Marcus Corp (MCS) 2010 Q3 法說會逐字稿

Good day, everyone and welcome the Marcus Corporation's third quarter earnings conference call. My name is Eric and I'll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference 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.

Thank you very much. I'm joining you here from Milwaukee and Greg Marcus will be joining us today from Las Vegas where he's been attending the ShoWest Conference -- movie theater conference.

Welcome to our fiscal 2010 third quarter 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. 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 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 various non-operating line items on our earnings statement and our expectations regarding future capital expenditures. Of course our actual results could differ materially from those projected or suggested by our forward-looking statements. Factors, risk and uncertainties which could impact our ability to achieve our expectations are included the risk factor sections 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.

So, with that behind us, let's talk about our fiscal 2010 third quarter results. Even if you exclude a favorable one time adjustment that I'll address in a moment, our theater division reported its fourth straight quarter of record revenues and record third quarter operating income. In our hotels and resorts division, the continued challenging economic environment in our traditionally weakest quarter of our fiscal year again produced an operating loss worse than the year before. But RevPAR trends continue to improve from previous quarters and we reported our first increase in our overall occupancy rates since our fiscal 2008 fourth quarter. Before I get into the operating results let me first briefly address any variations in the line items below operating income versus last year as well as the one unusual item we had this quarter. We're not having any major variations in investment income during the third quarter but I will remind you on a year-to-date basis we have a significant variation because of one time investment losses recorded last year that we described in detail before. This year's investment income is 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 $687,000 during our fiscal 2010 third quarter, compared to the prior year. It is now down nearly $2.5 million year-to-date due to reduced borrowings and lower short-term interest rates. Depending on the timing of our capital spending for the remainder of the year, and assuming short-term rates remain low for the quarter, our interest expense may again run lower than the prior year in the next quarter. Having said that, interest rates were declining last year at this time so I don't expect a variation in the upcoming quarter to be quite as large as we reported for the past three quarters. As we noted in our release, our overall debt to capitalization ratio at the end of the quarter decreased to a very strong 41%, down from 44% at our last May year end. Continuing down the earnings page we've had relatively little activity this particular quarter or the first three quarters, for that matter, related to gains from disposition and equity earnings and losses -- loss lines. Again, as a reminder, our year-to-date gains and losses from dispositions show a sizable variation due to the fact that last year, again, during our second quarter, we reported a $1.1 million loss related to our investment in condominium units at our Las Vegas property.

Our effective income tax rate for the first three quarters of fiscal 2010 was 37.1%. With our quarterly rate only slightly higher due 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. And finally, I do want to comment on the favorable change in estimate reported this quarter, related to deferred gift card revenue. We introduced a gift card program in our theater division several years ago and further expanded it to our hotels and resorts division in recent years. With very little history as to redemption patterns and a fair amount of uncertainty related to what to do with unredeemed gift cards, we've been taking a very conservative approach to our deferred gift card liability. After completing another holiday season of ever-increasing gift card sales, we concluded that we had enough historical data now available to us to reach a conclusion that a change in estimate was justified. Accordingly, gift card breakage income will now be recognized based upon our historical redemption patterns and will represent the balance of gift cards for which the Company believes the likelihood of redemption by the customer is remote.

Thus, during our fiscal 2010 third quarter, we recognized $3 million of gift card income, including approximately $2.7 million related to prior periods. As we noted in the press release that $2.7 million pre-tax change in estimate related to prior periods translates to approximately $0.05 per share. This amount is included in other revenues in our financial statement. The theater division benefited the most by this estimate change. They represented approximately $2.2 million of that $2.7 million prior period adjustment. Our future quarters will continue to recognize gift card income based upon actual redemption patterns. Based upon recent redemption levels I would currently estimate our annual gift card breakage income in the future to be in the $600,000 to $700,000 range.

Shifting gears, our total capital expenditures during the first three quarters of fiscal 2010 totaled just under $15 million compared to approximately $21 million last year. Approximately $12 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. With only a quarter to go in our fiscal year, barring unforseen growth opportunities that could arise in the remaining 2-plus months that remain in our fiscal year, I'm currently estimating our fiscal 2010 capital expenditures may end up in the $25 million to $30 million range which would be fairly consistent with the last two fiscal years. Now before I turn the call over to Greg let me provide a few additional financial comments on our operations for the third quarter and first three quarters beginning with theaters.

