The Marcus Corp. F2Q10 (Qtr End 11/26//09) Earnings Call Transcript

Dec.17.09 | About: Marcus Corporation (MCS)

The Marcus Corp. (NYSE:MCS)

F2Q10 Earnings Call

December 17, 2009 11:00 am ET

Executives

Greg Marcus - President & Chief Executive Officer

Doug Neis - Chief Financial Officer

Analysts

David Loeb - Baird

Marla Backer - Hudson Square Research

Operator

Good morning everyone and welcome to The Marcus Corp. second quarter earnings conference call. My name is Omida and I will be your operator for today. (Operator Instructions) Joining us today are Greg Marcus, President and Chief Executive Officer; and Doug Neis, Chief Financial Officer of Marcus Corporation.

At this time, I'd like to turn the program over to Mr. Neis for the opening remarks.

Doug Neis

Thank you and welcome everybody to our fiscal 2010 second conference call. As usual, I need to begin by stating we plan on making a number of forward-looking statements on our call today. Our forward-looking statements that could include but not be limited to statements about our future revenues and earnings expectations, our future RevPAR, occupancy rates and room rate expectations for our Hotels and Resorts division.

Our 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 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 second quarter results. Excluding onetime adjustment that I’ll address in a moment, our theatre division reported another good quarter with record revenues and increased operating income. In our Hotel and Resorts division, while RevPAR trends improved slightly, division continued to be impacted by a very challenging lodging demand environments, and our results further impacted by impairment charge.

Before I get into the operating results let me first briefly address any variations in the line items below operating income versus last year, especially do effect that we had a couple of unusual items last year that impacts the comparisons. As you can see, we show a significant variation and investment income this quarter, but that’s entirely due to unusual adjustment last year.

You may recall the last year we reported $2.2 million, of pre-tax investment losses during the second quarter related to two items, securities held by the company and investment in and loans to a former Baymont joint venture. This year’s investment income for the second quarter and first half are running at our expected levels, and we don't anticipate any significant variations during the remainder of the year.

Meanwhile our interest expense was down another $950,000 during our fiscal 2010 second quarter compared to the prior year. As now down nearly $1.8 million year-to-date due to reduced borrowings and lower short term interest rates depending upon the actual timing of future capital spending and assuming that short term rates remain low for the foreseeable future.

We could continue to see our interest expense run lower than the prior year in future quarters having said that, interest rates began declining last year about this time. So, I don't necessarily expect variations in the upcoming quarters to be quite it large as reported over the past two quarters. In addition, we’ll likely see our debt level rise slightly in future periods now that we are heading in to the slower cash flow month.

As we noted in our release overall debt to capitalization ratio at the end of the quarter remains are very strong 43%, that’s down from 44% at our last May year end. Continuing down the earnings page, we had relatively little activity this particular quarter or first half for that matter related to gains from disposition and equity earnings and losses lines. I think it's still possible that we will report some level of gains in sales during the remainder of fiscal 2010.

We do have a couple of asset sales that we’re working on but small scale. For as always the timing of such gains is always difficult to pinpoint. Of course as you can see in our reported results we do show significant variation on this line compared to last year, and as a reminder last year during our second quarter we reported a $1.1 million loss related to invest in the condominium units and our Las Vegas propriety. More about those units in a moment and discuss this years impairment charge.

Finally our affective income tax rate for the first half of fiscal 2010 was 37%. With our quarterly rates slightly higher due to a small adjustment to our estimated full year rate. This year-to-date rate is slightly lower than normal due to decrease in the amount of unrecognized tax benefits as a result of a lapse of applicable statute of limitations.

I currently expect our tax rate for the final two quarters of the year to be closer to historical 39% to 40% range pending any further lapses in status limitations or completion of taxes examination, by taxing authorities. Shifting gears, our total capital expenditures during the first half of fiscal 2010 totaled just under $11 million compared to approximately $15 million last year. Approximately $9 million of this year’s amount occurred in our hotel division and relates primarily to the ongoing renovation at Grand Geneva and Hilton, Milwaukee properties.

