Marcus Corporation (The)

Good morning, everyone, and welcome to the Marcus Corporation's third quarter earnings conference call. My name is Mel, 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 toward the end of this conference. If at any time during the call you require assistance, please press star zero, and an operator will be happy to assist you. And 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 and Chief Financial Officer of the Marcus Corporation. At this time, I'd like to turn the program over to Mr. Nice for his opening remarks. Sir, please go ahead.

Well, thank you very much, and good morning, everybody. Welcome to our fiscal 2021 third quarter conference call. As usual, 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 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. Our 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 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 requirements and various other mandates and the level of customer demand following the relaxation of such requirements. Our forward-looking statements are based upon our assumptions and 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, restaurant closures are not expected 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. Additional factors, risks, and uncertainties which could 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 third 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. 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. Our call will follow the usual format, where I start by spending a few minutes briefly sharing a few numbers from our quarter with you, and we'll also discuss our balance sheet and liquidity. I'll then turn the call over to Greg, who will focus his prepared remarks on where our businesses are today and what we're seeing ahead, both short and long term. And we'll then open the call up for questions. Well, you've seen the numbers. It truly is a pleasure to be reporting to you today that we hit a couple of major milestones this quarter. For the first time since the COVID-19 pandemic outbreak, now over 19 months ago, we're thrilled to be reporting both positive adjusted EBITDA and positive net earnings for the quarter. Needless to say, we've been looking forward to this day. The third quarter numbers in this morning's release obviously compare our results this quarter to the third quarter last year, where the majority of our properties were either closed for a large portion of the quarter or were operating under pretty distressed conditions. As a result, as I go through some of these numbers, I will sometimes reference of comparisons to pre-pandemic numbers in fiscal 2019 in order to provide some added perspective. Now, we did have a couple of non-recurring items this year and last year, all of which are detailed in a non-GAAP reconciliation we included at the end of the press release. And as we discuss adjusted EBITDA in our remarks today, 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. So, what a difference a year makes. During our third quarter last year, we reported adjusted EBITDA of a negative $25.8 million. This year, we're reporting adjusted EBITDA of a positive $24.5 million, a swing of over $50 million. We'll be providing a breakdown of these adjusted EBITDA numbers by operating segment in our Form 10Q that will be filed by next Tuesday, but as a preview, I'm happy to share with you that the nearly $25 million of adjusted EBITDA this quarter includes approximately $17 million from our Hotels and Resorts Division and nearly $11 million from our Theaters Division, partially offset by unallocated costs in our corporate segment. This is the second straight quarter that our Hotels and Resorts Division reported positive adjusted EBITDA, and it's the first time our Theory Division has produced positive adjusted EBITDA for a quarter since the pandemic hit. Now, getting back to the financial statement for a second, there were a few variations in our numbers below operating income, just worth briefly mentioning. As you'd expect, our interest expense continues to run higher during the third quarter and first three quarters of the year compared to prior years due to increased borrowings, a higher average interest rate, and an increase in non-cash amortization of debt issuance costs. Now, offsetting that increase in expenses, however, was an increase in gains from disposition of property, equipment, and other assets this quarter due to the sale of several parcels of surplus land. In addition, last year during the third quarter, we reported a larger loss from unconsolidated joint ventures, resulting in a favorable variation this year. Shifting gears away from the earnings statement for a moment, you probably saw in the supplemental information that our total capital expenditures, cash capital expenditures during the first three quarters of fiscal 2019 totaled approximately $9 million. And a large portion of these dollars were spent really on two projects, a theater renovation and a lobby renovation at the Grand Geneva Resort and Spa, with the rest really going towards normal maintenance projects. We'll continue to keep capital expenditures relatively low for the remainder of this year, but we will be prepared to increase expenditures in 2022, assuming conditions continue to improve. Let me now provide some brief financial comments on our operations for the third quarter and first three quarters, and I'll start with the theater division. We continue to experience increased per capita spending by our customers in the theaters. Comparisons to last year's third quarter are not particularly useful, given that most of our theaters were closed during July and August last year, but our average admission price at our comparable theaters has increased 6.1% during the first three quarters of fiscal 2021 compared to last year, and has increased 8.4% compared to the first three quarters of fiscal 2019. 