Marcus Corporation (The)

Good morning and welcome to the Marcus Corporation first quarter earnings conference call. My name is Stephanie and I will be your operator for today. At this time, our participants are in a listen-only mode. We will conduct a question and answer session at the end of the conference. If at any time during the call you require assistance, please and I will be happy to assist you. As a reminder, this conference is being recorded. Joining us today is Greg Marcus, President and CEO of and Doug Nice, Executive Vice President and Chief Financial Officer and Treasurer of the Markets Corporation. At this time, I'd like to turn the program over to Mr. Nice for his opening remarks. Please go ahead, sir.

Thank you, Stephanie, and good morning, everybody. Welcome to the Fiscal 2020 First Quarter Conference Call. As usual, I do need to begin by stating that we plan on making a number of forward-looking statements on our call today, all of which we intend to J.D. J.D. J.D. including assumptions about our ability to manage difficulties associated with or related to the COVID-19 pandemic, the assumption that our theater closures, hotel closures, and restaurant closures are not expected to be permanent or to reoccur, the continued availability of our workforce following the temporary layoffs we have implemented as a result of the COVID-19 pandemic, and the temporary and long-term effects of the COVID-19 pandemic on our business. Listeners are cautioned not to place undue reliance on our forward-looking statements. Additional factors, risks, and uncertainties which can impact our ability to achieve our expectations identified in our forward-looking statements are included under the heading forward-looking statements in the press release we issued this morning announcing our fiscal 2020 first quarter results and in the risk factors section of our fiscal 2019 annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. and the current report on Form 8K that we filed this morning, all of which you can access on the SEC's website. We'll also post all Regulation G disclosures when applicable on our website at www.marcuscorp.com. With that behind us, let's begin. Under normal circumstances, we'd now proceed to spend 80% of our time during our initial remarks looking backwards and talking about the quarter we just reported, with only about 20% of the time dedicated to looking ahead. Well, as I think we can all agree, these are not normal circumstances, so our plan today is to flip that 80-20 rule around. I'll still begin by spending a few minutes looking back at this past quarter and briefly sharing a few numbers with you, but then I'm going to pivot to more current topics such as the balance sheet and liquidity. And once I do that, I'll turn the call over to Greg, who will focus his prepared remarks on where our businesses are today, what we've done to date and are continuing to do to manage through this crisis, and what some of our plans are for the future. When we open up the call for questions, we certainly would be happy to revisit the quarter and answer any follow-up questions if needed. I also want to note that today we filed a Form 8K which extends the SEC filing deadline for our first quarter Form 10Q by up to 45 days, although we're hopeful that the delay will be no more than a week or less. The SEC provided this filing deadline relief recognizing that companies such as ours, J.D. J.D. Many with numbers that require this enhanced tagging, our SEC filing service needs a little more time to complete all of the necessary work required to get the Form 10-Q ready to be filed. And we need more time to review their work. What I can tell you, however, is that we believe strongly that the numbers we're reporting today will not change in any material respect between today and the date that we file our Form 10-Q. So you've seen the numbers, and with all the theaters closed for the last nine-plus days of the quarter, J.D. J.D. J.D. J.D. The vast majority of these expenses represented payroll continuation payments made to associates temporarily laid off in order to bridge the gap between their last day working and their eligibility for unemployment benefits. We've always said our associates are our most important asset, and this was just the right thing to do under very difficult circumstances. In addition, with almost all our theater and hotel properties closed as of March 26, 2020, the ending date of our first quarter, Accounting guidance required us to review virtually all of our assets for impairment as of that date. The way the accounting rules work, this becomes a point-in-time, almost completely mathematical analysis that relies heavily on projections of future revenues and cash flows. For most of our long-lived assets, with many years of useful lives left, we were able to quickly conclude that future cash flows in each asset support the carrying value of that respective asset. But for assets that have shorter lives, particularly leased assets with lease termination dates that are approaching, the mathematical impact of near-term negative cash flow impacts the impairment analysis. As such, we concluded that an impairment charge of approximately $6.5 million was necessary for several theater properties. We also carry a trade name intangible asset on our books. The value of which is determined mathematically using a discounted cash flow methodology based upon future revenues. With no revenues projected for several months subsequent to the March 26th date, we were required to recalculate the discounted cash flow value of this intangible asset, and the result was an additional $2.2 million impairment charge on this asset. In total, we reported $8.7 million of impairment charges this quarter. We included a non-GAAP reconciliation of our net loss and our adjusted net loss and our adjusted EBITDA with our press release in order to show you the impact these non-recurring items had on our reporting results. Now, in the midst of the current situation, it would be easy to just focus on the challenges we face at the end of the quarter, but there were several positive trends during the quarter that should bode well for us when we begin reopening. Our press release highlights several of these items, including the fact that both our theaters and hotels once again outperformed their respective industries during the quarter. And that includes significant outperformance for our movie tavern theaters. Our theater division also continued their positive trend of reporting meaningful increases in their average ticket price and average concessions in food and beverage revenues per person. It's also worth noting that spending a minute on income taxes for a couple of reasons. J.D. J.D. Preliminary review of the provisions of this legislation, we believe we'll be eligible to receive an income tax refund in the $15 to $25 million range in fiscal 2020 related to new rules for qualified improvement property expenditures and net operating loss carrybacks. We would also be able to apply any net tax loss incurred in fiscal 2020 to prior year income for what may be a significant refund in fiscal 2021 when our fiscal 2020 tax returns filed. Shifting gears away from the earnings statement just for a moment, our total cash capital expenditures during the first quarter of fiscal 2020 totaled approximately $10 million, compared to approximately $43 million last year, which included the cash component of the movie tavern acquisition. Most of this year's dollars are spent in our theater division on several projects, as noted in our release, and of course, as also previously disclosed, we have placed most future capital expenditures on hold for the time being. Before I turn the call over to Greg, let me also briefly comment on last week's announcement regarding our new financing. I don't need to tell you that the Marcus Corporation has been a conservatively run company for its entire 85 years of existence. Two of our core philosophies have been owning our own real estate whenever we can and maintaining a strong balance sheet. Well, I would suggest that those core values have never been more important. As a result of these longstanding management philosophies, J.D. J.D. J.D. With the new $90.8 million term loan aid, we've provided for an additional insurance policy to further enhance our liquidity, which we believe positions the Marcus Corporation to weather this current storm well into 2021 if needed. With that, I'll now turn the call over to Greg.

