Marcus Corp (MCS) 2012 Q3 法說會逐字稿

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

At this time all the participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded.

Joining us today are Greg Marcus, President and Chief Executive Officer, and Doug Neis, Chief Financial Officer of The Marcus Corporation. At this time I would like to turn the program over to Mr. Neis for opening remarks. Please go ahead, sir.

Thank you and welcome, everybody, to our fiscal 2012 third-quarter conference call. As usual, I need to begin by stating that we plan on making a number of forward-looking statements on our call today.

Our forward-looking statements could include, but not be limited to, statements about our future revenue and earnings expectations; our future RevPar, occupancy rates, and room rate expectations for our Hotels and Resorts division; expectations about the quality, quantity, and audience appeal of film product expected to be made available to us in the future; expectations about the future 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; our 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, risks, and uncertainties which could impact our ability to achieve our expectations are included in the risk factors section of our 10-K and 10-Q filings which can be obtained from the SEC or the Company. We will also post all Regulation G disclosures, when applicable, on our website at www.MarcusCorp.com.

So with that behind us, let's talk about our fiscal 2012 third-quarter results. We are obviously pleased to be reporting a significantly improved quarter compared to last year, thanks to much stronger results from our Theatre division and continued positive trends in our Hotels and Resorts division. I am going to take you through some of the detail behind the numbers and then turn the call over to Greg for his comments.

We did have some variations in a couple of our other income and expense line items, which are below operating income, primarily as a result of unusual items last year. The first unusual item is reflected in our investment income line, which shows $88,000 of investment income this year compared to $643,000 loss in this quarter last year.

The favorable swing on this line is attributable almost entirely to an approximately $700,000 adjustment to investment income during last year's third quarter related to a change in estimate of interest income earned to date on the funds we advanced several years ago in conjunction with the public portion of our Hilton Milwaukee parking garage. As we noted a year ago, we don't expect any additional significant revisions to this estimate in the future.

Skipping down two lines to our gains and losses from disposition of fixed assets line, the second unusual item last year was a significant contingent liability we recorded last year during the third quarter related to an adverse legal judgment rendered on a case related to our Las Vegas property. The largest piece of that liability, approximately $750,000, was recorded on our gain or loss line with the remainder negatively impacting Hotels' operating income. This judgment is still under appeal so the amount has not been adjusted since last year.

As the press release notes, the combined impact of the two unusual items -- again last year, not this year -- that I just described totaled approximately $1.8 million pretax, reducing our after-tax net earnings per share by approximately $0.04 during our fiscal 2011 third quarter. So that is just important to note from a comparison perspective. Now the fact that we also recorded losses on disposition this year during our fiscal third quarter which related to the write-off of various assets disposed of during recent renovations minimized the year-over-year impact on that gain and loss line during the quarter.

Moving on we reported another reduction in interest expense during the third quarter compared to the same period last year. Our interest expense was down approximately $260,000 during the fiscal 2012 third quarter and is down nearly $850,000 now year-to-date compared to the prior year's same period due primarily to reduced borrowings. Our total debt remains at historically low levels and our comparable debt to capitalization ratio at the end of the quarter was 37%, down from 39% at our recent May year-end.

Now there is one other variation in the last line in our other income and expense section. That is the equity gains and losses on investments and joint ventures line, this time with a negative impact on our comparisons to last year. Again, the reason relates to last year and was a result of the fact that we benefited during fiscal 2011 during the third quarter from one of our two hotels that we have a 15% interest in, reporting a sizable gain from a refinancing of its debt accounting for that comparative decrease in that line this year compared to the prior year.

Moving on, our effective income tax rate during the first three quarters fiscal 2012 was 37.9% compared to 38% last year. Not much of a change. This particular quarter benefited from adjustments in our year-to-date assumptions. I do currently expect our tax rate for the final quarter of the year to be closer to our historical 39%, 40% range, pending any further changes in assumptions, lapses in statutes of limitations, or potential changes in federal or state income tax rates.

