assume that our total capital expenditures for fiscal 2010 will likely end up less than our original estimates. We're still finalizing the scope and timing of several of the requested projects by our two divisions, and as a result, there appears that these expenditures related to some of those projects will likely carry over into our fiscal 2011.

Lastly, we currently estimate that our current fiscal 2010 capital expenditures may more likely end up in the 25 to $35 million range, which would be very consistent with our last two fiscal year. The actual timing of the various projects underway or proposed will certainly impact our final capital expenditure number, as will any currently unidentified products that could develop during the remaining of the fiscal year.

Now 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 6.2% during the second quarter, and concession revenues were up 1.8%. Year to date, these box office revenues were now up 3.2%, and concession revenues were down slightly at negative 0.5%. Comparisons to the prior year are fairly clean from a number of screens perspective, we did close three leased theaters with 16 screens last year. One of which was a budget theater. Closing these theaters had minimal impact on our comparable operating results.

Total attendance at comparable theaters decreased 1.6% for the second quarter due to a relatively soft four week period at the end of October, beginning of November, where the films released did not measure up to the prior year. Year to date, our comparable total attendance was down 3.7% compared to the prior year, and the majority of that can be attributed to the summer weeks where we were going up against the Dark Knight last year, and we described that last quarter. The impact of our small attendance decrease continues to be offset by an increase in our average admission price for these theaters, of 8.8% for the quarter, and 7.9% year to date. Premium pricing for our digital 3D attractions and ultra screens contributed to the higher average admission prices.

Our average concessions/ food and beverage revenues per person increased 4.3%, during the second quarter, is now up 4% year to date. Our expanded food and beverage offerings at several theaters contributed to our increased average concessions per capita. Excluding pension withdrawal liability I referred to earlier, our operating margins in this division are now running 20.4% compared to 20.9% last year. The small decrease can be attributed primarily to the impact of the reduced attendance on our fixed costs and slightly higher film costs.

Now as we noted in our release, our theater division took a one time $1.4 million pretax charge to operating income this quarter, related to a pension withdrawal liability. This liability relates to a multiemployer pension plan connected to our Chicago projectionists union. We had a window of opportunity to withdraw from this under funded plan using plan valuations as of August 2008, prior to the downturn in the investment markets. And given that we only had a few remaining active associates in this union, we felt it was prudent to exit now and lock in our portion of the unfunded liability in this plan. We are now making contributions to an individualized annuity fund for each of these four or five remaining associates that are impacted that work for us. While this is clearly real money, and we will be determining our payment plans for this $1.4 million in the near future, we have no other situations like this, and I can say with confidence it truly is a one time adjustment to our theater results.

Shifting to hotel resort division, our overall hotel revenues were down 14% and total RevPAR was down 15% during the second quarter compared to same period last year, year to date RevPAR is now running 18.3% lower than it was last year at this time. Consistent with prior quarters, our second quarter RevPAR performance did vary by market and type of property, ranging from a low of about minus 8% to a high of about minus 22%. Based upon data available to us, our results continue to be fairly consistent, almost spot on actually when we look at the comparable star data with those of other comparable upper upscale hotels through the the United States.

Fiscal 2010 second quarter overall RevPAR decrease was a result of overall occupancy decrease of 2.1 percentage points and an average daily rate decrease of 12.2 percentage points. For the first half of 2010, our occupancy is now running approximately 5.4% points behind last year, and our average daily rate decreased 11.7%. Our second big adjustment this quarter occurred in this division, as we noted in our release, we reported a $2.6 million pretax impairment charge this quarter related to our remaining 16 owned condominium units at the Platinum Hotel and Spa in Las Vegas. If you follow the Las Vegas real estate market at all, this charge may not have come as a surprise to you, prices have fallen steadily for some time now, and while we have no desire to sell our remaining units at the current distressed foreclosure prices the units are going for right now, it is incumbent upon us to continually look at the market and assign a probability of the units returning to the price levels that we originally forecasted in the near future and midterm future. With the market further saturated with new units in the Las Vegas City Center project, we believe that impairment charge remaining carrying value of our units was appropriate.

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

Thanks, Doug. As you saw in the release and now heard from Doug, there were several things going on this quarter in our reported numbers, both this year and last year, making it more difficult to sift through and determine how the quarter really went for us. Doug gave you a further description of two significant adjustments, totaling approximately $0.08 per share and muddying the waters for us during our fiscal 2010 second quarter. To be fair, we also had a couple of unusual items last year during the same quarter.