Thanks, Doug. As Doug noted earlier, I'm going to focus my remarks on where we are today, what we've done to date, and continuing to do to manage through this crisis. J.D. J.D. J.D. J.D. J.D. J.D. J.D. Our executive team faced the challenges head on and has worked literally night and day to develop and execute strategies that will get us through this crisis and put us in a strong position for continued growth over the long term. We're very fortunate to have such an experienced and dedicated leadership team. We're working to strike a balance between taking care of our people and helping to slow the spread of the coronavirus while at the same time making decisions that are in the best long-term interest of the company, our associates, customers, and shareholders. This is a delicate balance but vital. The hardest part of all these decisions is the impact the temporary closings have had on our associates, many of whom have been laid off. Caring for and valuing our associates has been a foundation of our culture since the day my grandfather opened his first movie theater back in 1935, and it's more important today than ever before. As Doug noted, we provided short-term compensation to these associates who were laid off in order to bridge the gap until they could receive unemployment benefits. We are also continuing to provide health insurance for those who are on our plan. Thank you for joining us. J.D. J.D. Reducing my salary and that of my dad's by 50%, as well as reducing the salary of all other executives and remaining divisional corporate staff. Temporarily eliminating all Board of Directors cash compensation. Actively working with landlords and major suppliers to modify the timing and terms of certain contractual payments. Evaluating the provisions of the CARES Act and utilizing the benefits, relief, and resources under those provisions as appropriate, and evaluating the provisions of any subsequent federal or state legislation enacted as a response to the COVID-19 pandemic. J.D. J.D. J.D. Thank you very much. J.D. J.D. J.D. particularly among business transient and group business travelers as travel budgets tightened in uncertain economic times. Whether the return to more normal demand is relatively rapid as it was after 9-11 or occurs over the course of one or more years as it was after the 2008 financial crisis is unknown at this time. Conversely, we now anticipate that hotel supply growth will be limited for the foreseeable future, which can be beneficial for our existing hotels. As we speak today, it is still uncertain what it will look like J.D. J.D. Some of which may be temporary and some of which might become the new operating standards in the future. Regardless of how this unfolds, I am confident that our hotel division president, Michael Evans, and his outstanding team will effectively manage this reopening process. And we look forward to welcoming guests through our hotel, restaurant, and bar doors as soon as safely possible and delivering services that align with demand at that time. The timing for when all our theaters will reopen is uncertain as well. J.D. J.D. J.D. This is what happened when we pioneered recliner seating in our theaters. Capacity was reduced as a result. We believe that the exhibition industry has historically fared well during the recession should one occur as a result of the COVID-19 pandemic. And we remain optimistic that the industry will rebound and benefit from pent-up social demand as home sheltering subsides and people seek togetherness in an attempt to return to normalcy. A return to a new normal may span multiple months driven by staggered theater openings due to governmental limits, reduced operating hours, lingering social distancing requirements, and a gradual ramp up of consumer comfort with public gatherings. J.D. J.D.

