Marcus Corporation (The)

Good morning, everyone, and welcome to the Markets Corporation Second Quarter Earnings Conference Call. My name is Cree, 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 the conference. If at any time during the call you require assistance, please press star zero, and an operator will be happy to assist you. As a reminder, this conference is being recorded. Joining us today are Greg Marcus, President and Chief Executive Officer, and Doug Nice, Executive Vice President, Chief Financial Officer, and Treasurer of the Marcus 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. Good morning, everybody. Again, welcome to our Fiscal 2021 Second Quarter Conference Call. As usual, you know I need to begin by stating that we plan on making a number of forward-looking statements in our call today, all of which we intend to qualify for the safe harbors from liability established by the Private Securities Litigation and Reform Act. Our forward-looking statements may generally be identified by our use of words such as we believe, anticipate, expect, or words of similar import. Forward-looking statements are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those expected, including but not limited to to the adverse effects of the COVID-19 pandemic on our theater and hotels and resorts businesses, results of operations, liquidity, cash flows, financial condition, access to credit markets, and ability to service our existing and future indebtedness, and the duration of the COVID-19 pandemic and related government restrictions and social distancing and level of customer demand following the relaxation of such requirements. Our forward-looking statements are based upon our assumptions which are based only upon currently available information, 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, and our assumptions about the release of new movies 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, And 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 2021 second quarter results, and in the risk factors section of our fiscal 2020 annual report on Form 10-K, which you can access on the SEC's website. And we'll also post our Regulation G disclosures when applicable on our website at www.marcuscorp.com. So with that behind us, let's begin this call. As usual, our format will be that I'll start by spending a few minutes briefly sharing a few numbers from our quarter with you, and I'll also discuss our balance sheet and liquidity. I'll also then turn the call over to Greg, who will focus his prepared remarks on where our businesses are today and what we're seeing for the near term and longer future. We'll then open the call up for questions. So you've seen the numbers. The recovery continues, and maybe even at a little faster pace than projected. We're obviously comparing our results this quarter to a quarter where most of our properties were closed for the majority of the quarter last year. So as I go through some of these numbers, I will sometimes reference comparisons to pre-pandemic numbers in fiscal 2019 in order to help gain some added perspective. We did have a few non-recurring items this quarter and last year, and all of which were detailed in a non-GAAP reconciliation that we included at the end of the press release. The small impairment charge we took this quarter is related entirely to certain surplus theater real estate that we're actively marketing for sale. As you probably know, in GAAP accounting, you never write an asset up if you believe you may sell it for a gain, and we certainly have assets that fall into that category. But you're required to write an asset down if you believe you may sell it for a loss. The impairment charge we took this quarter comes from over a half dozen individual assets with none of the individual charges being particularly large. I think the lead story of the quarter comes from the non-GAAP adjusted EBITDA measure that we shared with you in the release, which adjusts for items like the impairment charge that is discussed and gives one look at how our businesses perform from a cash flow perspective. As I discuss adjusted EBITDA, I do want to refer you to the disclosures we provided in the press release regarding the use of this non-GAAP measure in evaluating our performance and its limitations. As you know, our negative EBITDA has been gradually improving each quarter since bottoming out during the second quarter last year at negative $30 million. We took a really big step forward during the second quarter this year, improving our negative adjusted EBITDA of over $17 million during the fiscal 2021's first quarter, improving from that number and coming in at just over $1 million of breaking even on this very important metric during the second quarter. Now, breaking that number down even further, as our press release notes, I'm happy to tell you that our Hotels and Resorts Division had positive adjusted EBITDA for the entire second quarter. And for the first time since the onset of the pandemic, both divisions and the company as a whole delivered positive adjusted EBITDA for the month of June, a huge milestone in our continued recovery from this terrible pandemic. Greg will go into a little more detail about these improvements in his remarks. Getting back to the financial statements for just a second, there shouldn't have been anything particularly surprising about our numbers below operating income. As you'd expect, our interest expense increased during the second quarter and first half of the year due to increased borrowings and a higher average interest rate. It's very important to note, however, that our fiscal 2021 second quarter and first half interest expense included approximately $600,000 during the second quarter of non-cash amortization of debt issuance costs, compared to only about $100,000 to $150,000 of such costs during last year's comparable periods. Shifting gears away from the earnings statement for a moment, our total cash capital expenditures during the first half of fiscal 2021 totaled approximately $6 