Our box office revenues were up 8.5% during the third quarter with concession revenues up 4.3%. Year-to-date, box office revenues are now up 5.1% while our concession revenues are up 1.2%. The 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, but closing these theaters had minimal impact on our comparable operating results. Total attendance at our comparable theaters increased 0.4% for the third quarter, thanks to Avatar and other strong holiday films noted in our release. Year-to-date our comparable total attendance is down 2.2% compared to the prior year. The majority of which can be attributed to the summer weeks where we were going up against the Dark Knight last year.

The much larger percentage increase in our box office results can be attributed to another increase in our average admission price. We were up 8.6% for the quarter and we're now up 8.2% year-to-date. Premium pricing for our Digital 3D attractions and UltraScreens contributed the higher average admission prices once again. Our average concessions and food and beverage revenues per person increased 4.5% during the third quarter, and are now up 4.1% year-to-date. Our expanded food and beverage offerings at several of our theaters again contributed to our increased average concession per capitas. Excluding the prior period gift card income that we reported during the third quarter, and the $1.4 million pension withdrawal liability that we discussed last quarter, our operating margins from this division during the third quarter were 20.3% compared to 21.9% last year. And are now running 20.3% year-to-date compared to 21.3% last year. The decrease can be attributed in large part to the impact of higher film costs which Greg will discuss further during his remarks.

Shifting to our hotel and resort division, our overall hotel revenues were down 4.5% and total RevPAR was down 5.8% during the third quarter compared to the same period last year. Year-to-date our RevPAR is now running 15.7% lower than it was last year at this time. Consistent with prior quarters, our third quarter RevPAR performance did vary by market and type of property. One of our properties was even up for the quarter. Based upon data available to us, our results continue to be fairly consistent with those of other comparable upper scale hotels throughout the United States. Our fiscal 2010 third quarter overall RevPAR decrease was a result of an overall occupancy increase of 1.6 percentage points and an average daily rates decrease of 8.9%. For the first three quarters of fiscal 2010, our occupancy is now running approximately 3.1 percentage points behind last year, and our average daily rate has decreased 11.5%. While this division did benefit by gift card breakage of approximately $500,000 during the third quarter, I want to remind you that our year-to-date results from this division were negatively impacted by a $2.6 million pre-tax impairment charge last quarter related to our remaining 16 owned condominium units at the Platinum Hotel and Spa in Las Vegas.

With that I'll now turn the call over to Greg.

Thanks, Doug. Since I'm joining this call from the movie theater industry's biggest conference, ShoWest in Las Vegas, I'll begin my remarks with our theater division.

As we reported earlier, this was another record quarter for this division. Notwithstanding the fact that their results benefited greatly from the change in estimate related to deferred gift card revenue. Obviously having the number one box office film of all time during the quarter helped. But it is important to note that our box office was up over the prior year during ten of the 13 weeks during the quarter. As the press release notes, the majority of our overall box office increase occurred during the five-week period between Thanksgiving and New Years. We had a very strong January and February last year. With films such as Grand Torino, Paul Blart Mall Cop and Slum Dog Millionaire performing very well. So the fact that our box office results for those two months were even slightly higher than last year was a pleasant surprise.

So, having said that, while we certainly are pleased to be reporting these results, the quarter was not without its challenges. Doug shared our operating margin numbers with you and after adjusting for the unusual items our third quarter margins were down over 1.5 percentage points. During a quarter when we were playing the number one movie of all time and reporting an increase in our average ticket price of over 8% you would think we would have an opportunity to increase our margins. The fact that margins went down this quarter can be attributed primarily to what has been one of our primary challenges in this business, our film costs. We've seen our film costs creep up in the past year or so and we've expressed our concern regarding this development to our studio partners. We have made and continue to make a significant investment in our movie theaters with the purpose purpose of exhibiting their product and they must allow us to make a fair return on that investment. Now, the mix of films this quarter also contributed significantly to this rising cost., as the large blockbuster films historically have a higher percentage film cost than those that don't perform as well. During our fiscal 2010 third quarter, our top four films noted in the press release accounted for an astounding 46% of our total box office, double the 23% that our top four films from last year's third quarter represented of our total. In fact, all four of the fiscal 2010 top films generated greater box office results for us than our best film from last year's third quarter, Marley and Me. This dramatically top heavy film lineup is not conducive to lower film costs.

Further, we're now faced in many case with a 3D cost structure developed in a 2D environment. What do I mean by this? As we discussed quite often our film terms are based on the performance of the film. Generally the better a film performs, the greater the split is to the studio. As many of you know, today's 3D films command a $3 premium per ticket. This premium inflates the box office, thus raising the cost of film but it does so with fewer people which then impacts our vending income. This dynamic is one the studios are also aware of and we are working together to address it in today's very dynamic market.