Shifting to our capital spending, our total capital expenditures, including acquisitions, during our first three quarters of the fiscal year fiscal 2012 totaled approximately $31.3 million compared to $20.1 million last year during the same period. Theatre division capital expenditures was the largest piece of that totaling approximately $22.2 million and included the acquisition of a theatre in Franklin, Wisconsin, out of receivership, our upfront contribution to the digital cinema roll out, a lobby remodeling at one of our theaters, and expansions related to the construction of our newest Zaffiro's Pizzeria & Bar in St. Cloud, Minnesota, in addition to other normal maintenance capital.

This year-to-date approximately $8.7 million of expenditures have been incurred in our hotel division, all of which is primarily maintenance capital with renovations at our Hotel Phillips and Hilton Madison properties representing the largest pieces.

With one quarter remaining in our fiscal year, my current assumption is that our estimated fiscal 2012 capital expenditures may end up in the $35 million to $45 million range, down slightly from our prior estimates but still an increase compared to the last few fiscal years. 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 or acquisitions that could develop during the remainder of the fiscal year.

Now I would like to provide some financial comments on our operations for the third quarter and the first three quarters beginning with Theatres. Our box office revenues increased 9.3% during the third quarter and our concession and food and beverage revenues were up a very healthy 17.2%. Year-to-date box office revenues are now up 3.4% compared to last year and our concession revenues are up a significant 13.7%.

The third-quarter box office increase is entirely attributable to an increase in attendance at our comparable theatres of 8.7%, plus the addition of the newly acquired theatre in Franklin. Year-to-date comparable theatre attendance has now increased 2.1% due to the stronger film slates that we experienced during both our first and third quarters.

Our average admission price actually decreased by 0.03% for the quarter and has increased by 0.3% year-to-date. The mix of films during any given quarter can impact our average admission price and this time around fewer of our top films were presented in 3D than last year, likely contributing to the small decrease in our average admission price.

Conversely, our average concessions and food and beverage revenues per person increased by 6.6% compared to the same quarter last year and has increased by 10.1% for the first three quarters of the year so far compared to last year.

Pricing, concession product mix, and film product mix are the three primary factors that impact our concession sales per person. Selected price increases, a change during the second half of our last fiscal year from sales tax inclusive pricing to sales tax added pricing, an operational change to more grand-and-go candy offerings, and a change in concession product mix, including increased sales of higher priced nontraditional food and beverage items in our theaters, all contributed to our increased concession sales per person during the third quarter and first three quarters of the year.

Our year-to-date operating margins in this division have now increased to 20% compared to 17.5% last year. As we have pointed out previously, our operating income and margins would have been even better year-to-date if not for approximately $1.4 million of accelerated depreciation we reported during the first two quarters of fiscal 2012 related to 35mm film projection systems that were replaced in conjunction with our digital cinema deployment.

Shifting to our Hotel & Resort division. As we note in our release, our overall Hotel revenues were up 6.6% and our total RevPar was up 9.7% during the quarter. In fact, the same 9.7% for the first three quarters compared to the same periods last year.

Now one of the reasons for the difference between our total revenue growth and the RevPar numbers is the fact that our mild winter has resulted in a significant decrease in ski-related revenues at our largest property, Grand Geneva. Having said that, the mild winter has reduced our utility and snow removal costs for both divisions so that certainly has been very helpful.

As we have noted in the past, our RevPar performance did vary by market and type of property but all eight company-owned properties have reported increased RevPar for the year-to-date. According to data received from Smith Travel Research and compiled by us in order to match our fiscal year, comparable upper upscale hotels throughout the United States experienced an increase in RevPar of 6.1% during our fiscal 2012 third quarter and 6.7% during the first three quarters of our fiscal year, so we have once again outperformed the national average.

Our fiscal 2012 third-quarter overall RevPar increase was the result of an overall occupancy rate increase of 3.1 percentage points and an average daily rate increase of 3.6%. For the first three quarters of fiscal 2012 our year-to-date occupancy rate is now running approximately 2.8 percentage points ahead of last year and our average daily rate has increased by 5.4%.