At this stage of our fiscal year, borrowing some sort of unforeseen growth opportunity that could still arise in the remaining six months of fiscal year, I think it's safe to assume our total capital expenditures for fiscal 2010 will likely end up less than in our original estimates. We still finalizing the scope and timing of several that requested projects by two divisions and as a result it appears to be expenditures related to some of those projects will likely carryover into our fiscal 2011.

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

Now before I turn the call over to Greg, let me provide a few additional financial comments on our operations for the second quarter and first half beginning with theatres. Our box office revenues were up 6.2% during the second quarter and concession revenues up 1.8%. Year-to-date, box office revenues, now were up 3.2% and concession revenues was down slightly at negative point 5%.

Comparisons to the prior year are fairly clean from a number of screens perspective we did closed three leased theatres with 16 screens last year. One of which was a budget theatre. By closing these theatres had minimal impact on comparable operating results. Total attendance our comparable theatres decreased 1.6% for the second quarter due to relatively soft four week period at the end of October, kind of begin of November.

With the films released did not measure up to the prior year. Year-to-date our comparable total attendances is down 3.7% compared to prior year and the majority of that can be attributed to the summer weeks where we were going up against the dark night last year and described that last quarter. The impact of our small attendance decreased continuing to be offset by increase in our average admission price for the theatres, up 8.8% for the quarter, and 7.9% year-to-date.

Premium pricing for digital 3D attractions and ultra screens contributed to the higher average admission prices. Our average concessions last food and beverage revenues per person increased 4.3%, during the second quarter, is now up 4% year-to-date. Our expanded food and beverage offerings at several of theatres contributed to increased average concessions per capita.

Now excluding the pension withdraw liability that referred to earlier, our operating margins from this division are now running 20.4% compared to 20.9% last year. Small decrease can be attributed primarily to the impact of reduced attendance on fixed cost and slightly higher film costs.

Now as we noted in our release, theatre division took a onetime $1.4 million pre-tax charge operating income this quarter, related to a pension withdraw liability. This liability relates to a multiemployer pension plan connected to Chicago projections union. We had a window of opportunity withdraw from this under funded plan using plan valuations as of August 2008 prior to the downturn in the investment markets and given that we only had few remaining active associates in this union we felt it was prudent to exit now and lock in our portion of the unfunded liability in this plan.

We are now making contributions to an individual newly fund for each of these four or five remaining associates that are impacted that were for us. Lets clearly really money and we will be determining our payment plans for this $1.4 million in the near future, we have no other situations like this, and I can stay with content its truly as a onetime adjustment to our theatre results.

Shifting to Hotel and Resort division our overall hotel revenues were down 14% and total RevPAR was down 15% during the second compared to same period last year and year-to-date a RevPAR is now running 18.3% lower than it was last year at this time. Consistent with prior quarters, our second RevPAR performance did variable by market and type of property ranging from a low of about minus 8% to a high of about minus 22%.

Based upon data available to us, our results continued to be fairly consistent almost spot on actually when we look at comparable star data with those of other comparable upper upscale hotels throughout the United States. Our fiscal 2010 second quarter overall RevPAR decrease was a result of an overall occupancy decrease of 2.1 percentage points and average daily rate decrease of 12.2%.

For the first half of 2010, our occupancy is now running approximately 5.4 percentage points behind last year and our average daily rate at decreased 11.7%. Our second big adjustment this quarter incurred in this division as we noted in our release we reported a $12.6 million pre-tax impairment charge this quarter related to our remaining 16 owned condominium unit the Platinum Hotel & Spa in Las Vegas.

If you follow the Las Vegas real estate market it all this charge may not have come as a surprise here, prices of fallen steadily for sometime now and while we have no desire sell or remaining units at the current distressed foreclosure prices that units are going for right now, it's incumbent continue to look at the market and sign of probability of the units retaining to the price levels that we’ve originally forecasted in the near and midterm future. With the market further saturated with new units from the Las Vegas, City Center project we believe that impairment charge remaining carrying value of our units was appropriate.

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

Greg Marcus

Thanks Doug. As you saw in the release and heard from Doug there were several things going on these quarter in our reported numbers. Well this year and last year making it more difficult to sift through and determine how the quarter really went for us. Doug gave you a further description of two significant adjustments totaling approximately $0.08 per share it certainly mudding the waters for us during our fiscal 2010 second quarter.