Shifting gears, there's no question that talk of the Gabelli movie theater conference we attended last week and ShoWest this week is Digital 3D. It is probably not overstating the case to say that Avatar and now Alice in Wonderland may have been game changers. At least in the short term. The customers voted with their feet and their dollars and said they think the Digital 3D experience is worth leaving their homes for and worth paying a premium for. It is my understanding that approximately 70% of the opening weekend's box office of Alice in Wonderland came from 3D screens. Film companies are quickly adding 3D films to their lineup, resulting in at least 20 titles now scheduled for the rest of calendar 2010. And the prospect of even more in 2011. Shortly after the overwhelming success of Avatar became evident it was announced that big budget films such as Clash of the Titans as well as the seventh installment in the Harry Potter series were now going to be released in Digital 3D. As a result we recently announced plans to further expand our Digital 3D footprint, adding another 19 Digital 3D screens to our circuit. With the possibility of adding another eight to ten screens in the coming months. As our release notes, we will now have Digital 3D capability in nearly 80% of our theaters. And we are rapidly approaching having nearly 10% of our screens with this premium amenity.

Our fiscal 2010 fourth quarter has obviously gotten off to a very good start with the tremendous success of Alice in Wonderland. I hear a lot of people talking about Avatar and Alice being a -- "proof of concept" -- as it relates to 3D. I would also like to suggest that the success of Alice in Wonderland this March is also proof of concept as it relates to another topic -- that is releasing tent pole pictures throughout the year, not just during the summer or holiday time periods. This is something theater operators have been requesting for a long time and we've always been convinced that a more even distribution of films would benefit everyone -- studios, the exhibitors and customers alike. Studios have taken note of how well this film has performed. It is our hope that we see more of this in the future.

Looking ahead, our press release notes some of the major films scheduled to be released during the remainder of our fiscal 2010 fourth quarter including three 3D films. And I will tell you that the film lineup for the early summer months certainly has several potential hits as well, including films such as Prince of Persia, The Sands of Time, Sex and the City 2, Karate Kid, Toy Story 3 in 3D, Grown Ups, Despicable Me in 3D and the next film in the Twilight series, just to name a few. In fact, I was fortunate enough this week while here at ShoWest to see Toy Story 3. We didn't see it in 3D yet. It's not finished. I can tell you it is a great movie. We are very excited. It was very emotional. I can't give you any spoilers. They asked us not to reveal the plot which we won't do. But they were confident enough to show it to us and if you are involved in social media, check out Twitter and you'll see I'm not alone in my assessment of the film. It is really exciting. It is a great movie.

With that, let's move on to our second division, hotels and resorts. You've seen the segment numbers and Doug gave you some additional detail. Certainly nothing to be excited about. But it certainly appears that conditions have at least stabilized. I also attended a hotel industry conference in January. And the message was pretty consistent from the other hotel operators. It is hard to hang your hat on the fact that conditions are less bad. But that is probably still where everyone is. Having said that, as we continue to lap the time period when revenues were declining last year, it is not surprising to see that our RevPAR trends continue to improve. Last quarter our RevPAR was down 15% after being down nearly 7% the year before. This quarter, RevPAR was down just under 6% after being down 13% last year during the third quarter. In both cases, that means our RevPAR remains approximately 20% lower than two years ago. And while a lot of the focus typically is on RevPAR, please don't underestimate the importance of the other revenues that are generated at our hotel properties.

You'll notice that our food and beverage revenues were down over 9% this quarter compared to room revenues being down around 6%. This situation is directly related to the current difficult environment for group business travel. The largest portion of the F&B decline is not in our restaurants but rather in our banquet business. Without a solid group face of business, banquet business suffers. And I will tell you, even the group business that we are getting is typically spending less on F&B, either by reducing the scope of their events and/or by driving lower prices on the meals they buy. That is not to say that we aren't seeing some signs for cautious optimism. The hotel business is a cyclical business and these cycles have played out very consistently over the years. When we enter the cycle occupancy declines first followed by ADR. Hotel development slows and then comes to a near stop and the cycle bottom is hit. As the recover to ensue, lodging historically lags other sectors. The first signs of improvement are typically a slow recovery of occupancy rates and as you saw in our results and has been reported by others we may be seeing the first phase of the recovery cycle now. The cycle completes itself when ADR and margins return to prior levels. The question that no one has the answer to is how long will that take.