Now looking ahead, I do want to remind everyone that our fiscal 2012 is a 53-week year, so our upcoming fourth quarter will have an extra week in the reported results. The last time we had this extra week, which was in our fiscal 2007, the 53rd week contributed approximately $9.5 million, or about 3%, in additional revenues and $2.9 million, or about 7.6%, in additional operating income to our fourth-quarter and fiscal-year results. Although there can be no assurance that we will certainly realize a similar benefit in fiscal 2012.

Historically, the additional week of operations has particularly benefited our Theatre division as it includes the traditionally strong Memorial Day weekend.

Finally, on our last conference call I talked briefly about the fact that we were still finalizing the accounting treatment for our digital cinema master license agreement at the time that we did the call. We have previously reviewed the economics of the transaction with you, but as a reminder, we entered into an agreement with a subsidiary of Cinedigm whereby the subsidiary would purchase the digital systems and license them to us under a long-term arrangement.

Our only expected cash outlay is a one-time upfront exhibitor contribution and that amount is included in our capital expenditures that I reported earlier. The vast majority of equipment is expected to be paid for by the studios via the payment of virtual print fees, or VPFs, directly to the Cinedigm subsidiary.

Now in conjunction with this agreement we made a commitment to show a minimum number of movies per screen each year, a number less than what we have historically shown or expected to show in the future. It's referred to as a standard booking commitment in our agreement.

If you think about that it makes sense, as the playing of these movies that will generate the VPFs that will pay for the equipment. If in any given year if we ever fell below that minimum number of films per screen, we may be asked to make a payment to make up the difference. Other exhibitors have been asked to make similar commitments.

Now based upon the terms of the master license agreement, this arrangement is considered a capital lease for accounting purposes. That in itself is not unusual for a license agreement and under normal circumstances you would capitalize the present value of the payments you are required to make under the license agreement. In our case, the only payment we expect to make is that initial one-time upfront payment.

You might logically think that that would be the only amount we capitalize. Unfortunately, a nuance in the accounting standards for lease accounting requires us to include the entire amount of the standard booking commitment that I just described as a minimum lease payment for the purposes of determining our capital lease obligation, because we could be required to pay the entire commitment if we did not book any digital movies on our screens ever again.

Now, of course, that premise that we would put all this equipment in and then never show another digital movie on any of the screens doesn't make any sense, but, unfortunately, that is what the accounting guidance requires us to assume. Based upon our history, we believe it's unlikely that we will ever have to make a shortfall payment under the course of the agreement, let alone have to pay the entire commitment.

So while you can now see a capital lease obligation on our balance sheet, the practical matter is that we do not anticipate having to make any payments under this obligation. Instead, the obligation will, by definition, decline each and every day that we open for business and show VPF-generating films in our theatres. The current portion of the obligation represents an estimate of how much the obligation will decrease in the next 12 months as a result of the payment of VPFs by the studios to the Cinedigm subsidiary.

I share all the gory details with you because I believe it's important for our investors to know as they value our company that this long-term obligation on our balance sheet is not the same as our long-term debt and does not represent an expected future cash outlay for the Company. Fortunately, the impact of this unusual accounting is confined primarily to the balance sheet and is not expected to have a significant impact on our annual results of operations or cash flows as the amortization of the capitalized asset and the reduction of the capitalized lease obligation tend to offset each other.

Thanks you for your patience as I went through all that and I will now turn the call over to Greg.

Thanks, Doug. I will begin my remarks today with our Theatre division. We are obviously very pleased with the results we are reporting today and we are clearly on a path to report much stronger fiscal 2012 theatre operating results after a very challenging year last year. It has been well documented that the film product last year during our fiscal third quarter significantly underperformed, so it was gratifying to see this year's third-quarter film product perform at a much higher level.

There has been a steady stream of good quality films released in the past couple of months. In fact, dating back to Christmas week taking us all the way to last week, we have now had 11 straight weeks of box office increases. That is the sound of knocking wood. So the industry is on a nice roll right now and the mild winter weather has certainly helped us as well.