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 15.7% for the first three quarters of the year compared to last year, and have increased by 24% compared to the first three quarters of fiscal 2019. Our industry-leading mix of non-traditional food and beverage options, shorter lines at the concession stand, the emphasis we're placing on encouraging guests to purchase their concessions and food and beverage ahead of time, either online or using our mobile app, and possibly this pent-up demand for a return to normal likely has contributed to our increase per capita revenues. Since most theaters in both our circuit and the industry as a whole were closed during large portions of the third 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. So when you compare our third quarter and first three quarters admission revenues to fiscal 2019, you'll see that our admission revenues were down approximately 45% during the third quarter and are down approximately 65% for the first three quarters of the year, both compared again to fiscal 2019. Now, according to data that we received from Comscore and compiled by us to evaluate our fiscal 2021 results, United States box office receipts decreased nearly 53% during our fiscal 2021 third quarter, and approximately 71% during the fiscal 2021, our fiscal 2021 first three quarters, both again compared to U.S. box office receipts during fiscal 2019. So you can do the math. As a result, we believe our admission revenues decline, our admission revenue decline that we just reported outperformed the industry average by nearly eight percentage points during the third quarter and approximately six percentage points for the first three quarters of fiscal 2021. Now, shifting to our hotels and resorts division, the same kind of logic applies. Comparing our total rev par or revenue per available room to last year does not really 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 REVPAR for our seven comparable owned hotels decreased just around 12% during the third quarter and approximately 33% during the first three quarters compared to the same periods during fiscal 2019. Now, these numbers exclude the St. Kate, which had just reopened during the third quarter of fiscal 2019 and it was closed for major portions of the year for the first three quarters of fiscal 2019. Now, according to data that we've compiled from Smith Travel Research for the fiscal 2021 and fiscal 2019 periods, in order to compare our results, our hotels outperformed comparable upper upscale hotels throughout the United States during the third quarter and first three quarters by a significant 14 and 11 percentage points respectively. The data also indicates that our hotels outperformed competitive hotels in our markets by approximately seven and eight points, again, respectively, for the third quarter and first three quarters of the year compared to fiscal 2019. Now, breaking out the third quarter numbers for the seven comparable hotels a little bit more specifically, our overall REVPAR decreased during the fiscal 2021 third quarter compared to fiscal 2019 was due to an overall occupancy rate decrease of approximately 17 percentage points, offset by an impressive 10.3% increase in our average daily rate, or ADR. Our average fiscal 2021 third quarter occupancy rate, the average rate for this current quarter we're reporting, and for our own hotels was approximately 66%. Finally, before I turn the call over to Greg, let me also briefly comment on our balance sheet and liquidity position. As our press release notes, our liquidity remains extremely strong, with $197 million in cash and revolving credit availability at the end of fiscal 2021 third quarter. We're still waiting for an income tax refund of approximately $22 million, which we hope to receive in the fourth quarter, and of course we'll only further improve this significant liquidity. In addition to the monetization of two life insurance assets during our third quarter that we told you about during our last call, we also had proceeds from the sale of surplus land of nearly $5 million during the quarter as we continue to take advantage of opportunities within our substantial real estate portfolio. You'll also notice in our condensed balance sheet that we now have nearly $13 million of carrying value in additional assets currently under contract to sell later in fiscal 2021 or early 2022. Finally, just as a reminder, 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 data remaining term loan facility to September 2022. We also favorably tweaked our existing debt covenants through fiscal 2022 as well. With that, I'll turn the call over to Greg.