Our challenge as operators is to try to control costs while we are in this upward portion of the cycle. As occupancy recovers first, it becomes increasingly difficult to not add some level of costs to take care of the increased number of guests. That is typically why operating margins don't recover until rates begin to recover. The good news is that we are starting to see some positive trends in our booking pace. Properties that were consistently booking advanced business at a slower pace than the year before are now starting to report consistent weekly improvements in their booking commitments. Last year during our fiscal 2009 fourth quarter and fiscal 2010 first quarter, we hit what appears to be our low point, with RevPAR down 23% and 21% respectively for successive quarters. So if the recent trends continue, it would not be out of the question to suggest that we at least have the possibility of beginning to report flat to small increases in RevPAR in the periods ahead. Obviously, a lot will depend upon whether the economy continues to show signs of gradual improvement. The very short term, I'm happy to tell you, that while you are filling out your NCAA brackets and you better hurry up if you haven't, take note of the fact that regional games will be played in both Milwaukee and Oklahoma City so our hotels will certainly have plenty of activity this weekend which is always nice to see.

As you 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. We are halfway through a project that will upgrade a -- provide a major upgrade to the bathrooms in our suites at the Grand Geneva and our major renovations at the Milwaukee Hilton should be completed before summer. While transaction activity remains very limited at this point, with a 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 -- I would be happy to open up the call to any questions you may have.

(Operator Instructions) Your first question comes from the line of Andrew Wittmann with Baird. Please proceed.

Good morning, guys.

Good morning, Andy.

Hi. I guess I wanted to start with the theater side and talk a little bit about the capital. The guidance, Doug, what was the split? Can you just -- the split between theaters and hotels on that? And I wanted to get a sense of does that include the potential eight to ten extra screens that you're considering or would that be in addition to the $30ish million that you talked about?

The split of what? Of the remaining capital that we have?

Yes. You mentioned that CapEx for this year was $25 million to $35 million and I just wanted to get the split between hotels and theaters first.

Right. Well, yes, so as I told you of the $15 million or so that we spent already it's roughly $12 million and $3 million, give or take, in terms of $12 million for the hotels. Of the remaining $10 million to $15 million that we would spend, in this case here, theaters could end up being -- could be as high as $7 million or $8 million of that, depending on the biggest piece of it being if we would close on the property that we're working on in Sun Prairie. So we've got a location in that area, the Madison area -- that we've talked about previously, has been well publicized out there and so we haven't closed on that property yet and so that's -- tentatively planning on that happening this quarter. I can't guarantee that that's going to happen this quarter. So that's the biggest piece of that.

Although there is some additional 3D screens occurring in there. There aren't any additional screen additions per se in that number. The rest of the dollars, hotels, again, we're finishing up as we've said, we're finishing up the projects at the Grand Geneva and the Hilton. That's the rest of the dollars.

Some allocation to Sun Prairie potentially is in that guidance number that you gave?

That's correct.

Okay. And the eight to ten other 3D screens, would that be more than the -- is that in addition to what you guided or is that included as well.

Regardless, it's not going to move the needle very much if that happens during the next 2.5 months. The upfront capital under the RealD transaction, the way that works, the upfront capital is not overly significant. That eight to ten screens is not going to make a big difference in my number.

I wanted to get a sense in terms of returns on some of that capital in the theater business. Clearly if you're building a new theater that's going to make your underwriting hurdle. Do you feel like with 3D becoming more prevalent and more customers expecting digital product displayed is that a cost venture where you're not getting your target returns in the mid to high teen IRRs or is that something that you are still able to get those returns on?

Well, Andy, we expect to get returns on 3D. It's complicated because there's two parts of 3D. In order to have 3D, have you to have a digital projector and -- but even with that digital projector, given where we are, which is really the most -- by the way, which is the most expensive component of the process -- and that is not generally capital we're having to put out right now because we are involved in financing programs that help with the base digital projector. But even including that, we're seeing a -- we're projecting a return on the investment. So we really do hold the theaters to the standards of seeing an investment in 3D.

Now, it's hard to project going forward what 3D is going to mean to us as an industry because we're still very fresh. A year ago it was a fad. Now it feels like there's more to it than fad. We don't know -- Avatar was ground-breaking. It appears to be a game-changer. Alice is further proof of that. I think that still people checking out and hearing how get the experience is, so it's probably having a catalytic effect on it and maybe multiplying it more than what we might typically see when a 3D will be when it settles in. And it will depend how much product they release. We don't know ultimately where it's going but we do expect returns on it.

Okay. Thank you for that. Just a little bit more follow-up on the 3D, definitely looks like it's been impactful so far. Hard to deny that, just looking at your numbers, looking at other people's numbers. I think it was last week, the first 3D televisions hit the market and Greg, with your just being at the conference, I would like a little perspective, what are you hearing about the threat from the digital television and the 3D TV? What's the industry saying on that so far?