million. Most of these dollars were spent on two projects, a theater renovation and a lobby renovation at our Grand Geneva Resort and Spa. We'll continue to keep capital expenditures relatively low in the near term, but we will be prepared to increase expenditures in subsequent quarters and certainly in the 2022, assuming conditions continue to improve. So let me provide some brief financial comments on our operations for the second quarter and first half, beginning with theaters. We continue to experience increased per capita spending in our theaters. Our average admission price at our comparable theaters has now increased 7 percent during the first half of fiscal 2021 compared to last year. Our premium large format screens continue to outperform compared to our regular screens, contributing to this overall increase in our average admission price. Meanwhile, our average concession and food and beverage revenues per person at our comparable theaters increased by 17.2 percent for the first half of the year. Shorter lines at the concession stand, our emphasis that we're placing on encouraging guests to purchase concessions and food and beverage items ahead of time, either online or using our mobile app, and possibly pent-up demand for just a general return to normal likely has contributed to our increased per capita revenues. Since most theaters in both our circuit and the industry as a whole were closed during the second quarter last year, We believe a comparison of our results to pre-pandemic results in fiscal 2019 may be the best way to compare our performance to the industry this quarter. When you compare our second quarter and first half admission revenues to fiscal 2019, we calculate that our admission revenues were down 70% during the second quarter and nearly 75% for the first half of fiscal 2021, both compared to 2019. Now, according to data received from Comscore and compiled by us to evaluate our fiscal 2021 second quarter and first half results, United States box office results decreased 73.9% during the fiscal 2021 second quarter and 80% during our fiscal 2021 first half, both compared to U.S. box office receipts during fiscal 2019. As a result, we believe our admission revenues decline outperformed the industry average by approximately 4 percentage points during the quarter and approximately 5 percentage points during the first half of the year. Shifting to the hotels and resorts division, the same logic applies. Comparing our total revenue per available room, or REVPAR, to last year, when most of our hotels were closed for the majority of the second quarter, does not provide particularly meaningful numbers. We believe comparing the same metric to pre-pandemic levels in fiscal 2019, however, does help provide perspective on the pace of the current recovery. Our rev par for our seven comparable owned hotels decreased approximately 42% during the second quarter and 47% during the first half, compared to the same periods during fiscal 2019. Now, these numbers exclude the St. Kate, which was closed for most of the first half of fiscal 2019. According to data received from Smith Travel Research for the fiscal 2021 and fiscal 2019 periods, and compiled by us in order to compare our results, our hotels outperformed comparable upper upscale hotels throughout the United States during the second quarter and first half by approximately four and eight percentage points, respectively. The data also indicates that our hotels outperformed competitive hotels in our markets by by approximately 7.8 points during the second quarter and first half, again, compared to fiscal 2019 results. Breaking out those second quarter numbers for the seven comparable hotels more specifically, our overall rev par decrease during the fiscal 2021 second quarter compared to fiscal 2019, again, pre-pandemic, was due to an overall occupancy rate decrease of approximately 27 percentage points, and an 11.8 percent decrease in our average daily rate, or ADR. Our average second quarter occupancy rate for our owned hotels was approximately 49 percent, with lighter midweek business partially offsetting quite strong weekend occupancies at most of our hotels. Finally, before I turn the call over to Greg, let me also briefly comment on our balance sheet and liquidity position. You may recall that we reported cash and revolving credit availability of approximately $213 million at the end of the first quarter. Well, thanks to continued strong cost controls at every level of our organization and improved operations, our cash and revolving credit availability was still an extremely strong $210 million at the end of our fiscal 2021 second quarter. We anticipate an income tax refund of approximately $24 million in the second half of the year, along with tax loss carry-forwards that may be used in future periods. We also successfully monetized two life insurance assets early in our fiscal 2021 third quarter, totaling over $18 million, and anticipate sales proceeds from real estate sales in the upcoming quarters as well, further increasing our liquidity and strengthening our balance sheet. We have over $10 million of carrying value and assets currently under contract or letter of intent to sell later in 2021. Early in our third quarter, we amended our revolving credit agreement and made an early payment on our term loan facility, reducing the balance of our short-term borrowings from approximately $84 million to $50 million and extending the maturity date of this remaining term loan facility to September of 2022. We also favorably tweaked our existing debt covenants all the way through fiscal 2022. Our confidence in our strong balance sheet and our significant liquidity allowed us to make this early payment on our term loan. Once again, our conservative, long-term approach to our balance sheet continues to pay off, and we're confident that we're well-positioned to weather any remaining impacts of the pandemic and be in a position to come out the other side of this in really good shape. With that, I'll turn the call over to Greg.