So while I'm not a fan of discussing what we would call earnings before bad stuff, after all, some of the unusual items represent real circumstances that companies face from time to time, I think it's relevant and useful to note, that if you strip out the unusual adjustments from both years reported results, our core on going businesses would have reported earnings of approximately $0.07 per share this year versus approximately $0.10 per share last year. And the underlying story behind those numbers is not much different from what you heard from us in the last few quarters. That is, our theaters continue to perform well, while the hotel industry continues to struggle in the face of this difficult economic environment.

Let me make a few comments about both businesses. I'll begin my remarks about the theater division. As we reported earlier, the division had record revenues, and again would have reported increased operating income if not for the pension withdrawal liability adjustment. We got to those record revenues in a roller coaster way with a stronger than usual September giving way to a lull in the later weeks of the quarter, until we saw very strong performance with a record week leading up to Thanksgiving day holiday. By now you know, Twilight's sequel delivered for us in a big way, and turned up would have been a slightly down quarter in the results you see today.

In addition, as our press release notes and Doug expanded upon, our strategic initiatives to expand our Digital 3D footprint, increase our number of UltraScreens with related reserve seating, and expand our food and beverage offerings again paid dividend this quarter, as we we were able to make up for a small overall decrease in attendance with significantly increased per capita revenues. We are currently in the midst of what is traditionally the second busiest time of year for us, after the summer. The Christmas Holiday season, as we noted in our release, the momentum established in the last week of the second quarter has certainly carried over thus far to the early weeks of this Holiday season. Repeat business for New Moon, and the surprise hit, The Blind Side, have contributed to an overall 20% increase in our box office results during these first weeks.

With the highly anticipated Avatar opening tomorrow and likely hits Sherlock Holmes, Up In the Air, and Alvin and the Chipmunks, the Squeakquel, yet to come, we are hopeful our midwestern weather cooperates and plenty of moviegoers come out in the coming weeks to see one or more of the many films scheduled to be released. Then, once we get past the new year, we hope some of these films provide a strong holdover, and that Hollywood has films ready to compete against what was a very a strong January and February line up last year. Some of the films scheduled for release in those two months include Book of Eli, Edge of Darkness, Wolf Man, Valentines Day, and From Paris With Love.

Even with all of this good news, I must tell you that I can always find things to lose sleep over in both of our businesses. In our theater business, we have seen our margins dip slightly, and we are in a constant battle with our film distributer partners to keep our film costs in line. While we haven't talked about it the last couple of calls, we are always concerned about the preservation of the existing windows between the date the film is released in the movie theater and the date it becomes available to other markets, and there has been increased noise in with that discussion, with the take over of NBC Universal by Comcast. So while we anxiously await each weekend's box office reports and deal with the various industry issues inherent in this business, we also continue to execute on the many strategies we have highlighted in our prior communications with you.

In that regard, our press release noted the most recent initiative, the opening of the unique upscale four level five screen entertainment destination in Omaha, Nebraska that we are managing for Mutual of Omaha. As we noted, we've introduced our Synodine in-theater dining concept in all five auditoriums at this theater, and have taken our liquor service to a new level, as well. We also have taken one of our most popular items, Spiro's Pizza, to Omaha as well, and not surprisingly, for those of you that know it, it has been a hit. While the location only been open for a few weeks, we are pleased with the customer response to this theater so far.

With that, let's move on to our second division, hotels and resorts. On the one hand, it's encouraging to report a second consecutive quarter with improvement in our RevPAR trend during the fiscal 2010 second quarter. We are also beginning to lap the time period when revenues began declining last year. Our RevPAR was down almost 7% last year during the second quarter, and our room revenues are still over 20% lower than they were two years ago, I wanted to acknowledge the continued outstanding work of our management team to minimize the impact of these revenue decreases on our bottom line under very difficult circumstances.

Excluding the Platinum impairment charge, our team was able to see that only 42% of our decline in revenues dropped to our operating income line, will still providing the excellent service that our guests have come to expect from Marcus hotels and resorts. As I shared with you during our last call, in general in this industry, anything less than 50% flow through is considered very very good. Doug shared our occupancy and average daily rates with you and they tell the story pretty well as it relates to the current environment. We and others in our industry have finally seen our occupancy rates begin to stabilize, and we currently expect that trend to continue during our fiscal Q3.