I haven't heard a lot of discussion about it specifically. I think that on the one hand, we are enjoying having this very exclusive opportunity to be the only ones to provide 3D content. So having it provided at home doesn't -- is not something that -- if I had to take my pick.

On the other hand, we have a history in this business of having ancillary market boost the availability of product for the premium market -- the theater market -- which could be true in this case. Rights now when they make a 3D movie there's nowhere to see it but in the theaters in the follow-on markets. To the extent that they're able to develop a follow-on market that could be beneficial. What becomes important is that we maintain our window so that we have the exclusive period to show it first in the presentation as it's meant to be done. I've seen the 3D TVs. They're a good experience but it certainly doesn't match up to seeing it on 50 feet of screen in front you in a room with a bunch of people having some delicious popcorn and soda.

Okay. Great.

Bruce would have been proud of you there, Greg.

Thank you.

The other question I guess I had on theaters, then I'll jump over to hotels with one or two, is understanding your premium tickets. I understand the 3D premium, split with the studios. Does your seat premium for your pre-reserved seats or your UltraScreen, is that also revenue that gets split with the studio or is that 100% to Marcus Corp.?

Well, a piece of it is and a piece of it isn't. A piece of the premium is in a concession voucher which is used for the purchase of concessions. And that's the predominantly larger piece of the premium. The balance is.

Got you. Makes sense. All right. Then on hotels, just your outlook, what's your sense of the market for additional management contracts today, given distress. Maybe you hope -- thinking that hotels will be trading hands, special servicers, that sort of thing. If you could compare the deal activity you're seeing today versus maybe six months ago? Are we better or worse?

It still seems to be about -- we're seeing a little bit of pickup in the transaction market. I think look at, you're seeing the same stuff we're seeing, it was interesting in the deal they announced from Westbrook and Millennium yesterday or in the last couple of days for some Four Seasons. That doesn't work for us. We can't run Four Seasons. They don't allow outside management.

We've heard some -- look we're still predominantly in the extend and pretend mode I think with the special servicers. We recently were meeting with an investment bank and they said -- we're actually open for business and making hotel loans but unfortunately they asked -- do you know who our biggest competitor is, it's the special servicers. They are still extending. That makes a fair amount of sense if they have the opportunity to at this point, that's what they're going to do. But there appears -- slowly, but surely, things seem to be happening and we will just -- we're prepared to be patient and wait for the opportunities to -- that make sense.

Okay. Last one, maybe I'll chime back in if I keep going. Just wanted to get a view on -- obviously, very cautious outlook. Hard to make a lot of sense about what's going on. Trends are improving a little bit or certainly less bad. Just wanted to get your sense on your group booking pace, maybe compared to last year at this time, where are room nights? Where are rates compared to like I said this time last year?

Andy, the pace is ahead of where we were last year this time. I actually was -- I've looked at charts week by week on some of our hotels and I alluded to that in the script where we were looking at committed rooms in each of these weeks and for the first time in a while, I'm showing weeks where it's ahead of last year's pace. So I'm not -- we're not doing cartwheels down the halls here because it's not -- we'll take what it is. It's still behind where it was two years ago. But in general, there's some cautious optimism because in recent weeks the pace has been at least a little better.

We've seen some your competitors talk about room nights -- at least demand for rooms is up in the 10% range over last year. Obviously last year very depressed levels. Is that ballpark do you think or totally out of bed with what you're thinking.

It's not out of bed with what -- yes, as you heard, our overall occupancy was up 1.5 points, whatever it was. So whatever percentage that is and that was in the third quarter. Things are a little better now. So yes, it's -- certainly occupancy is there now. But rate's not yet, Andy.

Okay. Great. I'll leave it there. Thank you.

Your next question comes from the line of Marla Backer with Hudson Square. Please proceed.

Thank you. I want to follow up on Andy's last question about the hotel division. Is it cautious optimism -- obviously an emphasis I guess on cautious right now. Is it too early for you to start pulling back a little bit on some of the discount venues that you've had to use over the past year or so for -- to boost reservations? I guess Expedia, Orbitz and those others -- is it a little too early to pull back on those?

Marla, we're -- I would say it's too early to abandon them, that's for sure. But that being said, we watch them very carefully and we watch what we open into those channels very carefully and, frankly, we wait until the last possible minute to put product into those channels to see if we can get a better piece for it. So, selectively, when the opportunity arises and we feel we have the opportunity, we are limiting what we put there. But if we have rooms, they say there's nothing more perishable than a hotel room gone overnight. We look to put people in -- heads in beds, as they say.

