Greg Marcus - President and CEO Doug Neis - CFO.

Eric Wold - B. Riley and Co. Jim Goss - Barrington Research.

Good morning, everyone, and welcome to The Marcus Corporation Third Quarter Earnings Conference Call. My name is Victor 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..

Operating losses from our corporate items were unchanged during the third quarter but increased during the first three quarters of fiscal 2017 compared to last year due in part to increase Board of Directors costs, including one-time cost associated with the acceleration of certain long-term incentive compensation related to the retirement of two directors from our Board of Directors during the second quarter of fiscal 2017 and the unfortunate passing of another director during the third quarter.

Increased long term incentive compensation expenses resulting from our improved financial performance and stock performance over the last several years have also contributed to increase operating losses from corporate items during the fiscal 2017 year-to-date. With that, I’ll now turn the call over to Greg. .

Thanks, Doug. I’ll begin by remarks today with our theater division. Doug did a good job recapping some of the key third quarter numbers and I’ll give you a little more color. But as you could imagine our focus is on what lies ahead of us, not on the months that are now in our rear view mirror. The stories of third quarter is real pretty simple.

Film product was just not as good as last year, and when that occurs in July and August, two prime summer months, the negative impact on operating income is not particularly surprising.

In fact, given the amount of fixed cost inherent in our business, our theater management team led by Orlando Rodriguez deserve a lot of credit for effectively managing our variable cost as well as they did and driving additional business to our feeders with the tools that are disposal that we can control in order to lessen the impact at the reduced box office.

Of course, a bad July and August coming on the heels of a weaker than expected second quarter led to the inevitable articles written about the future of the movie theater business.

Until of course a scary com movie was released in September and turned it around once again, customers returned to the theaters and drove during the month that is typically the weakest month of the film year, proving once again that when Hollywood releases good movies, good things happen at the box office.

And we can easily get lost in the shuttle is the fact that we had a record first quarter this year contributing to a 13.5% increase in year-to-date operating income from this division.

You heard us say this before, it's very hard to predict in advance which quarters will be up and which quarters will be down in any given year, so when you step back and look at the results from 30,000 feet, the business looks significantly less volatile.

With a highly anticipated fourth quarter slated film get to come it is not crazy to suggest that calendar 2016 like settle up meeting or beating last year’s record results, and even if it does for short, the year will likely end up much better than some might have predicted in august.

But that’s what makes us interesting and keep us focused on the long term. I would tell you that film products was not our only obstacle this quarter, as Doug noted. We once again had a significant number of screens out of service. As we can see progressively add our proven successful amenities to more existing theaters.

And our markets were in both theaters. We have intentionally chosen to take more screens out of service at one time than we have typically done in our other renovations. As we believe, we have more gain in the long run by getting as many of renovations done prior to upcoming November and December films that are expected to do well at the box office.

You have heard us previously report that we have had as much as 5% of our Marcus’ legacy screen that as service during the significant portion of 2017. Well, during this past quarter, our percentage of Marcus Wehrenberg screens at its service were portions of the quarter for renovations was three times that amount, nearly 15%.

So that definitely impacted our results this quarter. I would also, if you have missed, if I didn’t comment on our small underperformance of our theaters versus the national numbers this quarter. Yes, we had market’s legacy screens out of service during the quarter again that impacted us. But the real story occurred in July.

Our reasons for variations and performance in any given month are never certain. We believe the particular mix of films during July 2017 was not as favorable to [indiscernible] as compared to the films released during July 2016.

For example, the top film during July 2016 was the secret life of pets, and this family oriented film performed particularly well in our theaters as they normally do compared to rest of the nation, contributing to our comparative on the performance to the industry in July 2017 versus July 2016.

In addition, historically in our Midwestern markets rained and weekends are very warm weather often has a favorable impact on theater attendance. During July 2017, weekend weather in the markets in which we operate was an average not quite as one at July 2016 noted it has as many weekend days with rain was good last year.