The issue now is pricing power. Or lack thereof. We have a strong group business segment to fill up lots of rooms, we have had to seek occupancy with the price sensitive leisure, government and contract customer segments. We are also taking rooms on the opaque internet channels than we would prefer under normal circumstances. The good news is that the demand from these segments has held up and we have successfully backfilled most of the lost occupancy from the traditional business traveler. The bad news, of course, is the lower average rates. In the short-term we don't see group book business booking pace changing very much. We are, however, starting to see positive occupancy momentum in several of our markets and we hope those trends continue.

Our RevPAR declined over 13% during our third quarter last year and 23% during our fiscal 2009 fourth quarter. So if the current trends continue it would not seem unreasonable to expect our negative year-over-year comparisons to lessen during the remainder of our fiscal year. As I mentioned, while we have to remain ever-vigilant, I think we have our costs under control, so the emphasis right now is on increasing revenues. We will continue to offer value packages to our guests in order to drive demand, and we will attempt to shift market share away from alternate internet channels and towards our own. As you have heard us say before, we will also continue to maintain and enhance our assets during a time when others are finding it difficult to do so. Next phase of our renovations at the Grand Geneva is about to begin and at the Milwaukee Hilton, our room renovations are nearly completed, and we are beginning to address some of the common areas right now, including the first floor entry. And with the balance sheet and credit availability that is the envy of others in our space, we remain poised to explore and follow through on potential growth opportunities that may arise during these difficult times.

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

Thank you. (Operator Instructions). Your first question comes from the line of David Loeb from Baird.

Close enough. Doug, Greg, thank you very much for doing this, Greg, I know you love funny movie titles and I know you loved saying "Squeakquel".

I ad libbed on the script there.

Very good. I asked the same question every quarter but you put the same line on the balance sheet every quarter about opportunities for new investments and can we start with theaters clearly, that's not a business that's feeling much distress, but are there financing issues for other operators, are there operators with maturity issues that are approaching, do you think that changes the equation? Can you give us a comment on the debt market as it relates to theaters and what it does for your acquisition pipeline?

That's one word as we said before, we don't know of anybody first of all, for theaters that we might be able to acquire, theater chains that would be in our let's call it our most our strike zone, that data is not public, these are talking smaller regional operators -- we aren't hearing whether they got what their debt situations are and roll over issues if I were a bank, the only thing I want to take over less than a hotel is a movie theater. I don't know if they are going to get the same extending treatment that the hotels have been getting. But in the bigger operators have we don't know what their I haven't been following their bank statistics, if AMC had a problem, nothing I would make a decision on.

The only transaction that was recently announced was it was basically related to financial pressure was disposition of the Showcase Cinemas, the National Amusement Theaters, the Red Stone stuff, that was bought up by a private equity group. We continue to look at that and we continue to look at any opportunity that comes our way. The business is okay, not a lot of distress.

Hotels do you think there are distressed real estate opportunities in your strike zone over the next year and how about management companies, is that something something you would consider as well?

I keep reading your research, David.

We are somewhat skeptical about the timing.

But I have to believe there is going to be some opportunities. We continue to see them. When you look at that W deal, it was very interesting what happened.

In New York, Union Square one. Where basically, what must have been the C piece of the mezz tried to protect itself. You'll see it too, these guys coming in and lenders are they keep going back to lenders repeated times. I think they must be working their way down the capital stack.

Which I guess means that you won't have a wave of opportunities any time soon but they may come eventually, is that fair.

I think that's fair. I guess -- then when the market opens up, would we be able to buy at a huge distress? I'm not so sure. I believe we are at the lower end of the cycle, that's probably a good time to be buying stuff.

On management contract opportunities or management company opportunities, are you seeing more of those, or is that are those pretty much frozen as well?

I think from what I seen pretty frozen. We aren't seeing too many of them. There are a lot of big management companies rolling around and they're not capital intensive.

On the management contract opportunities some of the stuff is management contracts. Some of that is, because as others are also looking to some of the stuff that is out there distressed that is available, there are situations where they're looking to pair up with a management company. We are involved in some of those type of discussions.

If I could give you one take away in the philosophy we got now, and that is that we are not just out racing around trying to manage anything and trying to manage just trying to take up especially where there is distressed stuff, if f a lender or somebody, or somebody ended up taking the property back, we aren't aggressively, although we do have some of that business and we're looking at it, we are being selective. We have to tend to our own assets. Those may not have long-term management horizon, those are nice pop in cash quickly. We have our plate full running on what we have. We are selective.

In terms of new supply particularly today I think the Aloft in downtown Milwaukee is opening, what do you think the impact will be of that opening and do you see much else coming in your markets?