Butts in seats and heads in beds.

Yes.

Switching to the theater side, so the firm commitment is for the 19 systems. You're not firmly committed for the eight additional ones for a total of 27?

That's correct.

Okay. And did you acquire those systems through you said a funding source, was that through Digital Link?

Yes.

So my understanding of Digital Link is that once -- correct me if I'm wrong on this -- but once the theater is 50% digital, the ownership passes -- or the obligation, the financial obligation -- passes to the exhibitor. Is that correct?

Doug, you want to take -- ?

I think that that's correct. Obviously we're not in a situation where we're close to the 50% right now.

Right. And then did you have an opportunity for maybe not even -- maybe you didn't even have an interest -- but did you have any chance to see the Technicolor demo?

I have seen the Technicolor demo.

Any thoughts on film based 3D, whether it's worthwhile?

It's -- all I'll really say is that it's very good. I was -- I think I was impressed and I think there's a lot of people curious about it. I was talking -- we certainly know the Technicolor people and the people specifically involved in the project and I saw it a number of months ago. I didn't see it here. I actually saw it at ShowEast

I saw it there. I liked it too.

Yes. I think maybe the more important take-away I heard they had to run it twice here because they filled the room with 1,100 seats full of people interested in what it meant. I think people are curious about it. I think even their point is it would only be a bridge to the future anyway because ultimately the business is going to be a digital based business. When that happens the add-on for 3D really isn't that expensive.

That makes sense. My last question, could you give us a little bit more granularity on the gift cards? And maybe you said it. I hopped on the call a couple of minutes late. So was that a one-time recognition basically catching you up now that you've changed the way that you recognize the gift card revenue? And also, did it impact your revenue line or it only impacted operating income through net income and EPS?

Sure. Well, the answer is yes, the largest piece of it was one-time -- a one-time catch-up and that's the $2.7 million that we referred to. That is related to periods prior to this third quarter. Having said that, now on an ongoing basis, now that we're -- we have enough history and we're comfortable with the redemption patterns, we would expect to continue to take this gift card breakage income on an ongoing basis and you may or may not have heard, I indicated that if redemptions were the same as they were the last year or so, as being the $600,000 or $700,000 annual range.

Redemptions?

No, the actual gift card income that we would record based on existing redemptions. Now, I'll tell you that our -- the gift cards, we're no different from any of the other retailers that are out there who have been seeing rapidly growing gift card sales. And so we certainly have seen an increase in our gift card sales which -- so if that continues, then that number, that $600,000 or $700,000 I mentioned could also grow but based on our past year's history or so that's what I would project as an annualized number.

Okay. Thank you.

You're welcome.

Your next question comes from the line of [Mitchell Leads] with Morgan Stanley. Please proceed.

Good morning, gentlemen.

Good morning.

I want to go back to the ratio. I may have written it down wrong, may have heard wrong -- of the split of motion pictures and your hotels. Did I write down $12 million to $3 million correctly? $12 million for the hotels, $3 million for the motion pictures?

For our capital spending?

Yes.

For the first three quarters, that's correct, roughly $12 million and $3 million.

Okay. Let's go to theaters. You have -- I have another question here that I just didn't understand it. Commitments for -- you have 13 in 3D -- I mean in digital on 3D and you intend to put up how many more?

We have -- at the moment, we have 34 3D screens in 33 locations. But we are -- as we speak adding another 19 locations -- 19 screens, including an additional ten new locations. And then the rest of them are doubling up at existing -- at places, giving us at least a second screen at locations that we already have one 3D screen. When we're done with this 19 that we're talking about, we will have 53 screens at 43 locations.

Okay. Let me ask you this. You said you're getting hit over the head by the studios because the extra expense for 3D. If you're digital, they don't have any costs in shipping. Does that not reduce their cost somewhat? Because in four minutes they shoot it from the studio to the projector?

Right. That's why the primary vehicle for actually putting the digital equipment in, once a full-blown roll-out does occur in the industry, it will be paid in large part by the studios for the very reason that you noted -- is that through the virtual print fee mechanism, they will pay the lion's share, at least that's the plan, of the capital expenditure, because they're the ones that stand to gain.

Let me just check my list here. Oh, yes. Gift card. How does that work? How much does it cost? Is it up to the individual? And are they good at any venue or just one? How's it work?

