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The Marcus Corporation (NYSE:MCS)

F1Q 2014 Earnings Conference Call

September 19, 2013 11:00 AM ET

Executives

Greg Marcus - President and CEO

Doug Neis - CFO

Analysts

Herb Buchbinder – Wells Fargo

Operator

Good morning everyone and welcome to The Marcus Corporation First Quarter Earnings Conference Call. My name is Clinton; 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 this conference. (Operator Instructions).

As a reminder, this call is being recorded, and 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’d like to turn the program over to Mr. Neis for his opening remarks. Please go ahead, sir.

Doug Neis

Well, thank you very much. Welcome everybody to fiscal 2014 first quarter conference call. As usual, I need to begin by stating that we plan on making a number of forward-looking statements on our call today. Our forward-looking statements could include, but not be limited to statements about our future revenues and earnings expectations, our future RevPAR, occupancy rates and room rates expectations for our Hotels & Resorts division, expectations about the quality, quantity and audience appeal of film products 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 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 factor section of our 10-K and 10-Q filings, which can be obtained from the SEC or the company. We’ll also post our Regulation G disclosures when applicable on our website at www.marcuscorp.com.

So with that behind us, let’s talk about our fiscal 2014 first quarter results. As you can see this is a very good quarter for the company as a whole and the Theatre division in particular. 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.

Before I dig into each division, let me start with some of the general numbers. As you can see there really weren’t any significant variations in most of the other income and expense line items below operating income, other than an increase interest expense compared to the prior year.

Our interest expense was up approximately $300,000 during our fiscal 2014 first quarter compared to the prior year due to increased borrowings primarily as a result of the assumed Cornhusker Hotel mortgage during which we took over -- during last year’s second quarter and new borrowings necessary to fund the special dividend we paid during the third quarter of last year.

As you know, during the summer, we were also at the peak of our cash inflows, while at the same time we generally refrained from significant capital spending. As in the past, we’ll likely see our debt level rise in future periods now that the summer is behind us. Our average interest rate was not significantly different during this year’s quarter compared to last year, but it will increase in future quarters due to our August closing and the $50 million of 4.02% senior notes that we have previously discussed and disclosed.

Based upon the assumption that the $50 million of long-term money replaces prior short-term borrowings under our revolving credit facility, the simple math would suggest that if everything else was equal, our interest expense will increase by approximately $300,000 in each of the remaining fiscal 2014 quarters compared to the prior year just due to the change in rate.

Of course changes in our borrowing levels due to variations in our operating results capital expenditures, share repurchases, asset sales proceeds among other items may impact our actual reported interest expense in future periods. Our overall debt-to-capitalization ratio at the end of the quarter was 42%, down slightly from 44% at our recent May year-end due to the aforementioned strong cash flow summer for us.

Our effective income tax rate adjusted for losses from non-controlling interest was 40.2% this quarter, generally right where we would expect it to be. Last year’s first quarter effective income tax rate was slightly higher due a proposed state income tax audit adjustment from one of our taxing authorities received during our fiscal 2013 first quarter.

We did successfully challenge that particular assessment last year, and as a result, the adjustment was reversed during our second quarter last year; so we will also have a bad comparison on a smaller scale next quarter as well. I just referenced non-controlling interest, and I do want to point out that we reported $585,000 of losses attributable to non-controlling interest during our fiscal 2014 first quarter.

The largest portion of this amount actually related to last fiscal year's extinguishment of debt income related to the Skirvin Hilton. You may recall at thattime, we allocated 100% of that income to the non-controlling interest in this consolidated joint venture.

Preliminary tax returns have now been completed for this entity, and it was determined that approximately $500,000 of that $6 million gain will be allocated to Marcus. Thus that gain to Marcus which essentially constitutes a loss to the non-controlling interest this quarter, because it was previously allocated to them, benefited our results this quarter.