J.D. J.D.

J.D. J.D. J.D. J.D. We believe that these select few instances are isolated and were a response to the immediate circumstances of nearly 100% of movie theaters being closed worldwide do not reflect the change in permanent distribution plans of these studios. Other films with greater expected box office potential from these same studios were delayed rather than released early, and comments from the film community in general have been very supportive of the importance of the theatrical experience. Are there always discussions around distribution strategies? Yeah, sure there are. But it's important to remember that the exhibition industry has been an $11 to $12 billion industry in the U.S. and approximately $40 billion worldwide. The film studios derive a significant portion of their return on investment in film content from theatrical distribution. In fact, just this past week, the head of Sony said the following, and I quote, There is no economic model. It doesn't exist to recover the size of the investment in a big theatrical movie without theatrical revenue. We believe distributing films in a movie theater will continue to be an important component. J.D. J.D. Just telling time and always. When we get through this storm, and we will get through this, I think people will want to do all the things they used to do. Go outside, go out to dinner, see a movie, meet with customers and travel. Perhaps they will value it even more. And when that happens, we will be there for them. With that at this time, Doug and I would be happy to open the call up for any questions you may have.

And we'll go first with Jim Goss with Barrington Research.

Thanks, and good luck to all of you through this crisis. I was wondering if you could talk a little more about the nature of the reopenings on the hotel side versus the theatrical side. It would seem like the theaters could pretty much open simultaneously at some stage, but the hotels... J.D. J.D. J.D.

I think uneven, yeah, I think that's the word. I think they'll be generally uneven depending on the market. So if you look at a market like Milwaukee, might we open all three hotels at the exact same time? Probably not. We might, you know, phase in as demand. And that's just unique to us, right? As demand builds, we'll be able to respond to what's coming. And frankly, each market will be separate in that regard. You're right, a little more homogenous. However, still, I think that we won't open everything all at once. I don't think we're just going to flip the switch because we're going to be testing and trying, again, things to see how they're working, to understand. Again, to take the efficiencies of demand, we might not have every complex open on the market right away, but it would move faster than hotels, I think. But frankly, we just don't know.

Again, all demand-dependent.