To be fair we also had a couple of unusual items last year during the same quarter. So while I'm not a fan of discussing what we would call earnings before bad stuff, after all some of the unusual items represent real circumstances that companies face from time-to-time. I think it's relevant and useful to note that if you strip out unusual adjustments from both year end reported results.

Our core ongoing businesses would have reported earnings of approximately $0.07 per share this year versus approximately $0.10 per share last year. Underlying story behind those numbers is really not much different from what you heard from us in the last few quarters that is our theatres continue to perform well, but the hotel industry continuing to struggle in the face of this difficult economic environment.

So, let me make a few comments about both businesses. Begin my remarks by theatre division. As you reported earlier the division had record revenues would have again reported increased operating income if not for the pension withdraw liability adjustment. We got to those record revenues in a roller coaster way with a stronger than unusual September giving way to a lull in the later weeks of the quarter, until we saw some very strong performance with a record week leading up to Thanksgiving day holiday.

By now, twilight sequel delivered for us in a big way, term would have been a slightly down quarter into the results you see today. In addition, as our press release notes and Doug expanded upon our strategic initiatives to expand our digital 3D footprint increase our number of ultra screens with related reserve seating and expand our food and beverage offerings again paid dividend this quarter as we were able to make up for a small overall decrease in attendance with significantly increased per capita revenues.

We are currently in the mid was traditionally the second busiest time of year for us after the summer. The Christmas Holiday season as we noted in the release to momentum established in that last week of our second quarter it certainly carried over thus far our to the early weeks of the Holiday season. Repeat business for new moon and surprise hit the blind side of contributed to an overall 20% increase in our box office results during these first weeks.

With the highly anticipated Avatar opening tomorrow and likely hits Sherlock Holmes up in the air, and Alvin and the Chipmunks, The Squeakquel yet to come, were hopeful our Midwestern weather cooperates and plenty of movie go as come out and come weeks to see one or more of the films scheduled to be released. Once we get past the New Year we hope some of these films provide a stronghold over into Hollywood has films ready to ready compete against what was in a strong January and February line up last year.

Some of the films scheduled for release in those two months include book of Eli, Edge of Darkness, Wolfman, and Valentines Day and from Paris with love. Now even with all this good news I must tell you that can always find things to lose sleep over in both of our businesses and our theatre business, we have seen our margins dip slight and we are in a constant battle with our film distributor partners to keep our film costs inline.

While we haven't talked about it last couple of call, we are always concerned about the preservation of the existing windows between the date film is released, the movie theatre and date becomes available to other markets. There has been increased noise with that discussion, while would be takeover of NBC Universal by Comcast.

So while we anxiously await each weekend's box office reports and deal with the various industry issues inherent in this business, we also continue to execute on the many strategies we’ve highlighted in our prior communications with you. In that regard, our press release noted the most recent initiatives, opening of the unique upscale four level five screen entertainment destination in Omaha, Nebraska that we are managing for Mutual of Omaha.

As we noted, we’ve introduced our CineDine in-theatre dining concept into all five auditoriums at this theatre and taken liquor service to a new level as well. We also taken one of our most popular items Zaffiro's Pizzeria to Omaha as well are not surprisingly for those of you that know it has been a hit. Now location has only been open for a few weeks. We are pleased with the customer response to the theatre so far.

With that, let's move onto our second division hotels and resorts. On the one hand, it's encouraging to report a second consecutive quarter with an improvement in our RevPAR trend during the fiscal 2010 second quarter. We are also beginning to lap the time period when revenues begin declining last year.

Our RevPAR down almost 7% last year during the second quarter, so room revenues are still over 20% lower than they were two years ago. I wanted to acknowledge, the continued outstanding work of management team to minimize the impact of these revenue decreases on our bottom line under difficult circumstances.

Excluding the Platinum impairment charge, are two more able to see that only 42% of our decline in revenues dropped to our operating income line, while still providing the excellent service that our guests that come to expect from markets, hotels and resorts. As I share with you during our last call, in general in this industry, anything less than 50% flow through is considered to very, very good.