Thanks, Doug. Before I make a few comments on our operating businesses, I want to briefly pick up where Doug just left off. You certainly have heard us refer to our balance sheet and our real estate holdings fairly often in the past. But I think our results this quarter warrant a couple of comments about what I believe are key differentiators for the Marcus Corporation. In fact, I would argue that today's announced results are a poster child for the value we believe we've been able to gain from owning our real estate and having a diversified business portfolio. We're thrilled to be reporting a return to profitability this quarter, and I think it's fair to say this may have been faster than many had anticipated. So let's talk about this for a moment, starting with our diversified businesses. Marcus Hotels and Resorts reported a very strong third quarter with overall revenues at nearly 90% of pre-COVID numbers from the third quarter of fiscal 2019. Our theater business gets a lot of attention, as it should, but in this recovery period, From an unprecedented time for our customers and our country as a whole, our hotels and resorts business has continued to surprise us and has accelerated our overall company-wide recovery. Those of you who have followed us for a long time know that we have had multiple legs at the proverbial stool over the years. And while our business mix has and still may change over time, our diversified business model has served us well and clearly differentiates us from our theater peers. Another differentiator is our substantial real estate holdings. By owning the majority of our theater real estate, not only do we believe it enables us to be more nimble and faster to market with new amenities and other changes to our business model, but it also has a direct impact on our financial results. There is no question in my mind that one of the reasons we've been able to return to profitability as quickly as we have is due to the fact that we have a more limited exposure to fixed monthly lease payments. And here's the thing. Without leases, it might be reasonable to expect to find that we have more debt on the balance sheet than our peers, but that's simply not the case. We have the lowest debt-to-capitalization ratio of any of our theater peers by far, and that's even with the substantial hotel assets I just mentioned. Another benefit of our real estate is the fact that selected monetization of surplus and non-core real estate is provided and continues to provide an additional source of liquidity for us, further strengthening our balance sheet. Personally, I don't think we always get enough credit for the value our diversified business model, our significant real estate holdings, and our strong balance sheet provide, but I'll leave that for the market to decide. We view the world through a long-term lens. As I said last quarter, the recovery journey we are on may not always be a straight line, and we clearly are not back to pre-pandemic levels in either of our businesses yet. But I do believe unequivocally that the key differentiators for the Marcus Corporation are major strengths for our company. and have contributed to both our short-term progress and our long-term success. 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 we 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 66% during the third quarter is certainly still below where we were in 2019, I can honestly say that our performance in this division has continued to surprise us to the positive each and every month so far this year. The leisure customer was certainly out in force this summer, And as we noted in our press release, several special events, particularly in Milwaukee, contributed to our higher average daily rate and our much stronger performance this quarter. And while you've heard me say this before, it bears repeating. Our outperformance is also a direct reflection on the quality of our hotels and resorts and the operational excellence of our outstanding teams, both in the corporate office and in each hotel. Stated simply, we've always had some of the best properties and facilities. best people in our respective markets, and it doesn't surprise us that we've outperformed during this period of recovery. We certainly still have a ways to go with the business traveler and group business, but even there, there are a number of indicators suggesting that improvement may continue in these important segments. We've always believed that in order for the business traveler to return to pre-pandemic levels, it all begins with employees returning to offices. That then can lead to businesses getting comfortable with their employees getting back on the road to see clients, potential clients, remote offices, plants, etc. Available data suggests that office occupancies have been gradually increasing, and as a result, it appears travel intentions continue to rise as well. We're beginning to see that in our markets, which is encouraging. Continued progress in the business traveler segment would be particularly helpful in the coming months as the weather worsens. Leader travel returns to being more weekend-focused, and we experience our typical seasonality associated with primarily Midwestern-based hotels and resorts. As for group business, we continue to have a very strong wedding season, and we're experiencing increases in smaller group business as well. Our group room revenue bookings for 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 same time in pre-pandemic years. But that's quite an improvement from where we were earlier in the year, and the increased amount of activity and leads we are experiencing suggests to us that we may end up better than that percentage by the time we get through 2022. Banquet and catering revenue pace for fiscal 2022 is also running behind where we would typically be at this same time in prior years, but not as much as group room revenues due in part to the strength of wedding bookings. 