Shifting gears, our total capital expenditures during the first quarter of fiscal 2014 totaled approximately $8.7 million compared to $5.3 million last year, approximately $4.8 million of this amount was incurred in our Theater division; the majority of which was related to the items noted in our press release including the renovation of the renamed Majestic of Omaha theatre, the addition of Take Five Lounge at our Madison theatre, and the construction currently underway related to a new UltraScreen in Gurnee, Illinois.

We spent approximately $3.9 million in CapEx in our Hotel division during the first quarter, and the renovation at the Cornhusker, Marriott accounted for the largest portion of that amount. As I noted earlier, we generally tend to limit our CapEx spending during our busy summer time period.

At this early stage of our fiscal year, we have no reason to adjust our previous estimate for capital expenditures for fiscal 2014, which was in the amount of $60 million to $90 million range recognizing that as we pointed out in our recent 10-K filings. The timing of several of our plan expansions are still just estimates at this time. We are still finalizing the scope and timing of many of the various requested projects by our two divisions, and we anticipate proceeding with many of these projects as the year unfolds.

Some of these projects certainly could carry over to the next fiscal year. And if that occurred, it would be less likely that we would spend to the top end of that projected range. The actual timing of various projects currently underway, all proposed, will certainly impact our final capital expenditure number as will any currently unidentified projects that could develop during our fiscal year.

So now I would like to provide some financial comments on our operations for the first quarter beginning with theatres.

As you can see in our reported numbers, our box office revenues increased 9.4% during the first quarter and concession in food and beverage revenues were up 12.9%. These increases are attributable to an increase in attendance at our comparable theatres of 7.9% for the first quarter.

As pointed out in the press release, we had a strong slate of movies compared to the prior year. And while our largest year-over-year increases occurred in June, business was solid throughout the quarter, and we ended up with increased box office revenues in 10 out of the 13 reported weeks during the fiscal 2014 first quarter compared to the same weeks last year.

Our average admission price for these comparable theatres increased by 2.2% for the quarter, due primarily to small price increases. Although 4 of our top 5 films were available in 3D, our overall box office revenues from 3D presentations were actually down slightly from last year, so 3D did not have a disproportionate impact on our average admission price compared to the prior year.

Our average concession in food and beverage revenues per person increased by 5.6% compared to the same quarter last year. Our continued focus on additional food and beverage concepts certainly contributed to this increase, but we also experienced a strong increase in our core concession per capitas during the quarter as well. Film mix can have an impact on this measure as well and the fact that our top 2 films this quarter were animated family films, certainly didn’t hurt as these films tend to do well at the concession stand.

Shifting to our Hotels & Resorts division, as we noted in our release, our overall hotel revenues were up 7.9% and our total RevPAR for comparable properties was up 4.5% during the quarter compared to the same period last year. As we have noted in the past, our RevPAR performance did vary by market and type of property, and all but one of our eight comparable company-owned properties reported increased RevPAR again in this quarter. Our fiscal 2014 first quarter overall RevPAR increase was a result of an overall occupancy rate increase of 1.1 percentage points and an average daily rate increase of 3.1%.

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

Greg Marcus

Thanks, Doug. I will begin my remarks today with our Theatre division. It’s always nice to start the new fiscal year with a record quarter for our largest division. You had a chance to see the numbers and Doug gave you some additional detail. Bottom line, a solid slate of films with a nice mix between known franchise films and new material, along with multiple genres represented such as comedies, animation, and action gave us a chance to leverage our strong market position, great facilities, excellent service, and industry-leading concession in food and beverage business into our most profitable summer ever.

It’s obviously no secret that the most important factor impacting attendance has been and always will be the quality and quantity of the films released during the period. There will be quarters in the strength and depth of film product is not as strong as what we had this quarter. So when it comes, it is imperative that we take advantage of them, make hay while the sun is shining.

I am happy to say our team did a great job of capitalizing on the strong film lineup this quarter. It certainly is too early to tell what our fiscal 2014 second quarter will be like. September is always our slowest month of the year and historically approximately 50% to 60% of our second quarter box office receipts are produced during the last five to six weeks of the quarter as the holiday film season kicks off in earnest.