Speaking to your question about the contactless experience, so we've got this focus on what we call low to no contact. How do you make that whole experience? And really, in either of our businesses, and they both lend themselves to it with technology, a low to no contact experience for the customer. In the theater side, you can start off and you can order your ticket on your phone and J.D. J.D. J.D. J.D. J.D. J.D. You know, the one thing we've been talking about as we talk to municipalities about this, you know, because I think that they think about these, you know, more along the lines of a concert facility. But in a way, these are much different than that. We don't have a thousand people all showing up at one time. You know, we're able to spread the shows out Thereby, we make sure who goes in the lobby, who doesn't go in the lobby. You can keep that at a very low level because you're just letting, just done through show scheduling. The other thing, you get into a movie theater and you don't talk. You just sit there quietly. There's no air being expelled other than just your breathing, but really, it's not a more... emphasized kind of thing. So it's an environment that we think can be properly addressed through good social distancing.

Okay. Thanks for going through all that. Maybe my last question then would be the $64,000 question is your opinion about customer attitude toward taking the, quote, risk of attending even if you are socially spaced and whatever approaches you might have to mitigating or reducing those concerns. Do you intend to funnel people through a channel and take their temperatures or something of that nature? Or are there other things you have in mind? You've gone through quite a bit already, but are there any other opinions you have about the attitude J.D.

And there'll be a very visual sanitation process going on so that people can see that this is a clean environment. This is so that, and our employees' temperatures will be taken. They will, you know, when they come to work, so that we know that our employee base is going to present a safe environment J.D. that we've created a safe environment for everybody. So I think that that's how we'll get there.

All right. Well, thank you very much. Appreciate it.

Next, we will have Mike Hickey with The Benchmark Company. Please go ahead.

Hey, Greg, Doug. Hope you guys are... Doing good here, definitely unprecedented challenges. But look, solid execution from your team, so tough work. Thank you, Mike. I guess as you think about reopening here, can you give us some perspective on revenue or attendance that you need from your theater and hotel segments to be cash flow positive?

Mike, I'll start with, so on the hotel side, and this kind of follows on a little bit as well to Jim's earlier question, there is not a one-size-fits-all answer to that question. And it was evidenced by the fact that we closed, we didn't close them all down initially as well. So a property, a big box property with lots of outlets, et cetera, and J.D. J.D. J.D. J.D. Keep in mind that when we close, and a lot of times people ask us about occupancy, and while certainly occupancy is important, rev par is more important. Rev par is the combination of raise and occupancy. And so we'll be doing, we are doing, and we will continue to do a lot of analysis, and we're in the process of really trying to get a good handle on that right now to understand for each property, What the right rev power, what the right occupancy levels need to be in order to be, you know, in order to reach that point where it's incrementally time for us to be opening up. And so it really will be a hotel by hotel decision and market by market. Look, I mean, you've all heard the statistics. I mean, the quote-unquote occupancy statistics that are sometimes attributed to the theater industry that talk about total occupancy being, you know, 20% or give or take. I mean, I've heard 20 to 30. I've heard different numbers. But, of course, that number doesn't mean a lot when you look at it in total because, as we addressed in our prepared remarks, J.D. J.D. J.D. and adapt to the situation by in turn going to different show times, going to different days as well. So there's a lot that goes into that analysis as well, and we're not going to state that there's some given revenue number. That also could be, as Greg indicated, we'll be looking very closely at the markets, and there could be scenarios where maybe not initially, not every theater could open in a market. There could be markets where they all open at once. So it's a long-winded answer to say that there's not a single number that we can share with you that says that's the magic point where we now reopen.

Because another thing, too, to build on that, Doug, to build on that just a little bit is going to be just, again, we will react to what's coming in the door in a hotel if it's a certain percentage if we're doing a certain IAR and occupancy. We will provide a service that is commensurate with what's coming in. It may not be the service that we had before. It's still a high level of service, but it will just depend on, as I said, on what we've got. We'll have the right side of the ship to what's coming in. And by the way, just on that theater side thing, just to make it more clear in case it wasn't clear, to go back, the experience we were talking about with the recliners is since we were among the first in a lot of our markets to put recliners in, J.D.