Yes, we sell them at all locations. We've been in the program a lot longer in our theaters than we have with our hotels. But we are now selling them at hotels. They're good at all Marcus theater locations and in fact they can be interchanged as well. So a gift card purchased at a Marcus theater can in fact be used at one of our hotels and vice versa.

On the candy sales, which are apparently being reduced -- concessions, rather -- when you have 3D because you have less people in the theater, I don't understand why you have less people in the theater. Can you explain that?

Sure.

If you had the IMAX system, special theater chairs or stadium type chairs, I could understand why it would be less people. But I don't understand it, if you're just -- if you just switch to 3D and digital, why would there be less people seeing the film?

It's not a question of less people seeing the film. Less people seeing the film as it relates to the total box office. We split the box office with the studios. It's a percentage. So the more -- the greater the dollar amount, the more money goes to the studios.

However, based implicit in that calculation, when we figure out what we can afford to pay in what's known at rent to the studios -- film rent -- we also figure out how much money we expect to make from the sale of concessions. We know that historically we said if a film grossed X, that a certain number of people will show up and our concessions will produce Y. Well, now if a film -- because of the significant disparity in pricing, in that it's much higher -- a film could gross X, the same amount that it grossed in a 2D environment, yet less people are there.

Just simply -- it may be less people on a proportionate basis. So less people means less concession sales, thus less other profit from the other part of our business. At the end of the day it all washes together and we are then challenged as to how much we can pay for film rent.

Last question. You have three theaters you've closed.

Last year, three theaters.

Oh, last year.

Yes.

Not this year. Were you leasing those theatres or did you own them?

As I recall, at least one or two of those were leases. Again, these were mid-year, so we're looking at a good year plus ago. A couple of them were leased. One of them may not have been.

Okay. I guess I have another last question. That is, do you have any intention of putting in the IMAX system at any theater?

No.

No? Okay. That's it. Thank you very much.

Thank you.

(Operator Instructions) Your next question comes from the line of Herb Buchbinder with Wells Fargo. Please proceed.

I want to go back to the 3D just for a second. Can you discuss the 3D pricing going forward, if there's anything that you can do to get a larger share of that revenue and if you think there's any room to raise that premium some more and what you ultimately will do when you get 3D in your UltraScreens, how you might price that compared to how you price it currently versus IMAX.

Well, that's a great question as to what's the premium going to be going forward. I don't think anybody knows.

You've asked a number of questions there, but let's start right now with -- 3D right now is a treat. There hasn't been proportionately a lot of it. As you heard in our prepared remarks, the quantity of 3D films coming out is going to significantly increase. The old Hollywood adage if one is better, ten is the best. But I don't know what that means going -- I don't think anybody knows, what's that mean, how is that going to impact the premium going forward. Will we always be able to command the same premium that we're getting now when the product becomes more commonplace? You're asking me how to write your pro forma. I couldn't tell you how to do that.

It clearly is a premium product and we will continue to strive to maintain a premium pricing for it but I don't know -- I can't tell you what it's going to be a year from now or two years from now. The UltraScreen, when we get 3D for it, eventually we will have it, we're in a testing phase right now as we discussed, disclosed previously. I can't guarantee we'll have it. I'm confident that there ultimately will be a solution one day. I don't know if it's tomorrow or two years or ten years but when we do find that solution, we will -- I believe we will charge a premium on top of the premium because that UltraScreen is hands down the best way to see a movie.

If you currently charge a $3 premium, is that throughout all your theaters for 3D?

I'm sorry?

You currently charge a $3 premium for all your digital 3D?

Yes.

And so theoretically you might charge $4 if you can get it into the UltraScreen, but IMAX charges a premium of $4 typically.

I think IMAX is actually $5. I'm not certain of IMAX's pricing schedule and we haven't determined what ours will be yet.

Going back to the situation with Avatar, do you get a larger share of the revenue now that you're in -- I don't know how many weeks it's in, seven or eight weeks -- or you're not set up that way?

We haven't historically disclosed individual terms on different films. Doug, I don't know if you want to build on that.

No, that's the right answer.

Okay. Because a lot of the deals are done where you get more towards the latter. You're just saying that you're not -- you can't say if you get more -- a higher percentage as you go further into the run of Avatar or Alice in Wonderland.

What we have talked about in the past is that every deal, every film Company, every movie can be different. We have pointed out that the historical way of paying film where it was higher percentage in the first week and lower percentage in the later weeks, there's less of that going on now. A lot of deals now are done in what's -- where you pay some percentage on the whole run and that percentage might be determined based on how well the film performs. So, again, we're not going to disclose what our particular deal was on any given picture but just as many if not more deals these days are based on these fixed percentages or these sliding scale percentages based on how a film performs.