I would be remiss if I didn’t also point out that last year’s second quarter was a record quarter for us. So, comparisons will be difficult. Having said that, September has started off better than last year, including this past week’s opening of Insidious: Chapter 2, and over the next four weeks several new pictures (inaudible) surrounding them our opening including Prisoners this weekend, Rush and Cloudy with a Chance for Meatballs 2 the following week, Gravity with George Clooney and Sandra Bullock the week after that, and Captain Phillips will come the following week.

And then looking at the November lineup, that is so important in the second quarter, we will be hoping that films such as Ender's Game, Thor: The Dark World, The Wolf of Wall Street and Hunger Games: Catching Fire will be able to match or exceed last year’s strong slate that included Wreck-It-Ralph, Skyfall, Lincoln, Twilight: Breaking Dawn Part 2 and Life of Pie.

Whether we will be able to match last year’s record performance, I don’t know, but on paper, it certainly looks like a solid for the films. And if I was to sneak a peek into December and the beginning of our fiscal 2014 third quarter, we can look forward to films such as Disney’s animated picture Frozen, the next installment of the Hobbit and other pictures such as Walking with Dinosaurs, Anchorman 2, Jack Ryan, The Secret Life of Walter Mitty, and American Hustle among others.

Meanwhile we continue to execute on several of the strategies we highlighted in our recent 10-K and year end conference call. We opened our fifth and sixth Take Five lounges at theatres in Madison and [Omaha] in the quarter and we also added Zaffiro’s Express concepts to each of these theatres. As previously noted, our 15th UltraScreen is under construction at our Gurnee, Illinois theatre.

Our press release also highlights the major renovation and renaming of a theatre in Omaha which included the addition of premium seating in all auditoriums. We are thrilled with the early response from our customers to this new theatre and we expect to add premium seating to several additional theatres in fiscal 2014.

And finally, shortly after our yearend earnings conference call, we announced the hiring of Rolando Rodriguez as our new President and CEO of Marcus Theatres and Executive Vice President of Marcus Corporation. As you probably know by now, Rolando has extensive experience in the motion picture industry. For the past two years, he served as CEO, President and Board member of Rave Cinemas of Dallas, Texas which have been the fifth largest theatre circuit in the U.S. [until was failed] this past May. He also worked for AMC Theatres, the world's largest second largest exhibitor for 30 years in various positions, including Senior Vice President, North American Field Operations, Senior Vice President, Food and Beverage Group and Executive Vice President, North America Operations Service. His career also includes 5 years at Wal-Mart in varying roles.

Rolando is a proven leader with deep roots in the exhibition industry and he has hit the ground running since he joined us in early August. With his past success in leading Rave Cinemas and his expertise in strategic planning, operations, marketing and merchandising, he is extremely well qualified to build on the Theatre division’s long history of success. We are happy to have him.

The (inaudible) portion of that news however is the fact that one of the primary architects of that long history of success Bruce Olson will be retiring at the end of this month after a 39-year career with the company. Bruce has stayed on to assist for the transition. I'm happy to note that Bruce will continue to serve on the Marcus Corporation four days after his retirement. Words can that express Bruce’s leadership has meant to this company, moreover his friendship and support that meant me personally, and we look forward to recognizing Bruce’s tremendous impact on this company at our upcoming shareholders meeting in October.

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

We continue to be encouraged by the fact that we reported an overall increase in our average daily rate of over 3% this quarter. Our 11th straight quarter of increased ADR, and while our average rates still trails our peak average rate prior to the recession, we continue to close the gap.

This year’s first quarter average rate was only 1.9% lower than what we reported during the first quarter of our fiscal 2008. You may recall that we ran over 5% lower in rate during our recently completed fiscal 2013, compared to fiscal 2008.

One of the dynamics still contributing to the rate pressure is the fact that leisure travel remained strong and that customers’ very loyal to online travel agencies. We’ve been selective in which online portals we’ve chosen to provide more inventory to, but they are part of the landscape today and our job is to use them in the most efficient way possible.