Appreciate that, guys. I guess, again, on your reopening, you mentioned increase in demand. I guess that's not impossible to measure when you're closed. You can look at economic considerations, slave, et cetera, peers. But when you think about reopening, obviously there's an expense there. Of course, you anticipate inflecting and being cash flow positive. But I guess how do you factor in what appears to be J.D.

I guess I would say that it's really hard to have any idea what that might look like or when that might come or will there be a therapeutic before that happens. That's so hard. So for us, and this is where I'll pass to Doug as I say, what we want to make sure is that we have the balance sheet to be able to make work through whatever that might be because that's the unknown, and that's why our balance sheet is the way it is. I'll let Doug take it from there.

Well, the only other thing I would add, Mike, is that it also harkens back to some of our comments earlier, is that we see technology as being an important part of this because that can also help from a cost perspective and a cost structure perspective. We were focused on that before this happened. Before this all happened, what did you hear from us call after call? Our biggest opportunity was to deal with labor costs and shortage of labor and just in general labor costs and rising labor costs. Well, the fact of the matter is that technology could help us in this situation staff properly and have a cost structure that still allows us to have it be Thanks, Doug.

The last one from me on that point, assuming we get back to sort of a more normalized future, which I'm sure we will, and you sort of use this disruption to embrace change with technology, what kind of Is this meaningful to sort of your future profitability profile compared to what it's been historically?

You know, Mike, again, I mean, we don't know. I mean, if the fact of the matter is that if a larger percentage of customers embrace ordering their food, for example, their concessions, that certainly could impact how we staff I don't have numbers to share in terms of saying that, well, if all of a sudden 20% or 30% or 40% or whatever the percentage is, but we certainly think that that would be overall helpful, and we thought that was the case before this happened.

That's why we were developing the software we were developing. I do think that we're ahead of a lot of the industry actually in this. Because of the labor markets, we were like, yeah, we need to be able to employ technology to the best of our abilities. So that's why we were in a position actually right now to be able to literally flip the switch to say, okay, all of our theaters you can order online. We had to put a little bit of technology in some of them, but for the most part, We've been thinking that way, so this just accelerated that. Thanks, guys.

Ladies and gentlemen, as a reminder, to ask an audio question, please press star 1 on your touch-tone telephone. Again, that's star 1. We will now take Eric Wold with B. Riley.

Thank you. Good morning, Greg and Doug. A couple questions, you know, not to harp on, I think, from the same ones that have been asked every which way to Sunday already, but I guess on the, on kind of the reopening plans of hotels, you know, I guess trying to understand kind of the thought on how you'd make the decision, because clearly you've got to turn on the switch to begin accepting reservations for a certain date before you may know what demand is starting on that date for, you know, hotel occupants. So I guess, are you looking at You know, when flights start kind of getting rebooked again, when events start kind of coming back into play in Milwaukee, other markets, what kind of gets that decision point to where you want to flip on and start taking reservations? And then how easy is it to initially, you know, staff a hotel at low levels? Clearly you can open half the floors and offer half the rooms and kind of commensurately kind of bring in half the cleaning staff and How easy is that to do versus a fear?

Well, it depends on how we know. That is the big question, how we know when the right time is. I think, look, as the economies start to open up, we will start to see a demand for travel. And you can look at the other countries to see sort of as they open themselves up sort of what that curve had looked like.

So we've got some level of guidance that will be a part of that.

