Doug Neis - CFO Greg Marcus - President and CEO

Jonathan Pong - Robert W. Baird

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 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 his 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 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 a 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, 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 could 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 let's talk about our fiscal 2012 third quarter results. We're 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 ins our Hotels and Resorts Division. I'm going to take you through some of the details behind the numbers, then turn the call over to Greg for his comments. We did have some variations in a couple of 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 and the funds we advanced several years ago in conjunction with 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 for gains and losses of dispositions 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 of 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 of pretax reducing our after tax net earnings per share by approximately $0.04 during our fiscal 2011 third quarter. So just a important 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 off 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 periods due primarily to reduced borrowings. Our total debt remains as 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's the equity gains and losses on investments in joint venture line this time with a negative impact on our comparisons to last year. Again, the reason it relates to last year was a result of the fact that we've 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 it's 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 of fiscal 2012 was 37.9% compared to 38% last year, not much of a change. This particular quarter benefitted 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, losses, and 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 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 theater in Franklin, Wisconsin on a receivership, upfront contribution to the digital cinema roll out, a lobby remodeling at one of our theatres and expenditures 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 on our fiscal year, my current assumption is that our estimated fiscal 2012 capital expenditures remain 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 are underway. The proposal will certainly our final expenditure number as will any currently unidentified projects or acquisitions that could develop during the remainder of the fiscal year. So now I'd 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 in food and beverage revenues were up at 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 theaters of 8.7% plus the addition of the newly acquired theatre in Franklin. Year-to-date comparable theatre tenants have 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 had 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 in food and beverage revenues per person increased by 6.6% compared to the same quarter last quarter and it 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 impacts our concession sales per person. Selective price increases, a change during the second half of our last fiscal year from sales tax inclusive pricing to sales tax added pricing and operational changed to more grab and go candy offering and a change in concession product mix including increases sales of higher priced non traditional food and beverage items in the 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've 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 that we reported during the first two quarters of fiscal 2012, relating to 35 millimeter film projection systems that were replaced in conjunction with our digital cinema deployment. Shifting to our hotel and resort division, as we noted in our release, our overall hotel revenues were up 6.6% and our total RevPAR was up 9.7% during the quarter and in fact the same 9.7% for the first three quarters compared to the same period 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 in 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 scale hotels throughout the United States experienced an increase in a RevPAR of 6.1% during our fiscal 2012 third quarter and 6.7% during the first quarters of our fiscal year so we've 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 above 3% in additional revenues and $2.9 million or above 7.6% in additional operating income to our fourth quarter and fiscal year results, although there can be no assurance we will certainly realize the similar benefits in fiscal 2012,. Historically the additional week of operations has particularly benefited our Theatre division and includes a traditionally strong moral day weekend. And 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 previously reviewed the economics of the transaction with you but as a reminded we entered into an agreement with a subsidiary of Cinedigm whereby the subsidiary would purchase the digital systems and license them to us our 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 the equipment is expected to be paid for by the studios via the payment of virtual credit fees or VPS 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 expect to show in future. It's referred to as a standard booking commitment in our agreement. You think about that, it makes sense and it's the playing of these movies that will generate the VPS that will pay for the equipment. If in any given year, if we ever fell below that minimum number of films per screen, we maybe asked to make a payment to make up the difference. Others 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. Now that in itself is not unusual for a license agreement and other 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 locally 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 a minimum lease payment for the purposes of determining our capital leased 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 premises that we will put all this equipment in and then never show another digital movie in any of the screens doesn’t make sense but unfortunately that's what the economy 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 VPS 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 VPS by the studios to the Cinedigm subsidiary. I will share all the gory details with you because I believe it's important for our investors to know as they value the 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, the reduction of the capitalized lease obligation tend to offset each other. Thanks for your patience as I went through all that and I'll now turn the call over to Greg.