Our past experience has been the people in Midwest tend to enjoy outdoor activities once dry in the weekend and not overly hot.

What leads us to believe that our July underperformance was an anomaly is the fact that in August our results were more in line with the industry and then in September our review in national numbers indicates that we outperformed the industry by over 9 percentage points.

Unfortunately, since July box office revenues represent approximately 50% of our third quarter total box office revenues, that month had a disproportionate impact on our overall third quarter results. But we’re not [indiscernible] of excuses around.

Our goal remain to continue to outperform in the industry each quarter and I'm pleased to tell you that we did that in September and we continue to outperform in October so far. Clearly the investments we are making in our theaters are continuing to make a difference.

And when you combine those investments with our innovative marketing and pricing initiatives along with our loyalty program that is now to over 2.4 million members, good results should follow.

And speaking of investments, as evidenced by the capital expenditure numbers Doug shared with you, we have been and continue to be very busy rolling out our successful amenities to new theaters with a particular focus right now on our Marcus Wehrenberg theaters.

We get asked this question a lot, let me do brief run down of what has happened this past quarter and what we are working on now? During the first three quarters of fiscal 2017, we completed the additional DreamLoungers recliner seating to nine more existing theaters, including two theaters, one of which was a Marcus Wehrenberg Theater, completed late in our fiscal 2017 third quarter, increasing our industry leading percentage of first-run auditoriums with recliner seating to 66% for legacy Marcus leaders and 56% overall, including the theaters we acquired in the Wehrenberg acquisition.

This month, we are completing the addition of DreamLoungers recliner seating to four more adjusting theaters, including three Marcus Wehrenberg theaters, and we are currently in the process of converting two additional Marcus Wehrenberg theaters to all DreamLoungers recliner seating, with expected completion late in the fourth quarter of fiscal 2017 or early in the first quarter of fiscal 2018.

In addition, we opened one Zaffiro’s Express outlet during the third quarter of fiscal 2017 and expect to open two Zaffiro’s Express outlets, three [indiscernible] outlets and two - during the fourth quarter of fiscal 2017.

We also converted one existing traditional UltraScreen DLX Auditorium and three existing screens to SuperScreen DLX Auditorium during the third quarter of fiscal 2017 and converted one additional existing traditional UltraScreen to an UltraScreen DLX Auditorium and 2 existing screens to SuperScreen DLX auditoriums earlier in the fourth quarter of fiscal 2017.

We expect to convert one existing Wehrenberg branded PLX and UltraScreen DLX and at the six edition of existing screens the SuperScreen DLX auditoriums during the fourth quarter of fiscal 2017 as well. So yes, the team has been busy.

Obviously, our plan is to have as many screens as possible converted before many of the highly anticipated pictures in November and December that we lifted at in our press release start hitting our screens, which brings me back to my remarks.

It is difficult to predict the box office over the short term, but over the long term steady growth has proven to be very predictable. We continued to execute in our operating and investment strategies so that we’ll be prepared to capitalize like we did in the first quarter and the two fiscal year before that.

And if the quarter disappoints, we’ll be prepared for that as well. One thing in this business like we always do, the long term perspective. Let us move on to other divisions, hotels and resorts. You see the segment numbers and Doug gave you some additional details.

It was a challenging quarter for our hotels in pretty good August sandwiched by a weaker than hope for July and September. Once again the drop in group business was the main story but also once again we outperformed our competitive sets during the quarter by a pretty significant 4 percentage points.

As we’ve shared with you in the past, our collection of hotels and particularly our largest hotels will have a great deal on group businesses overall customer mix. I will tell you that some of the decrease in group business was unexpected and we hope a result of the non-recurring issue.

I’m not sure if I referred to the term group sales productivity in the past, but it was a particular challenge during the third quarter. Productivity relates to the percentage of group rooms actually sold which is the group rooms originally booked.

During the fiscal 2017 third quarter, we had unusually high number of groups contribute less actual rooms sold than we originally booked. For example, for a particular city-wide convention in Milwaukee this quarter, we were asked to book a 1,000 room nights and unfortunately the actual number of rooms sold were significantly less.