It will then also have bearing on where these properties are. So for example, the Grand Geneva is really a drive-to property. So for us, we actually think that as people become comfortable with traveling, and we do believe that leisure is going to be the first travel to come back. So that's where we're going to be looking. So as the leisure guest says in Chicago or Milwaukee or in the other sort of Midwestern areas around here, he says, I'd like to just get away. I've been locked in my house for the last number of months. I want to get away to just take a couple days, go somewhere. A resort like the Grand Geneva is actually easy to get to. You don't have to get on a plane to go there. And for most of our properties, they're not in gateway markets yet. So we're not international markets, so we're not sitting there waiting for the international flights to book up again. So I think that there's going to be a fair amount of emphasis on drive-to business. And again, it starts with leisure. But again, we're just going to have to wait and see and watch and see as the economies open up. And as I said, we can use guidelines. such as what's come out of Asia and Europe as they've started to reopen their economies and their lodging facilities. It's a gradual growth, but it does grow into – you start to see business show up again. And then – I'm sorry, what was the other question? Just kind of on the ease of operating on lower staffing. It's not easy, but I know our teams are working very hard on it. and trying to figure out what is the right amount of staffing to be able to put in place as we start things off. We won't have, for example, we're not going to have at first as much banquet business because it's given sort of the way the world is going. There will probably start to be some that we would socially distance, that kind of a thing. But we will just bring staff back as the business demands it.

Okay. And then second question, the last question I guess on the feeder side, I know you've done a great job in past years with the $5 Tuesday promotion and kind of shifting attendance into that slot and kind of making it a new big day of the week. And there's been talk about obviously consumers naturally migrating to the other days in this post-COVID environment. Would you try to kind of help that migration? I mean, do you see a room to kind of, you know, maybe not necessarily promote but somehow kind of, you know, proactively push people to go to Monday, Wednesday, Thursday, not only to spread attendance but also possibly to ease the burden on your staff in kind of that post-COVID environment and kind of reduce kind of the pressure kind of on you guys as well?

We haven't made plans to yet, but I wouldn't doubt that we might do some stuff like that. We're going to have to get a look and see what the business looks like and get in there.

What I would add, Eric, is that, look, this is another case, this is another situation where having a loyalty program with now 4 million members really pays off because we have the ability to communicate. And so we have been, during this time of being closed, as you can imagine, we have kept in touch with our customers and we have continued to try to keep them engaged. And so it's already proved extremely beneficial just in this time. And if we were to decide to do things along what you're suggesting, that would be a vehicle that would allow us to do that. And so it's once again a case of where that – I'd like to echo a previous caller on the solid execution from your team. It sounds like

You are doing the most with the hand you've been dealt, so kudos to you. Most of the questions have been answered. I guess I've just got one. Any conversations with vendors, supply chain, issues that may come up as you plan on reopening, anything on that front?

In terms of what kind of issues?

Well, you know, maybe inability for them to provide as they have in the past. Maybe if they're struggling along the lines of staffing or whatever it might be. I'm just thinking, you know, outside the box a little bit.

I mean, we've been in constant contact with all of our key vendors through this process, Ryan, and obviously J.D. J.D. J.D. J.D. J.D. J.D. J.D.

kind of giving a picture for what it might look like when you do reopen. Maybe a limited menu? I'm just thinking here.

Well, I think our menus might be a little bit limited when we open, not necessarily because of just the inability to get something, but more along the lines of just trying to keep the process easy, to be able to properly social distance, things like that. You know, that's where we might start, not because we're having vendor issues. Okay. And we'll just adjust the venue.

Right. Okay. That answers my question. Thanks a lot, guys.

Thank you, Ryan.

Thank you. At this time, it appears there are no further questions. I'd like to turn the call back to Mr. Nice for any additional or closing comments.

Well, we'd certainly like to thank all of you again today for joining us. Tomorrow we'll be holding our first-ever virtual annual meeting at 9 a.m. Central Time. Interested parties can listen to a live audio webcast and view presentation slides by logging on to the Investor Relations section of the company's website, www.marcuscorp.com, or through the direct link that's provided in our press release that was dated April 15, 2020, and selecting Guest when logging in. Shareholders can log in with the control number that was provided on their proxy card. We also look forward to talking to you once again in approximately three months when we release our fiscal 2020 second quarter results. Until then, thank you, and stay safe, stay healthy, and please have a good day.

That concludes today's call. You may disconnect your line at any time.