Thanks, Doug. As you saw in the release and heard more about in Doug's remarks, our second quarter marks a continued emergence from the depths of the pandemic for the Marcus Corporation. We reached a milestone in our hotel division with positive adjusted EBITDA for the quarter. And while we don't normally highlight the results of any specific month, in June we reached another milestone with both our theater division and our company as a whole turning positive cash flow for the month. Contrast that with where we were a year ago at this time, when we reported negative adjusted EBITDA of $30 million in the second quarter. We've come a long way. Now look, we're still reporting a loss for the quarter, and it will definitely still take some time to return to pre-pandemic levels. But what we're all looking for is progress. And there was a lot of progress to hang our hats on during our fiscal 2021 second quarter. As I said from the beginning, While the path to a full recovery might not be a straight line, and the pace of that recovery might be either faster or slower than expected at times, we believe in the long-term viability and strength of our businesses. This quarter was another step on that journey, and we're pleased to be sharing these results with you today. So let me start my remarks with our hotel division. Doug shared some of the numbers with you, including comparisons to our pre-pandemic fiscal 2019 numbers and the fact that the data indicates that but we've once again significantly outperformed both the industry and our competitive sets this quarter. As you know, our hotels have consistently outperformed their markets in prior years as well, but the amount of outperformance in recent quarters has widened significantly. And while an overall occupancy rate of approximately 50% during the second quarter is certainly below where we were in 2019, I can honestly say that our performance in this division has surprised us to the positive each and every month so far this year. The leisure customer is out in force, and our team has done an outstanding job adapting to the temporary reduction in business and group travel, successfully filling our hotels on weekends. And with the advent of summer, our weekdays are doing much better as well. The outperformance is also a direct reflection on the quality of our hotels and resorts. Stated simply, we have always had some of the best properties in our respective markets, and it doesn't surprise us that they've outperformed during this period of recovery. We've highlighted the strong performance of the Grand Geneva Resort and Spa on prior calls, but that's not the only property currently exceeding expectations. As we noted in our release, not only did we report positive adjusted EBITDA in this division during the second quarter, but several of our properties also reported positive operating income. We certainly still have a ways to go with transient business and group business. But even there, we are encouraged by noticeable improvements in these two business segments as well. We continue to have a very strong wedding season, and we are experiencing increases in smaller group business as well. We also continue to have success booking major league baseball teams, and not surprisingly, the Milwaukee Bucks playoff run to the NBA championship was not only great for the city, but also a nice boost for our Milwaukee hotel business in June and July. The next step is the gradual reopening of offices in our downtown markets. which would likely be accompanied by an easing and ultimately lifting of travel bans that so many businesses put in place during the pandemic. While this might be delayed slightly with the recent uptick in cases, that next step is coming. Our significantly improved second quarter numbers are also a direct result of the continued hard work of our entire hotel team. They continue to do a fantastic job of managing cost and providing the same superior service we are known for, all in the midst of what most would agree is a very challenging labor market. Looking to future periods, our group room revenue bookings for the remainder of fiscal 2021 and into fiscal 2022, commonly referred to in the hotels and resorts industry as group pace, is currently running approximately 20% behind where we would historically be at this time in prior years. But that's quite an improvement from where we were earlier in the year, as our booking activity continues to improve each week. Banquet and catering revenue pace for the remainder of fiscal 2021 and into fiscal 2022 is also running behind where it would typically be at this time in prior years, but not as much as group room revenues, due in part to the strength of wedding bookings. It is our hope that as we get to the fall and midweek leisure travel subsides as kids go back to school, we'll also be experiencing continued improvement in the various business segments. Overall, we generally expect our revenue trends to track or hopefully continue to exceed the overall industry trends for our segment of the industry, particularly in our respective markets. As I said in my opening comments, we know it will take a while for business travel to return to normal, but the speed with which overall travel has ramped up bodes well for the long-term future of our hotel business. Many of our assets don't depend solely on business travel. These are special assets that make our portfolio unique. Let me end my remarks by congratulating our hotel team on the recently announced addition of a new management contract. The Coralville Hotel and Conference Center, soon to be a Hyatt Regency, and located near the University of Iowa, is a great addition to our portfolio. With two other hotels in the Big Ten cities of Madison, Wisconsin, and Lincoln, Nebraska, we think we're a great fit for this property, and we look forward to a long, prosperous relationship with the city of Coralville. So let's shift to our theater division. Doug went over the numbers with you. We started the quarter off with 74% of our theaters open as we waited for