Sounds like the studios are getting even tougher to deal with, now that they have 3D, that puts them in a stronger bargaining position. Is that a fair statement?

Not necessarily. It's -- the problem that the studios are bumping into is there's not -- there's a limited supply of 3D screens available. And it's a balancing act for us because we don't like to turn away revenues. Frankly, if Alice in Wonderland hadn't come along, Avatar would still be playing on our 3D screens. But fortunately, Alice in Wonderland came along and really produced.

I'm just trying to think of ways that you can get a larger share of this take and whether it's as a result -- I don't -- that's obviously what you're going to try to do is negotiate somewhat better deals and hopefully you're in a position to do that. But the studios may not budge.

Well, we continue to negotiate with them and work with them. As we pointed out, at the end of the day the studios have expressly stated they want a healthy exhibition business and for a healthy exhibition business to exist, we have to be able to make a return on the investment commensurate with the risk we take when we buy and develop the facilities. And we will continue to negotiate with that in mind.

Okay. One last thing. Do you think you're more likely to buy a hotel property during calendar 2010 than sell one or is the focus more on trying to add either through management contract or purchase or there's some opportunities to sell something too this year?

Look, I can't predict when we'll necessarily buy something or not. We are actively in the market and we look at different structures and different participation levels and I think the best thing to say is simply, look, we believe in cycles and this -- let's hope that we're clearly at the low end of a cycle because business is pretty challenging.

Do you have any properties that you're targeting to sell?

No, not that I can -- not that we've ever -- not that we've disclosed. I don't think now is the time to.

Okay. Thank you.

Your next question comes from the line of Bill Nasgovitz with Heartland Fund. Please proceed.

Hey, good morning. Thanks for taking my question. This is Will here from Heartland. Just wanted to verify something. Did I have the numbers right that occupancy was down 3% in the quarter and rate down 11% in your hotel business? Was that right?

No, for the quarter, I think what you heard -- might have been the year-to-date numbers.

Oh, okay.

For the quarter, occupancy was up.

Excuse me.

Was up 1.6 percentage points and rate was down 8.9%. What you heard was for the first three quarters of the year, occupancy was down 3.1 percentage points and rate was down 11.5%.

Okay that's perfect. Thanks for clarifying that. Related to the hotel business, when you look at the ten markets that you're in whether it's here in Milwaukee or Madison, Minneapolis, Oklahoma City you mentioned earlier, I know you have properties in other cities, whether it's Houston or down in the Southwest. What type of capacity, are projects winding down there? What about future projects in some of those markets. Just trying to get an understanding of the competing capacity that might be coming online here in 2010 or 2011 or I guess in 2012.

Look, industry-wide, we're seeing the pipelines are shrinking. We've had some -- in Milwaukee, for example, we've had some properties that have come online. We had a property come online.

Nothing new is being built right now but we have a property sitting there that's half completed and not going anywhere right this minute. I don't know where that ends up. It's not a big, full service property, as you may know. But rooms are coming -- at some level, rooms are competitive on the market at almost any level. So we watch the pipelines very carefully. As we said, there's -- I think the industry dynamics are favorable from a supply standpoint and it really just depends on the market. Madison -- they talked about adding supply to Madison. Each market is taken individually but I will tell you overall it's favorable.

Okay. Well, thanks for that and I guess congratulations on celebrating your 75th anniversary this year. That's great. Congratulations.

Thank you.

Your next question is a follow-up question from the line of Marla Backer with Hudson Square. Please proceed.

Thank you. Just one follow-up on the 3D with the ticket prices, obviously being higher and as you noted not necessarily attendance being higher. I think you said that you're having some discussions with studios. Any possibility of having conversations or not just you but other exhibitors collectively having conversations with RealD to lower the revenue share there?

They haven't come and offered us a drop in their share.

I don't think that's how it usually works.

Marla, I couldn't tell you the specifics of what the -- I'm sure they have their ongoing discussions with our theater business but I'm not involved in that. Doug, you may have some insight.

Again, we talk to them, deal with them all the time and I'm sure we want it lower and they want it higher and it's really no different from our same relationship with the film companies.

Okay. Thank you.

At this time it appears we have no other questions. I would like to turn the call over to Mr. Neis for any additional closing remarks.

Well, listen, thank you everybody for joining us today. Appreciate it, appreciate all the questions. We look forward to talking to you once again in July when we release our fourth quarter and final fiscal 2010 results. Thank you. Hope you have all a wonderful weekend and we'll talk to you soon. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.