It’s not that it doesn’t ever happen, but I raise it because it was larger issue for some reason in our fiscal third quarter. I have no reason to think this represents a trend. We think it was just specific to this particular batch of group bookings.

In fact if anything, we’re encouraged by the fact that our group room revenue booking for the remaining quarter of 2017 and for fiscal 2018 so far, something commonly referred to group pace in the industry, allowing ahead of group room revenue bookings for future periods last year at this time.

Banquette and catering revenue pays for the remainder of fiscal 2017 has also increased compared to last year at this time. If productivity returns to more normal levels, then that would bode well for future periods in this division.

Now you’ve heard me say before, when group room revenues are down, we need to work very hard to replace that business with non-group business. As evidenced by our performance versus our competitive set, we were able to do that better than So I want to once again congratulations our outstanding management team on that out performance.

And as often the case, we did have to give up a little bit of average daily rate -- occupancy and that showed up in the numbers Doug shared with you earlier. Our hotels and resorts division operating results should continue to benefit in future periods from the new rules of the Grand Geneva. We are really happy with how that turned out.

In addition, the Omaha Marriott Downtown at the capital district in Omaha, Nebraska, a new hotel that we manage in which we hold the minority interest opened on August 27 and initial guest response this hotel is the very favorable.

We were also pleased to announce our assumption of the management of the Sheraton Chapel Hill Hotel in Chapel Hill, North Carolina in September. These two new management contracts will help to offset the loss of management fees from the two hotels that we sold in the last few months.

We will also continue to actively review opportunities to add to our portfolio of managed hotels in the future and we hope that one or more of those come with the vision in the coming months. I want to close my remark by commenting on our announcement today that the Westin Atlanta was recently sold for a substantial gain.

You have heard us talk about our growth strategy of adding management contract, often with a small minority equity component in the past. Well, I would suggest to you that the Westin Atlanta is a perfect representative for what we would like to continue to do in the future.

Five years ago this month, with strong partners we identified a hotel that needed a renovation and a better operating strategy, but had a lot of things going forward including the strong location.

Together we bought it at a fair price and at the right time and then Marcus Hotels and Resorts proceeded to oversee a significant renovation and manage the hotel with great results. For five years, our operating results benefited and the management fee generated from this hotel.

Not surprisingly with significant value created our partners decided it was time to sell we [indiscernible] After a successful execution, the sale closed this month. And with our 11% equity interest is an opportunity for promoted interest built into our deal, we will now be recognizing a gain of over $4.5 million in this transaction.

I know our analyst friends and our loyal investor are often to value our company based on the multiple of EBITDA and the result again of this type can easily be overlooked. But I’d if remised if I didn’t once again point out that given the value that is often inherent in the strong asset base, it makes up the Marcus Corporation.

These assets in the strong conservative balance sheet that back them up is one of the real strengths of your company. And finally, before we open up the call for questions, I want to conclude my remarks by saying thanks you to all the hardworking associates of the Marcus Corporation.

I don’t want to ever take for granted with each and every one of them does to contribute the success of both our businesses. I also want to share with you the news that we certify with Joe Khairallah, who recently submitting his resignation as division president and Chief Operating Officer of Marcus Hotels and Resorts to pursue global opportunities.

I would like to thank Hoe for his service and contributions in these past four years. For the time being, I have assumed day-to-day operational oversight of Hotel division along with the support of our outstanding senior leadership team in that division.

I'm confident that we will - beat as we continue to serve people, create memories and deliver exceptional experience in our hotels and resorts. With that, at this time Doug and I will be happy to open the call up for any questions you may have..

[Operator Instructions] And our first question comes from Eric Wold from B. Riley and Co. You may begin sir..

A couple of questions. You mentioned that 50 of the screens were out of service during the quarter due to the renovations. I'm assuming a much lower percentage will be out there in Q4 given the slate give a sense of what that could be or what we should assume in 2018..

