Marcus Corporation (The)

Good morning everyone and welcome to the Marcus Corporation second quarter earnings conference call. My name is Seb and I'll be your operator for today. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of the conference. If at any time you need assistance during the call 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 Chad Parris, Chief Financial Officer and Treasurer of the Marcus Corporation. At this time, I'd like to turn the program over to Mr. Parris for his opening remarks. Please go ahead, sir.

Thank you. Good morning and welcome to our fiscal 2022 second quarter conference call. I need to begin by stating that we plan to make a number of forward-looking statements on 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 the 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. listeners our caution not to place undue reliance on our forward-looking statements. The 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 2022 second quarter results and in the risk factor section of our fiscal 2021 annual report on Form 10-K which you can access on the SEC's website. We will also post all Regulation G disclosures, when applicable, on our website at www.marcuscorp.com. The forward-looking statements made during this conference call are only made as of the date of this conference call and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. In addition, we routinely post news releases and other information regarding developments at our company that impact our investors, customers, vendors, and other stakeholders. You should look at our website, www.marcuscorp.com, as an important source of information regarding our company. We also refer you to the disclosures we provided in today's earnings press release regarding the use of adjusted EBITDA, a non-GAAP measure used in evaluating our performance and its limitations. A reconciliation of adjusted EBITDA to the nearest gap measure is provided in today's release. All right, with that behind us, let's begin. This morning, I will start by spending a few minutes sharing the results from our second quarter with you and discuss our balance sheet and liquidity. I will then turn the call over to Greg, who will focus his prepared remarks on where our businesses are today and what we are seeing ahead. We'll then open the call up for questions. This morning, we reported our strongest quarter in years. with both of our businesses outperforming their markets and delivering significantly improved results. For the first time since the onset of the pandemic, we had strong momentum in both businesses. On the theater side, it is clear people of all ages want to go back to the movies. A significantly improved film slate provided an increased quantity of films that appealed to a wide variety of audiences, bringing customers to the movies in huge numbers. On the hotel side, the leisure traveler remained strong and we are now seeing the recovery of our group business accelerate. The improvement in our results compared to where we were a year ago is dramatic. Consolidated revenues more than doubled over the prior year, growing from 92 million last year to over 198 million in the second quarter this year. As a result, consolidated adjusted EBITDA increased by nearly 38 million. improving from a negative $1 million last year to a positive $37 million this year. This quarter also marks the first quarter since the onset of the pandemic in which substantially all of our operations in both businesses were open and operating for the trailing 12 months. As of the end of the second quarter of fiscal 2022, on a trailing 12-month basis, consolidated revenues were nearly $646 million and consolidated adjusted EBITDA was $94 million. We provided a breakdown of our second quarter numbers by segment in our press release where you can see that in the second quarter, our theater division contributed approximately 71% of the combined 40 million of adjusted EBITDA prior to unallocated corporate expenses. We continue to trend towards our historical portfolio mix of EBITDA generation as the theater business recovers. Our second quarter interest expense decreased by approximately 850,000 primarily benefiting from lower short-term debt and reduced borrowings resulting from our improved operating results. The reduction in interest expense was partially offset by investment losses on marketable securities this quarter compared to last year. Turning to our segment results, Cedars continues to experience increased per capita spending by our customers. Our average admission price increased by 3.3% during the second quarter of fiscal 2022 compared to last year, and increased by 9.3% compared to fiscal 2019. This increase was primarily the result of targeted admission price increases implemented during the second quarter in response to cost inflation, as well as continued strong customer demand for our premium large format screens. Meanwhile, our average concession food and beverage revenues per person at our comparable theaters increased by 2.9% during the second quarter of fiscal 2022 compared to last year, which was primarily due to pricing changes implemented in response to food cost inflation. These pricing changes were implemented in early June and provided approximately one month of impact to the quarter. When compared to fiscal 2019, our per capita average concession food and beverage revenues increased by 23%, which we believe is the result of several factors, including our industry-leading mix of non-traditional food and beverage options, shorter lines at the concession stand, the emphasis we are placing on online ordering through our mobile app, as well as pricing changes. As a significant number of theaters in both our circuit and the industry as a whole were closed during large portions of the second quarter of last year, We continue to believe a comparison of our box office results to pre-pandemic results in fiscal 2019 may be the best way to compare our performance to the industry. Our second quarter fiscal 2022 admission revenues were down 24% during the quarter when compared to 2019. According to data received from Comscore and compiled by us to evaluate our fiscal 2022 second quarter results, United States box office receipts decreased 26.6% during our fiscal 2022 second quarter compared to U.S. box office receipts during fiscal 2019. As a result, we believe our admission revenue decline once again outperformed the industry average by 2.6 percentage points during the second quarter of fiscal 2022. Due to the impact of three strong blockbusters released during the second quarter of fiscal 2022, which were Top Gun Maverick, Doctor Strange and the Multiverse of Madness, and Jurassic World Dominion, the