There was a really interesting dynamic that occurred this quarter that hasn't happened often, but would bode well for the future if it were to happen more frequently. When I took a look at the performance of our top 15 films this quarter compared to last year, I was surprised to note that this year's top 15 films produced box office receipts that were 5.5% lower than our top 15 films last year.

Doug earlier pointed out to you that our total box office revenues for the quarter were 9.3% higher than last year. On the surface it would appear these numbers conflict with each other. Waxing philosophical for a moment, like many things in life, the answer to this apparent contradiction lies in the middle.

In this case it is the middle films. We had a very deep slate of films this quarter and as a result we had a very healthy middle class that performed very well. This is a very encouraging dynamic.

Don't get me, wrong we love blockbusters but keep in mind that those types of films generally come with more expensive film costs as well. It is generally more profitable for us to have a large group of good performing films producing box office revenues of X than a very top-heavy lineup of films with the same X level of total box office revenues.

With that in mind, while we often talk about the quality of the movies, the quantity of films released also matters. You have heard me say before that the movie business is a numbers game and it has generally proven that the more films that are released the greater chance that we will also have more top performing films as well.

On that front, the news appears to be pretty good. As we look ahead to calendar 2012 and the films currently on the release schedule, we believe it is possible that we may show up to 20 more films this year than last year. This increase in production, while no guarantee of success, is generally a good thing for exhibitors and we hope that it translates into continued improvement at the box office in the upcoming year.

It certainly is too early to tell how the spring and early summer film season will perform, but on paper the product looks promising and the quarter is certainly off to a good start. It always looks good on paper. Advanced ticket sales for The Hunger Games are strong so that certainly is encouraging. We had a very strong May last year, so I don't know quite what to expect from this year's films yet, but as Doug noted, the extra week will have a significant impact on our results.

And as the press release notes, there appears to be a strong lineup of films set to launch in June and July, including the relaunch of the Spiderman franchise and the next in the highly anticipated Dark Knight series. Add the May release of The Avengers which includes characters from the successful Iron Man and Thor films, to name a couple, and we have no shortage of superheroes this year.

Shifting away from the movies, it is evident by our numbers that our concession business benefited from both the increased attendance and our continued ability to increase our average concession food and beverage revenues per person. Doug went over some of the contributing factors to this outstanding performance and we continued to execute on several of the strategies we have previously outlined in our effort to expand both our traditional and our nontraditional food and beverage offering in our theatres.

As our press release notes, we opened our second full-service Zaffiro's Pizzeria & Bar during the third quarter and construction is under way on our third Zaffiro's location at the Ridge Cinema in New Berlin, Wisconsin.

We can also grow by adding screens and during our fiscal 2012 third quarter we purchased a 12-screen theater in our Milwaukee market out of receivership and we acquired a former OMNIMAX theatre in Duluth Minnesota, adjacent to our existing 10-screen theatre there. We will convert this theater into one of our successful UltraScreen concepts making it the 14th such screen in our circuit. We will continue to look for further opportunities to expand our successful theatre circuit in the future.

With that let's move on to our other division, Hotels & Resorts. You have seen the segment numbers and Doug gave you some additional detail. Certainly, we were pleased with yet another quarter of year-over-year improvement.

With our company-owned hotels predominantly located in the Midwest, we have never made money in our fiscal third quarter in this division and this year was no exception despite the overall improvement in operating trends. Having said that we had another nice quarter of revenue improvement and our operating loss was reduced. And as Doug shared with you, it is also gratifying to see us continue to outperform the industry during this recovery.

Particularly encouraging in the detail behind our numbers was the fact that we reported an overall increase in our average daily rate again this quarter, our fifth straight quarter of increased ADR. All eight of our company-owned properties reported an increase in rate this quarter compared to the same quarter last year. That is not to say we aren't still experiencing pressure on our rates in this current environment.