Well in October, which is the beginning of Q4, we’re still in that same general range as it related to the Marcus Wehrenberg theaters. As we mentioned in the call, Eric, where our goal is that we accelerated our whole plan of the Marcus Wehrenberg theaters in order to try to be ready for a bunch of the pictures are coming out in November.

So we still have what really is the equivalent of couple of - we got four or five auditoriums per locations or more in some situations and you add them all up, we’ve got the equivalent of two full theaters basically still down in October at Wehrenberg.

But you’re right, once we hit November, we’ll still have, as Greg mentioned in his comments, we will have a couple of theaters that will continue on until the end of the year, but it will certainly will start to decline once we get November. .

But to be clear just to make sure Marcus correct, the 15% only applies to the Marcus Wehrenberg status screen. That’s not the overall percentage..

Correct..

Okay. And then on the hotel side, congrats on the news on the Atlanta sale. I guess Atlanta of first think about your own strategy to sell your own hotels. Obviously that was not opportunity cost of Wehrenberg transaction to do a diverse -- that has not occurred.

You maybe talk about just see the environment out there, buyers versus sellers in terms of where we get something done that we’re still also looking for opportunities for minority interest ownership and hotels along with management contracts, just trying to understand that the valuations and the industry given on the buyer side having integral time on the seller side so much.

.

Sure, let me take it backwards. First your last question about, are you still looking for minority interest where we make acquisitions and that’s absolutely in that -- as you can see that, that strategy worked. So that is one that we continue to focus on. As it relates to hotels for sale, we continue to be out in the market, we’ll watch in the market.

The market is - it is still a disconnect that we haven’t seen the pricing that we want to see yet, and -- but we continue to look forward and we’ll take advantage of it when we can..

Okay.

And then lastly, it’s general question, obviously a lot of press out there on movie path and subscription programs, what is your view on subscription program in general that’s something you will consider implementing markets on its own or should - over the third-party with revenue share deals with concessions or omissions or even something you consider?.

Well it’s hard to make a comment on movie path because I don’t have access to their numbers and what are they doing and know how it works. In terms of I mentioned a model, we can I think read in the press.

You know look that we have to watch all the pricing models and I think that the comments that they made originally when you talk about the certain price point the customers are going to do the math and we end up with a very soft customers and we can bear out because as you know we are a pretty forward fixing company and we tested our own subscription services in some certain markets probably four years ago, maybe five years ago, and it’ll be soft very differently we were at about $30 to $35 a month, was that we were able to raise start selecting group and we weren’t winning that bet, which is highly didn’t extending.

Now the lower price point, I'm not sure with that model go. It's up for us to watch it. But you bring up a very important point which is -- would you like to do it yourself or with the movie path and frankly I go back to its one of the benefits of our loyalty program.

For the first time, in 82 years, it was really once now there was a [indiscernible] for few years, but for almost 80 years we didn’t who was walking in the door. We now know and we believe that that knowledge is power and we think it's very important to make sure that preserve and manage and own that relationship with our customer.

And I can't tell you the number of people who would like to get in the middle of that, movie passed clearly is one of them. So I think it's up to us as a company and up towards the industry to be thoughtful and very careful about how we manage that relationship because I think its very important to us and will be important to us in the future..

[Operator Instructions] Our next question comes from the line of Jim Goss from Barrington Research. You may begin sir..

IMAX just had a call on which they talked about the strong performance they had in September, especially relative to and the latest quarter out over the industry. I'm wondering if you can pick out just how well your own PLS screens paired relative to the rest of your stabled screens, then both of you mentioned it, of course.

Is there any way to look at that performance through set of your overall performance?.

Jim, we don’t not have numbers that - not on my are fingertips so I can through at you, but there is no question that performed very well on our large format screen. As you heard, we reported a national increase in our average ticket price this quarter and certainly September had a big part of that because of two fold.