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 in the past, our results in this division will vary by quarter due to the seasonality our properties historically experience. But on a relative year-over-year basis, we look for continued improvement during this ongoing recovery. And as I've said in the past, we believe we have special assets that make our portfolio unique and give us the ability to pivot to other customer segments where we wait for business travel to fully return. In the near term, I would be remiss if I didn't note that our hotels continue to be challenged by the ongoing labor shortage that we and many other businesses, including our theaters, are experiencing. An unusual twist, this challenge is likely helping our operating margins currently, but it is a challenge nonetheless. Our people are working extremely hard in both our businesses, and we continue to focus on opportunities to use technology to reduce our labor needs, but we will need to add staff as the recovery continues. Finally, as the press release notes, we officially took over the Hyatt Regency Coralville Hotel and Conference Center during our fiscal 2021 third quarter, and we will continue to seek opportunities to strategically grow our hotel portfolio in the future. So let's shift to our theater division. Doug went over the numbers with you, and as you saw, the steady improvement has continued in this division. We returned a positive adjusted EBITDA from this division during our third quarter, which was a major milestone for our team, and with virtually all of our theaters reopened and an increasing number of new films being released, we've continued to see good progress in the growth of our admission revenues as the recovery continues. And, as Doug pointed out, we're very pleased with the results from our concession and food and beverage portion of our business. I think the numbers really put this recovery path in perspective. It may seem like a long time ago, but we began this fiscal year with January box office results equal to only 16% of our fiscal 2019 pre-pandemic numbers. As more theaters opened, the vaccination rate increased, and film studios began slowly releasing new products. Our fiscal 2021 second quarter ended with emission revenues during the month of June equal to approximately 48% of 2019. That improvement then continued into the third quarter with both August and September producing emission revenues of 60% or more compared to 2019. And as our press release noted, that percentage relative to 2019 for both us and the industry increased quite a bit in October 2019. as more hit films were released at a faster pace, resulting in the single best month at the box office we've had since the pandemic began in March of 2020. 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 once again outperformed the industry during the third quarter, and for that matter, throughout fiscal 2021. Additional data received and compiled by us from Comscore indicates Our admission revenues during the third quarter and first three quarters of fiscal 2021 represented approximately 3.5% and 3.6% respectively of 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 3.1% during the comparable periods of fiscal 2019 prior to the pandemic. Once again, I want to call out our outstanding teams in our theaters and our corporate office. Like their counterparts in our hotel division, they've had to navigate through an uncharted period of time while dealing with some of the same labor shortages most businesses are dealing with these days. And they've done so with incredible effort and dedication. So one of the obvious questions is, where does the business go from here? We have no illusions that we're back to normal, whatever that ultimately means, but several indicators do suggest we're on the right path The pace of recovery is accelerating. First off, the October box office results show that more and more moviegoers are ready to return to seeing films the way they are meant to be seen, on a big screen with incredible sound, recliner seating, and some of the best concession and food and beverage options in the industry. Recent surveys by the National Association of Theater Owners back this up. The percentage of those surveyed saying they are very or somewhat comfortable going to the movies is once again approaching 80% after dipping into the mid-to-high 60s a couple of months ago as concerns over the Delta variant took hold throughout the country. So while there's still a portion of the movie-going audience who needs a little more time, it's very encouraging to see this percentage increase once again. Of course, another major development during the quarter was an increased commitment seen from our film studio partners to stick with their film release schedule, and just as significant, reaffirm a commitment to the importance of an exclusive theatrical window. As we all know, there's been a lot of experimenting by multiple studios during the pandemic, But as the smoke clears, we continue to believe the entire film ecosystem performs better when a film is first released exclusively in theaters. Theatrical exhibition still represents an important component of the financial model of a film and its distribution. In addition to other important benefits, theatrical exhibition spurs millions of people to collectively seek a shared experience on any given weekend. Theatrical exhibition gives a film gravitas that can't be achieved with a tile on a TV screen. theatrical exhibition creates franchises like nothing else can. Theatrical exhibition makes piracy more difficult, and most importantly, theatrical exhibition makes money for the studios. Thus, we weren't surprised when Warner Bros. indicated it intends to return to an exclusive theatrical window with a significant number of films in 2022, or when Disney announced the remainder of their 2021 films would receive an exclusive theatrical window after the success of Shang-Chi and The Legend of the Ten Rings. And when it comes to positive indicators for future performance, last but certainly not least is a really impressive upcoming film slate. We listed a number of films scheduled to be released during the remainder of the fourth quarter, beginning with Marvel's The Eternals this weekend, and the list of films scheduled for 2022 reads like a who's who of successful film franchises. As a result, we're excited about building upon the progress we've made so far in our theater division, and we look forward to continued improvement in the periods ahead. As I wrap up, I want to note that this week, we're celebrating 86 years for the Marcus Corporation. Starting on November 1st, 1935, with a single movie theater in Ripon, Wisconsin, our remarkably resilient company and collection of businesses has navigated and adapted to change for the entire 86 years of our existence. And I'm confident that we will continue to adapt and thrive in the months and years ahead. And as first said by my grandfather, Ben Marcus, when asked what he attributed the company's success to, It all starts and ends with our people. With Thanksgiving right around the corner, I want to publicly express how thankful my dad, our entire executive team, and I am for our dedicated associates throughout our organization. They are simply the best, and everything we've accomplished during this recovery and return to profitability are due to their extraordinary efforts. With that, at this time, Doug and I would be happy to open the call up for any questions you may have.