Thanks Doug. I'll begin my remarks today with our Theater division. We're 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. Is has been well documented that film products 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 getting back to Christmas week and taking us all the way to last week, we have now had a 11 straight weeks of box office increases. That's 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 could go 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. I'd to go 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 cost 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 line 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've heard me say before that the movie business is a numbers game and it is generally proven that the more films that have 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 look on paper. Advance 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 film's 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 line up of films set to launch in June and July including the re launch 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 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 benefitted 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 continue to execute on several of the strategies we have previously outlined in our effort to expand both our traditional and our non traditional food and beverage offerings in our theaters. As our Press Release notes, we opened our second Zaffiro’s Pizzeria & Bar during the third quarter and construction is underway on our third Zaffiro's location at the Ridge Cinema in New Berlin, Wisconsin. We an also grow by adding screens and during our fiscal 2012 third quarter we purchased a 12 screen theatre in our Milwaukee market out of receivership and we acquired a former OMNIMAX theater in Duluth, Minnesota adjacent to our existing 10 screen theater there and we will convert this theater into one of our successful ultra screen 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 lets move on to our other division, hotels and resorts. You've 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 predominately located in the mid-west, 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 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 and 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 quarter's ADR is still nearly 5% and 7% respectively lower than it was during the same time period 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 quarter's RevPAR is only 1% to 2% lower than our prerecession fiscal 2008 performance. Thanks to approximately eight additional points of occupancy this year, compared to the comparable year-to-date results from fiscal 2008. In fact our combined occupancy for 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 and improvement in business travel is leading the way. All three primary sub-segments of this customer, the individual business traveler, the corporate volume customer and even group business continue to show improvement over the prior year. In fact when we compare 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. Now 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 paid 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 be 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 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. And 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. Though 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 were 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 publically 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, Bill Reynolds is actively exploring numerous opportunities that can provide long term value to the Marcus Corporation. And we are confident that some of these opportunities will come to fruition in the near future. We don’t have time table that might force us to do something that doesn’t may 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 book field. A proposed enter fashion mall project anchored by one of the sought after department stores in the mid-west Von Maur, we continue to make progress on the project on a number of different fronts. Our discussions with the local community continue to progress as evidenced by the account 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 start 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 tenant 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 will be happy to open up the call for any questions you may have.

(Operator Instructions). Our first question is from the line of Jonathan Pong from Robert W. Baird. You may proceed. Jonathan Pong - Robert W. Baird: Obviously your SMB and your theater division has been highlighted in the recent quarters, I just want to see with that success are there plans to potential expand on those opportunities that some of your other theaters?

Well as we talked about we are currently expanding the Zaffiro's into the region of New Berlin. I would call this still work in progress; we continue to try to find the optimal mix, whether it's standalone 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 with how things are going and because we are doing, but I can’t commit to a certain number.

Jonathan, I would add just as well. We didn’t mention in the press release but we are also adding another take Take Five Lounge up at, it's going to be in conjunction with that OMNIMAX is become an UltraScreen in Duluth. So there are multiple levers that we have and we location by location making decisions that relate somewhat what might be appropriate. Jonathan Pong - Robert W. Baird: Got it makes sense. And then on the MCS capital site, 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 market 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?

I hear the engines revving up, it sounds like the beginning of a race. At least someone's point the court on the lawnmowers; you can hear the engine revving up there. I am not sure what the right analogy is but it's clear we are seeing increased activity. I am pleased with the quality of the stuff that we're seeing. But I can't tell you when I think there is going to be a real good match between buyers and sellers. The sellers I think, how the regulators are dealing with the bank system as we talked about before, there is not a huge pressure to sell. Although there's a huge backlog of things to sell, yet it 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 may not see fire sales. As you look at it, as we all witness and you all write about it, you are seeing, when the REIT's price, the stock goes up and they can afford to pay more, then sellers want to sell. But when the price goes, their stock goes down, the sellers don't want to sell. So as we said, we keep seeing stuff. We are being opportunistic. We are looking at interesting deals and I am confident we'll (inaudible) soon.

And Jonathan what I would add is that Bill Reynolds liked to use the term REIT food in that there are certain properties out there that we're not going to chase after. The stuff that we tend to be looking at and we think as our wheel houses, stuff where we can add value, where we can step in and do something and really add value. 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 said, our strategy is to do stuff where we’ve got a long history of coming in and adding value by, repositioning and we have things like that. When you buy something that you have to add value that way as opposed to just playing cycle, you've got to give a little more room for air, because you are just buying something that you are just buying for cash flow that you can't affect changes you just have to write about where you are in the cycle. In our case it's sort of a double win because if we can do it, we're going to buy something right, we're going to add value by improving management, maybe improving the physical plant, changing marketing orientation and then on top of that we believe it’s a good time to be buying things.

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

Well thank you. You guys are really at us today. We certainly would 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.

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