more new films to be released. By the time we got to Memorial Day weekend and the release of Quiet Place Part II and Cruella, we had reopened most of our remaining theaters. As we note in our release, we currently have 97% of our theaters open again, almost all of which are operating seven days a week with normal operating hours. Like our hotel division, one of the highlights of the quarter was our continued outperformance versus the industry. As Doug shared with you, Based on industry data available to us, we believe we've outperformed the industry throughout fiscal 2021 and week in and week out. We believe we've been one of the top performing feeder circuits in the US compared to the top 10 circuits that we track on a regular basis. Additional data received and compiled by us from Comscore indicates our admission revenues during the second quarter and first half of fiscal 2021 represented approximately 3.4% and 3.7% respectively the total admission revenues in the u.s during the same two periods this is commonly referred to as market share in our industry this represents a material increase over our reported market share of approximately 3.2 percent during the comparable periods of fiscal 2019 prior to the pandemic a great job all around by the team i mentioned earlier that we were looking for continued progress in both of our businesses so here are another couple of numbers for you In January of this year, our total theater division revenues were only 16% of our theater division revenues in January of 2019, prior to the pandemic. While clearly we still have a ways to go in June of this year, thanks to increased attendance and increases in our average admission price and average concession revenues per person, our total theater division revenues had increased to 48% of our theater revenues of June in 2019. That's progress. And we've seen that percentage continue to gradually increase in the early weeks of July as well. That doesn't mean we aren't still facing some challenges in the near term. Recent surveys by the National Association of Theater Owners have indicated that the percentage of those surveyed saying they're very or somewhat comfortable going to the movies right now has been hovering in the 70-plus percent range in recent weeks, with likely concerns over the Delta variant and new masking recommendations in some markets dropping that percentage down several points in recent weeks. But the same percentage was about 47% at the beginning of the year, So again, taking a step back in the big picture, progress. The fact that we're not completely out of this yet as a country has also contributed to continued experimentation on the part of the studios of different distribution strategies. The studios have clearly chosen to use this unique time to develop their streaming services, which frankly is likely more of a challenge for their linear TV in the long run than exhibition. We recognize that it's hard to interpret the various box office numbers being reported while we're still not back to normal. It's hard for you and it's hard for us. But let's step back and take stock of a few of the things that we do know. There has never, ever been a permanent pandemic. It won't always be like this. We as human beings are social creatures. We have an inherent desire to interact with others, be together, get out of the house. You've heard me quote my grandfather numerous times. There's a kitchen in every house, but people still go out to eat. Going to the movies remains one of the cheapest forms of out-of-home entertainment. Linear TV and streaming are relatively substitutable. Going to a movie theater is not. It is a completely different experience from your home. And the people who make these films, the producers, directors, actors, have continued to express their agreement with that basic principle. Just yesterday, David Zasloff, soon to be CEO of Warner Discovery, said the following, and I quote, The motion picture business is not going away. It is the top of the patina. It is why the greatest writers... producers and creative talent came. When you look up at that big screen, that is where stars are made and where their magic happens. And finally, theatrical exhibition still represents an extremely important component of the financial model of a film and its distribution. Theatrical exhibition gives a film gravitas that can't be achieved with a tile on a TV screen. Theatrical exhibition spurs millions of people to collectively seek a shared experience on any given weekend. creating that water-cooler moment on Monday that every content provider seeks. Theatrical exhibition creates franchises like nothing else can, and most importantly, theatrical exhibition makes money for the studios. My point is that our focus on our theater division continues to be on managing through the short-term challenges, all while keeping our eye on the long-term. And we believe in the long-term prospects of this business. This remarkably resilient business has navigated and adapted to change for the entire 85 years we've been in it, and I'm confident that we will continue to adapt and thrive in the months and years ahead. And speaking of the months ahead, there are a lot of potentially very good movies scheduled to be released during the remaining months of fiscal 2021. We listed a number of them in our press release, and the list of films scheduled for 2022 reads like a who's who of successful film franchises. So I'll wrap this up exactly where I started. We're pleased with the significant improvements we reported today in our theater business, and we're looking forward to continued progress in the periods ahead. And I can't end my prepared remarks without saying once again that I continue to be thankful for our experienced and dedicated associates throughout our organization. Thinking back to where we were a year ago at this time, it's incredible what this amazing team has accomplished. I couldn't be more proud. With that, at this time, Doug and I would be happy to open the call up for any questions you may have.