Our fiscal 2012 third quarter and first three quarters ADR is still nearly 5% and 7%, respectively, lower than it was during the same time periods in our pre-recession fiscal 2008. An improving trend, but an indication that there is still room for further improvement.

It is interesting to note, however, that our fiscal 2012 third quarter and first three quarters RevPar is only 1% to 2% lower than our pre-recession fiscal 2008 performance, thanks to approximately eight additional points of occupancy this year compared to the comparable year-to-date results from fiscal 2008. But our combined occupancy for our eight owned hotels has never been higher and that same dynamic is occurring nationally as well.

I saw an interesting chart the other day that was prepared by Smith Travel Research showing what has happened with ADR during this recent cycle. On an overall industry basis across all hotel segments, Hotel ADR dropped from $108 in September 2008 to a low of $97 in April 2010, a 10% decline over the course of 19 months. In the subsequent 19 months after that low point the national ADR has only increased to $102.

Said another way, the decline in ADR was at twice the speed of the current recovery. No one really knows how long it will take to get back to 2008 levels, let alone inflation-adjusted levels, but we are on the right track and some markets are getting there faster than others.

With an increasing portion of our revenues coming from ADR increases, we have gained nearly 3 points in our year-to-date operating margin increasing from 4.3% to 7.2%. The story behind these improved results remains the same, an improvement in business travel is leading the way. All three primary subsegments of this customer -- the individual business traveler, the corporate volume customer, and even group business -- continued to show improvement over the prior year.

In fact, when we compare our results to our competition in our various markets and the overall national numbers for our segment our increases in group business appear to be the primary factor setting us apart from others. As we have said before, the ability to lock up an increasing portion of our room availability with group business reduces our reliance on the various Internet distribution channels which subsequently gives us less heavily discounted rooms.

The advanced booking space for groups continues to be good, but there will be less city-wide events in our key Milwaukee market this upcoming summer. Summer is our best season in that market and we are optimistic that we will replace the business not being generated from conventions this year.

And so while we continue to see opportunities for occupancy growth, the emphasis continues to be on gradually increasing our average daily rate. I mentioned on our call that for the first -- I mentioned on our last call that for the first time in several years, as we negotiate our corporate volume agreements for the next year, we are finding some receptivity to modest price increases.

Another positive trend is the fact that we are beginning to experience food and beverage growth associated with the business meetings that are being booked. As you know, companies reduced their ancillary spending at their meetings during the height of the recession so it is encouraging to see growth returning to that portion of our business.

Looking ahead, we continue to be generally optimistic about the future. We hope to report continued year-over-year improvement during the remainder of the fiscal year and into our next fiscal year assuming no major disruption or changes in the economic environment.

Having said that, we are concerned about the upcoming increase in room supply in our key Milwaukee market, particularly because the new supply is being subsidized in a manner that minimizes the underlying economics of the hotel itself. As I have said publicly on many occasions, it is imperative for the community to invest in opportunities that will increase demand for the new supply that is being built over the next 18 months. Without this investment, we will be very challenged.

Finally, as you know, we also continue to look for opportunities to grow our Hotel business through a variety of different ways. Our Hotel division continues to seek additional management contracts and has the ability to make minority investments in projects when the opportunity arises.

MCS Capital, under the direction of Bill Reynolds, is actively exploring numerous opportunities that could provide long-term value to be The Marcus Corporation and we are confident that some of these opportunities will come to fruition in the near future. We don't have a timetable that might force us to do something that doesn't make long-term sense. We remain patient investors and believe value-added opportunities will become available in this industry.

Before opening the call up for questions I also wanted to give you a brief update on The Corners of Brookfield, our proposed open-air fashion mall project anchored by one of the most sought-after department stores in the Midwest, Von Maur.

We continued to make progress on the project on a number of different fronts. Our discussions with the local community continued to progress as evidenced by the town of Brookfield's recent steps to create a community development authority for this important gateway location for the region. And I remain confident that our discussions will result in a mutually beneficial public-private partnership with the town.