Well, I'm not looking forward to the Aloft opening. I haven't seen the actual product. I won't be a great barometer. I think it will -- rooms are rooms. They're adding inventory to a market that doesn't need a lot of inventory right now. I think that they will impact us but I couldn't give you exact number what I think it's going to be yet. I would tell you we are going to be -- we are working hard to aggressively market and sell benefits of our properties. We will continue to do so.

Great. Thank you very much.

Your next question comes from the line of Marla Backer from Hudson Square Research. Please proceed, ma'am.

Thank you. I have one question on the lodging business and then a couple of questions on the theater business. You talked about trying to boost occupancies at the hotels a little bit by migrating some demand to the alternative internet but lower margin channels. First of all, can you quantify what if any impact you've seen so far and is there, I think you alluded to this, is there stickiness that you anticipate there that will make it a little difficult in the short-term to move back to the higher margin channels once the industry starts to rebound?

Well, Marla, as far as quantifying, no I can't -- I'm not able at this moment -- as some percentage of our business, it's quantified in the standpoint when you look at the average rate, no question that those channels play a role in that. If you understand how that works, the consumer may be paying $89, $99, that's not what we're getting. Because the channel is taking their pound of flesh, so as we make our decisions daily, in terms of how much inventory to put out onto the channels, it is a science, and but clearly when we report 12% decrease in average rate, it is a component of that. I couldn't separate out and tell you how much is contributing to that.

As it relates to making the transition, the occupancy cures all ails, fact is as the demand, particularly in a group business, that's one of the keys, as you have blocks of rooms that take up and compress -- cause compression in the hotel, you no longer need to be concerned about giving as many rooms to the channels. The ultimate fix is that. In the meantime we do marketing efforts and value packages and we do things that try to make have the customer make the transition to us if they got us through opaque channel the first time, we try to make sure the second time they come directly to us, that's the effort you try to make.

You cited the Las Vegas market, obviously there has been a lot of hotel rooms coming on the market with City Center. I've seen increased marketing, I think for the overall Las Vegas market. How long do you think it will take to absorb some of the rooms. My understanding is there are several projects put on hold but the developers are talking about resuming development, at some point in the future. Do you see significant number of new rooms coming on in line in Las Vegas over the next couple of years?

Well I think that City Center is going to be a big chunk to digest. What might come on line -- the only thing the one that I got to believe has to come on line has to be the Fountain Blue because it's got a curtain wall, it's up, that thing is stopped in the middle. I guess -- you got a piece of raw land I wouldn't be too worried to think anyone is going to build a new room on it. If you got something that's under construction, and maybe significantly advanced someone might buy it at a very discounted price and that might be something that would be finished up.

What you noted, Marla, is correct, there has been a lot of marketing to Las Vegas. While I don't normally single out properties I will tell you that our occupancy was up at that property compared to last year for the quarter. So it's not that people aren't necessarily doing to Vegas right now but it's the rate. Conversely, the decline in the rate was higher than what the average for whole circuit, chain was. So that's a market that again, given the number of rooms, that's very aggressive pricing going on.

Makes sense. Switching topics to the theater business. Getting back to the rentals and your margins. Do you think that alternative content can help with that and I noticed that in some of your theaters you will be playing the Dave Matthews Concert Movie this week. Are you feeling kind of optimistic about the potential for alternative content like concerts and sports events and just what kind of impact do you think it will have on margins?

Well, it can -- I mean no question that any time I can put some additional people in the theater, particularly at a time when maybe we wouldn't be as busy, that's a good thing. That would help our margins. But right now the size of this is not big enough that you would notice it right now. You need to have more. In order for you to ever notice it in our numbers. I absolutely agree and buy in to what you are seeing in theory as more of that comes on it can make a difference. Dave Matthews concert here, Glenn Beck Christmas.

Not going to do it right now.

No.

But good signs about what the potential is.

Absolutely.

Lastly, as you continue to expand your dining options and your F&B options generally, are you worried about cannibalizing some of the higher margins on the concession stands. I think I asked this on the past quarterly calls. I wanted to get your current feeling now that you have more data.

Yes. That's something we watch all of the time. We don't just look at our gross per cap, we look at net per cap, because it doesn't do us any good to sell more and make less.

Right now you are not seeing that?

Right now we are not seeing that.

Okay. Thank you.

(Operator Instructions).

All right. Listen, we certainly thank you for your questions and attention. Thank you for joining us again for our conference call and we look forward to talking to you in March when we release our third quarter fiscal 2010 results. Thank you, hope you have a very wonderful holiday season and happy new year.

Ladies and gentlemen, thank you for your participation in today's conference this concludes the presentation you may now disconnect, have a great day.