Overall business travel continues to stay at a healthy level. Our non-group pace is strong and steady, non-group travelers are increasingly looking for packaging whether it is with parking, breakfast or club rooms, like the ones we recently added to the Pfister and Grand Geneva.

Group business is steady as well. No slowdown but no significant increases either. Group planners are telling us their customers are still booking meetings and conferences, but some things have changed.

As we’ve shared previously, less overall food and beverages often contracted, which is an industry trend, their bookings and continental breakfast and lunches and letting attendees gone on their own for dinner. They often will have only one program dinner per event, meetings are also shorter; two and half days is not uncommon, and for bookings are still short term, many smaller meetings book and execute within 90 days.

Looking ahead our outlook for the future hasn’t really changed. Our fiscal 2014 second quarter got off to a great start here in Milwaukee with another successful Harley-Davidson anniversary event. But that is still unfortunately only three nights. So that alone certainly can’t carry our quarter. The group business on the books for the quarter looks good, and with continued strength in the non-group and leisure segments, we have no reason not to expect yet another quarter of improved operating results from this division.

In comparisons to last year during our third and fourth quarters of the fiscal year, we’ll definitely benefit from the fact that last year’s results were significantly impacted by the settlement of the Las Vegas claims and the startup operating losses from the Cornhusker, Marriott. Speaking of the Cornhusker, our press release highlighted our progress in our renovation. I was just there last week and the hotel improvements will be significant when completely finished.

We were already able to open our new Miller Time Pub in time for the football season, it looks great. By the way and the progress on the room renovation has been significant. I remain confident that when completed, we will be able to return this hotel to its proper place as the hotel in Lincoln, Nebraska. We have a number of additional potential growth opportunities in the pipeline, and we hope to get a few of those to the finish line in the near future.

As we have said in the past, the form of these opportunities will likely vary. Additional opportunities that we are currently pursuing include pure management contracts and management contracts with minority interests in joint ventures. Regardless of the form of the transaction, we are looking forward to increasing the number of rooms under management by Marcus Hotels & Resorts.

Before I wrap up our prepared comments and open the call up for questions, let me briefly talk to you on a couple of quick topics starting with The Corners of Brookfield, Our proposed mixed-use project that we’ve been talking about for sometime now. Those of you who locally may have seen the news The Corners of Brookfield recently received the positive report from their financial consultant and staff for guiding the continuing negotiation of the development agreement for this project, and as a result past a motion instructing town staff to essentially finish the deal and that is exactly what we are trying to do.

We’ve also made progress with our continuing negotiations with our potential equity partners and a joint venture structure is beginning to take shape. The final [form] in ownership percentages may still change, but we are inching closer. Of course the project also needs a sufficient level of leasing before it can proceed, but even there progress has been made since we last talked, and I look forward to eventually sharing some of the premier local and national tenants that are helping to help make The Corners a reality.

As always we promised that we will provide update as milestones are reached. I also want to draw your attention to the press release and note that we repurchased another 48,000 shares of our common stock in the first quarter and reinstituted our quarterly dividend after choosing to prepay the February and May dividends last December.

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

Question-and-Answer Session

Operator

(Operator Instructions). We'll go first with Herb Buchbinder of Wells Fargo.

Herb Buchbinder – Wells Fargo

I figured I would ask one question. Did you guys use any reserve seating in your movies, and is that something that you're looking at? And the other thing is just does the Cornhusker have any year-to-year positive impact this year versus last as a result of it now being open and getting close to normal?

Greg Marcus

We will divide and conquer, Herb, it’s Greg. On the reserve seating, yes, we do have a -- we have reserve seating in certain, it is in a number of locations. We've been testing it in different configuration of our theatres. It’s not widespread yet. I don't know what the ultimate deployment of something like that will be. It is wherever we have -- certainly wherever we have our dine and eating concepts, the big screen bistros we're using it there. We've used it with premium seating. We used it. We've been testing it with, in our theatre on the north side of Milwaukee, the north shore where we have conventional seating.