The majority of our current focus continues to be on leasing up the over 200,000 square feet of retail space that will surround the Von Maur department store. The response to this project from potential tenants continues to be very encouraging and we hope to make our first major announcement of the initial retail and restaurant tenants to commit to the project in the next 30 to 60 days. At this point, we believe we remain on track to begin construction early next calendar year with the entire project scheduled to open in the fall of 2014.

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

(Operator Instructions) Jonathan Pong, Robert W. Baird.

Obviously, your SMB in your Theatre division has been a highlight in recent quarters. I just wanted to see with that success are there plans to potentially expand on those opportunities at some of your other theaters?

As we talked about, we are currently expanding the Zaffiro's into the Ridge in New Berlin. We continue -- I would call this still a work in progress. We continue to -- trying to find the optimal mix, whether it's stand-alone restaurants inside the theater or in-theater dining. As we continue to do -- as we have always done, we are going to move at a measured pace and refine the operations. But obviously we are pleased at how things are going because we are doing more of them, but I can't commit to a certain number.

Great.

Jonathan, what I would just add as well and we didn't mention in the press release, but we are also adding another Take Five Lounge up at -- it's going to be in conjunction with that OMNIMAX that is going to become an UltraScreen in Duluth. So there are multiple levers that we have and we are kind of location by location making decisions that relates to what might be appropriate.

Got it, makes sense. And on the MCS Capital side, can you guys comment on the pipeline of hotels that you see out there? With REITs basically recovering all of the lost market value over the summer you would think that a lot of the sellers are coming back to the market with new inventory.

Is that what you guys are seeing? Are those opportunities starting to pick up again and when do you think we can start seeing some activity in terms of capital that you guys put into that initiative?

You know, I hear the engines revving up. It sounds like the beginning of a race or at least someone is pulling the cord on the lawn mowers. You can hear the engine revving up there. I am not sure what the right analogy is, but it's clearly -- we are seeing increased activity.

I am pleased with the quality of the stuff that we are seeing, but I can't tell you when I think there is going to be a real good match between buyers and sellers. I know sellers have sort of -- the sellers, because of I think how the regulators are dealing with the banking system as we have talked about before, there is not a huge pressure to sell. As we all know, there is a huge backlog of things to sell yet there doesn't seem to be a commensurate pressure.

So I can't tell you when things are going to start to necessarily let loose and without that pressure you are not seeing fire sales. Look, as we all witnessed and you guys all write about, I think you are seeing when the REITs -- prices of stock goes up and they can afford to pay more than sellers want to sell. But when the price of their stock goes down sellers don't want to sell. So we keep seeing stuff; we are being opportunistic, we are looking at interesting deals, and I am confident we will see some stuff that will be interesting soon.

Jonathan, what I would add is that -- Bill Reynolds likes to use the term REIT food in that there is certain properties out there that we are not going to chase after. We tend to be looking -- the stuff that we tend to be looking at and we think is in our wheelhouse is stuff where we can add value, where we can step in and do something and really add value. And so there are a lot of different types of properties out there and I don't necessarily see us going head-to-head with REITs on lots of properties.

To build on what Doug is saying, our strategy is to do stuff where we can -- we have got a long history of coming in and adding value by repositioning, rehabbing, things like that. When you buy something that you have to add value that way as opposed to just playing cycles, you have a little more room for error because if you are just buying something that you are just buying for cash flow then you can't affect change as much and you have to have just been right about where you are in the cycle.

In our case it's sort of a double win because if we can do it we are going to buy something right, we are going to add value by improving management, maybe improving the physical plant, changing its marketing orientation. And then on top of that we believe it's a good time to be buying things.

Great, makes sense. That is all I have for now. Thanks.

(Operator Instructions) At this time there are no other questions in the queue. I will turn the call to Mr. Neis for any additional or closing comments.

Thank you. You guys were easy on us today. We certainly like to thank you once again for joining us today. We look forward to talking to you again, this time in July when we release our fourth-quarter and year-end fiscal 2012 results. Thank you and have a great day.

Ladies and gentlemen, this concludes your presentation. You may disconnect and have a good day.