Doug shared our occupancy and average daily rates that fix with you and frankly they tell the story pretty well as it relates to the current environment. We and others in the industry finally seen our occupancy rates begin to stabilize and we currently expect that trend to continue during our fiscal Q3. The issue now is pricing power or lack there of. We have the strong group business segment to fill up lots of rooms.

We have had to aggressively seek occupancy with the price sensitive leisure, government and contract customer segments. We are also taking rooms on the opaque internet channels than we would prefer under normal circumstances. The good news is, the demand from these segments is held up and we have successfully back filled most of the lost occupancy from the business traveler. The bad news of course is the lower average rates.

In the short term, we don't see group business book in phase changing very much. However, we’re starting to see some positive occupancy momentum in several of our markets and we hope those trends continue. Our RevPAR declined over 13% during our third quarter last year and 23% during our fiscal 2009 fourth quarter. So if the current trends continue it would not seem unreasonable to expect our negative year-over-year comparisons to lesson during the remainder fiscal year.

As I mentioned, while we have to remain vigilant, I think we have our costs under control, so the emphasis right now is on increasing revenues. We will continue to offer value packages to guests to drive demand and we will attempt to shift market share away from alternate internet channels and towards our own.

As you heard us say before, we will also continue to maintain and enhance assets during a time when others are finding it difficult to do so. Next phase of renovations at the Grand Geneva is about to begin and at the Milwaukee Hilton, our room renovation are nearly completed and we are beginning to address some of the common areas right now, including the first floor entry.

With the balance sheet and credit availability that is the end, we have others in our space. We remains poised to explore and develop potential growth opportunities that may arise during these difficult times.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Loeb - Baird.

David Loeb - Baird

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

Doug Neis

As we said before, we don't know of anybody. First of all, for theatres that we might be able to acquire, theatre chains that would be let's call it our most our strike zone, that data is not public, these are talking probably smaller regional operators. We aren't hearing whether they got what their debt situations are and roll over issues, but I guess the only thing I want to take over less than a hotels and movie theatre.

So I don't know if they’re going to get the same extending treatment that the hotels are getting. So the bigger operators have, we don't know what they’re. I haven't been following their bank statistics, and frankly if AMC had a problem, it wasn’t got anything. I would make a decision on.

The only transaction, as you know that was recently announced and it was basically related to financial pressure was disposition of some of the Showcase Cinemas, the National Amusements Theatres, red stone stuff, and that was bought up by private equity group. We look at that, we continue to look at any opportunity that comes our way, but as point out, the business is okay, and there’s not a lot of distress, so.

David Loeb - Baird

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

Doug Neis

I keep reading your research, David.

David Loeb - Baird

We’re somewhat skeptical about the timing?

Doug Neis

I have to believe there’s going to be some opportunities, we’re looking at. So we continue to see them. Look at that deal was interesting sort of what happened, in New York and Union Square one, where basically, most of them like the C piece have been try to protect itself. I think what you’re seeing, I don’t know if you’re seeing at two, but these guys coming in and they keep going back to the lenders repeated times. I think they must be working their way down the capital stack.

David Loeb - Baird

Yes, which I guess means that you won't have a wave of opportunities anytime soon, but they may come eventually, is that fair?

Doug Neis

I think that's fair. Again, I guess and then when the market opens up, would we be able to buy at a huge distress. I'm not so sure, but I believe it. We’ll be at the lower end of the cycle and that’s probably a good time to be buying stuff.

David Loeb - Baird

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

Greg Marcus

I think from what I’ve seen pretty frozen. We aren't seeing too many. Many of those tend to be a lot of big management companies rolling around and they’re not capital intensive.

Doug Neis

On the form around the management contract opportunities some of the stuff is looking as management contracts, so some of that is because as others are also looking to some of the stuff that is out there distressed that is available. There are situations where they’re looking to pair up with a management company. So we’re involved in some of those types of discussions.

I think, if I could give you one takeaway in the velocity we got right now, and that is that we’re not just out racing around trying to manage anything and trying to manage just trying to take up especially where there’s distressed stuff just if a lender or somebody or somebody ended up taking the property back, we aren't aggressively.