I don't know if that's the wait of the world, it is interesting. There are a certain group of people who may have been turned off to go into the movies because of the hassle, and the nice thing about reserve seating is we know where your seat is going to be, and you don’t have to send everybody in to hold seats, one person can stay behind and buy concessions, while the other person goes in and sits down or nobody has to go sit down while they buy concessions. So, we think it’s really interesting and could have potential as people think about what the movie experience is going to be for the next generation.

Herb Buchbinder – Wells Fargo

As long as the theatre is lead and you can see -- and the seats are marked well, it’s not that bad, but it will be interesting to see if we use it more.

Greg Marcus

And then on your second question Herb, absolutely, I mean I’d be disappointed if we didn’t see some year-over-year improvement. When we took over the Cornhusker, if you recall, we didn’t even have the Marriott flag initially, we didn’t -- we regained that sometime in December. So it had a particularly difficult impact on us year-over-year in our fiscal third quarter, where by definition December, January, February, winter in the Midwest, so we had losses from that facility and maybe that most of our properties in the Midwest lose money in the third quarter pretty consistently, but this was significantly more and of course we had nothing the year before, and so I would certainly expect that year-over-year we’re going to see -- we’re going to benefit from lapping that difficult kind of first few quarters with that property.

And then the property of course is going to be pretty much done by the end of the calendar year as you’ve seen an update in the press release and a lot of it is done, the rest of the rooms will get done in this next month or so, month or two. And then the meeting space will be completed, I think, by the end of the fiscal or calendar year. And so, we should be in a really good shape to really start to see return from that property after that.

Herb Buchbinder – Wells Fargo

You are using your theatres for things other than movies occasionally, and I happen to have seen a live performance of a British play that was screened into a theatre here in Kansas City called The Audience, and they brought it back for about 10 or 12 performances with Helen Mirren, but is this something that has some potential down the road to do these sort of different kind of either live or they could be taped and make any difference, but how important might alternative type programming be for your theatres going down the road?

Greg Marcus

Well, I wouldn’t write it into a pro forma just yet to say what it’s going into a projection or a forecast of what it could mean. It is an interesting dynamic. So far to-date it’s really been -- it’s been de minimis. Yet it does have potential. I do think that there are some that the math has worked. The challenge that we have to figure out the answer to is how do you market it because a movie is really a phenomenal thing if you think about what a marketing experience that is, and how hard it is to do what they do where they get 7 to 10 million people on a, let’s say take a big weekend, a big opener 75 million people or $75 million box office, the big, big, big openers. I think it is 7 million to 10 million people off their sofa to go to a movie, but part of it is because that thing is playing 35 times in each theatre, times thousands of theatres, times multiple weeks and you have got hundreds and hundreds of thousands of runs.

So you can throw a lot of marketing dollars against something with hundreds and hundreds of thousands of runs and something is running once even if is in 1000 theatres, well it’s a 1000 runs compared to maybe a 500,000 runs or 400,000 runs, how much marketing can you throw against that. So the question mark is, how do you market these things, and I think series tend to be more where the world is going, where they are looking at saying , how do I market a series of something. And given that -- so that you can keep repeating the message over and over and spread it across multiple, but maybe different installments in a series. So it’s interesting, but I couldn’t tell you where it is going.

Herb Buchbinder – Wells Fargo

All right. Thank you.

Operator

Thank you. At this time, it appears there are no other questions. I would now like to turn the call back to Mr. Neis for additional or closing comments.

Doug Neis

Well, certainly I want to thank all of you for joining us again today. We hope to see some of you at our annual meeting on Thursday, October 17 at the InterContinental Hotel in Milwaukee, Wisconsin. For those of you who could not attend, we will be webcasting the meeting. We also look forward to talking to you once again in December when we release our second quarter fiscal 2014 results. Thank you and have a great day.

Operator

Thank you. That concludes today’s call. You may now disconnect your line anytime.

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