In my prepares I mentioned the fact that okay, you had some mix of pictures and so you had a out rated picture being a number one film and so certainly by definition your ticket mix is going to skew towards to higher price.

But then -- and I didn’t mention but you have actually -- I think you have [indiscernible] the fact that large format screens were key element of our success certainly contributed to that as well. And we absolutely benefited from that picture playing on the large format screens and you heard.

I mean we had -- for some time now we have had a pretty significant focus on expanding our number of large format screens. There is no exact statistics out there in the industry but I haven’t found anybody that has a higher percentage of large format screens than we do in our circle in terms of complex has been at least one large format screen.

So we think that’s very key going forward, if at you at these next two months, and then look we have had a strong push to try to even get more open and more converted because when you get these big pictures coming up the way we do in November December, that’s where the customer loves to see the picture.

And so it’s a pretty big focus for us no question about it..

In terms of financial results covering out those, do you try to analyze those screens relative to the rest of your?.

Oh, we do. We don’t share that publicly, but obviously IMAX sets their business and so we see if we can get those direct numbers from them, but so we certainly do our own internal analysis but I’m not prepared to share any numbers with your today. .

Okay.

And in terms of competitive situation, AMC just announced it was going to build an auditorium or a set of auditoriums in Orland Park not very far from you’re a pretty significant property of yours, and not to just talk about that situation, but how have these competitive situations been working out for you specially as the receiving initiatives have become more important?.

Jim, that’s a great point that you’re bringing up in the end. Yes, we noticed that announcement. For us and what we’ve been very good about, and yes, we’re going to see competition in our market.

There is not doubt about it, but the team has been very focused on it and we had a strategy from day one has looked at let’s make sure that we keep our fingers as competitive as possible and to just to makes sure that we minimize that there is this kind of disruption, and I would tell you that these that that’s what we’ve done and that’s why our asset base is as strong as it is and where we’ve gone up against them, we win.

And so it’s going to be, it will be a battle and then we’ll win the battle. But it is something that we have got our eye on and we’re focused on intently. .

All right. So the last thing I would raise is dynamic pricing, ticket pricing, regal raised in conjunction with Adam Tickets earlier this week.

Have you been looking at that aspect and is that something you would to experiment with as well?.

Well, as you know we are a forward-thinking company. We’re always trying to think about where the industry is going and you could take the position that variable pricing is something that we’ve been involved in now for a while, especially if you think about our $5 Tuesday program in a variable pricing can take many forms.

It can be pricing based on the day, it can be pricing based on the film. Now we obviously haven’t been doing a based in the film but we are doing it based in the day that we think we’ve had success.

I think what that points to and I think that’s Regal things points to as -- why has our $5 Tuesday program worked? And I talked about this before, the reason it has worked because we’re not cannibalizing really much business out of our weekend business because there is a certain group of customers that had left the theater because you now people forget.

And I think Hollywood sometimes forget that the laws which supply and demand do apply to our business, and the more supply you pump into the ancillary markets at a very low price which is what happens.

Netflix, I don’t know what the cost per view on a streaming service is? But its slow as you pump supply into the low-price downstream you will ultimately impact upstream what’s happening and I think that it would be naïve for anyone who is thinking about how the model should look like to think the moves they make will only have a isolated impact on what they are doing.

They impact the entire chain. And so $5 Tuesday was in an essence of rear action to what has been going on over a number of years. And so what Regal is doing is continues to show that there is going to be reactions to what is going down in our industry, we don’t exist in isolation.

Now the good news is that our variable pricing model by day the week has been very successful. And so we watch it and we resumed very intently and we assume were things done..

[Operator Instructions] And at this time it appears there are no other questions. I would like to turn the call back to Mr. Neis for any additional or closing comments..

Well, thank you, everybody, for joining us once again. We look forward to talking to you again this time in February, when we release our fiscal 2017 fourth quarter and year end results. Until then, thank you. Have a good day and go see a movie..

Ladies and gentlemen, that conclude today’s call. You may disconnect your line at any time. Everyone have a good day..