Although, we do have some of that business and we’re looking at it. We’re being selective, because we have to tend to our own assets. Those may not have as long term management horizon, that’s a nice little pop in cash quickly, but we have our plate full just running on what we have, so we’re selective.

David Loeb - Baird

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

Doug Neis

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

Operator

Your final question comes from Marla Backer - Hudson Square Research.

Marla Backer - Hudson Square Research

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

Doug Neis

As far as quantifying, no I can't I'm not able at this moment to say it at as some percentage of our business. It's quantified in the standpoint when you look at the average rate, there’s no question that those channels play a role in that, because if you understand how that works, the consumer may be paying getting a room for $88, $99, but that's not what we’re getting, because the channel is taking there pound of flesh, and so as we make our decisions daily in terms of how much inventory to put out onto the channels, I mean it is a science, but clearly when we reported 12% decrease in average rate it is a component of that.

I couldn't separate out and tell you how much of it is contributing to that. As it relates to making the transition, the occupancy cures all ills and so the fact is as the demand, and as the particularly in a group business, that’s one of the keys, as you have blocks of rooms that take up and cause compression in your hotel, you then no longer need to be concerned about giving as many rooms to the channels and so the ultimate fix is that.

In the meantime, we try to do marketing efforts and value packages and we do some things that try to make that have the customer make the transition to us, if they got us through an opaque channel that first time, if you try to make sure that second time they come directly to us, that's the effort you try to make.

Marla Backer - Hudson Square Research

As you cited the Las Vegas market, obviously, there’s been a lot of hotel rooms coming on the market with City Center. Anecdotally, I've seen some increased marketing, I think for the overall Las Vegas market. How long do you think it will take to absorb some of the rooms and my understanding is that there were several projects that have been put on hold, but the developers are talking about resuming developments, at some points in the future, do you see significant number of new rooms coming on in line in Las Vegas over the next couple of years.

Doug Neis

Well I think that obviously City Center is going to be a big chunk to digest. What might come on line I mean, the one that I got to believe as to come online, is got to be the sound blue, it’s got curtain always up, I mean, that thing to stop in the middle. So that’s what I guess, it year to piece of raw land I wouldn't be too worried to think anyone is going to build a new room on it.

If you got something that’s under construction and maybe significantly advanced someone might buy it at a very discounted price and that might be something that would be finished up. Now, what you noted Marla is correct is that there has been a lot of marketing to Las Vegas and so while I don't normally single out properties, I will tell you that our occupancy was actually it was up at that property compared to last year for the quarter.

So it's not that people aren't necessarily doing to Vegas right now, but it is the rate. Conversely, the decline in the rate was higher than what the average for whole circuit, chain was. So that's a market that again, given the number of rooms that's very aggressive pricing going on.

Marla Backer - Hudson Square Research

So switching topics to theatre business, okay getting back to the rentals and your margins; do you think that alternative content to kind of help with that and I noticed that in some of your theatres, you will be playing the Dave Matthews concert movie this week. Are you feeling kind of optimistic about the potential for alternative content like concerts and potentially sports events? Again just what kind of impact do you think it will have on margins?

Doug Neis

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

Marla Backer - Hudson Square Research

Not going to do it right now?

Doug Neis

No.

Marla Backer - Hudson Square Research

Good signs about what the potential is.

Doug Neis

Absolutely.

Marla Backer - Hudson Square Research

Lastly, as you continue to expand your dining options and your SMB options generally, are you worried about cannibalizing some of the higher margins items at the concession stands and I think I asked this on the past this both for on your quarterly call. So just wanted to get your current feeling about it, now do you have more data?

Doug Neis

Yes. Actually, we watch all the time, we don't just look at our gross per cap we look at net per cap, so it doesn’t do us any good sell more and make less.

Marla Backer - Hudson Square Research

Right now you are not seeing that?

Doug Neis

Right now we are not seeing that.

Operator

(Operator Instructions)

Doug Neis

Alright, listen, we certainly thank you for your questions and attention. Thank you for joining us again for our conference call and we look forward to talking to you once again in March when we release our third quarter fiscal 2010 results. Thank you. Hope you have a very wonderful Holiday season and a Happy New Year.

Operator

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

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