second quarter box office was more weighted towards our top movies as compared with the second quarter of fiscal 2021 and fiscal 2019. These films drove significant PLF sales, but at the same time resulted in higher film costs as a percentage of admission revenues. While film costs as a percentage of admission revenues increased significantly year over year, Due to a limited number of new films and fewer blockbusters last year, resulting in abnormally low film cost percentages in the prior year, they were generally in line with our costs in the second quarter of fiscal 2019 prior to the pandemic. With that said, we are thrilled with the success of these blockbuster films that drove new audiences to return to the movies for the first time since the pandemic began. Shifting to our hotels and resorts division revenues were 69 million for the second quarter of fiscal 2022 as we continue to see strong seasonal demand for leisure travel in the early summer and improving conditions for business travel. The division delivered 11.8 million of adjusted EBITDA, which is a record second quarter for any fiscal year. We continue to believe comparing our results to pre-pandemic levels in fiscal 2019 helps provide perspective on the pace of the current recovery. Second quarter total revenue for the division was nearly 99% of 2019 levels, a post-pandemic high. As I've mentioned last quarter, the St. Kate was closed for the majority of the first half of 2019 during its conversion from a branded property. But if you take the St. Kate out of both years' numbers, Our fiscal 2022 adjusted second quarter revenues were still 92% of adjusted 2019 levels. Our rev par for our seven comparable owned hotels decreased 6.3% during the second quarter compared to the same quarter during fiscal 2019. According to data received from Smith Travel Research, For the fiscal 2022 and fiscal 2019 periods, and compiled by us in order to evaluate our results, comparable competitive hotels in our markets experienced a decrease in a rev par of 9% during our fiscal second quarter compared to the second quarter of fiscal 2019, indicating that our hotels once again outperformed by approximately 2.7 percentage points during the second quarter. When comparing our RevPAR results to comparable upper upscale hotels throughout the United States, the industry experienced an increase in RevPAR of 0.8% during our fiscal second quarter compared to the second quarter of fiscal 2019. We believe our results compared to the national numbers reflect an increased customer mix of group business at our properties during midweek days at lower daily rates as more corporate and industry events return. While the increase in group business during the week has resulted in a lower mix of leisure customers, which are typically at higher average daily rates, the increase in group business resulted in higher food and beverage revenues from our banquet and catering operations, which are not reflected in REVPAR, but are accretive to the division results as a whole. Food and beverage revenues were up 98.2% in the second quarter of fiscal 2022 compared to the prior year. and we're up 2.1% compared to the second quarter of fiscal 2019. Breaking out the second quarter numbers for the seven comparable hotels more specifically, our overall RevPar decrease during the fiscal 2022 second quarter compared to fiscal 2019 was due to an overall occupancy rate decrease of approximately 11.2 percentage points, offset by a 9.3% increase in our average daily rate, or ADR. Our average fiscal 2022 second quarter occupancy rate for our owned hotels was 66.3%. Shifting to cash flow in the balance sheet, our cash flow from operations was $48.8 million in the second quarter of fiscal 2022, an increase of over $45 million compared to the prior year. Total cash capital expenditures during the second quarter of fiscal 2022 were $9.8 million. A large portion of these dollars were spent on the completion of the first phase of a guest room renovation project at our Grand Geneva Resort and Spa, with the rest going toward normal maintenance projects in both of our businesses. We ended the second quarter with $57.7 million of cash and nearly $280 million in total cash and revolving credit available liquidity, with no borrowings on our $225 million revolving credit facility. Our debt to capitalization ratio was 37% and our net leverage was 2.4 times net debt to adjusted EBITDA at the end of the second quarter. Following this strong cash generating quarter and with our bolstered liquidity, today we are pleased to announce that subsequent to the end of the quarter, we completed two key steps on our recovery path following the pandemic. First, in late July, we repaid 46.6 million of short-term borrowings Repaying in full and retiring early the term loan facility we took on to help manage through the pandemic that was set to mature in September of this year. Our priority in managing our balance sheet has been to first reduce the incremental debt we took on during the pandemic, and we have now executed this significant step, which then brought us to our second step. This morning we announced our Board of Directors has reinstated our quarterly dividend, declaring a five-cent dividend to common shareholders of record on August 25th to be paid on September 15th. Greg will comment further on how we think about capital allocation, but from a purely financial perspective, the strength of our balance sheet and liquidity, coupled with the steady progress in the recovery of our businesses and strong free cash flow generation, gave us the confidence to once again return capital to our shareholders. With that, I will now turn the call over to Greg.

Thanks, Chad. We entered the quarter with a momentum of improving conditions in both of our businesses that gave us the optimism that the second quarter was setting up to be a big step in our recovery. The film slate looked stronger, customers were indicating they were increasingly comfortable coming back, and business travel was starting to show early signs of returning. The stage was set and our team was ready to execute. I'm pleased to report the trend we saw early in the quarter continued, and our team delivered our best quarter since the onset of the pandemic. Our customers came back to the movies in huge numbers because finally there was a lot to see. Our hotels saw groups return that hadn't held an event in three years. Overall, it was incredibly encouraging to see the real progress in both businesses. All's not back to normal yet, and at times, We may take two steps forward and one step back as we go from one quarter to the next. But this quarter, we took a big step forward in our recovery, and we're pleased to be sharing these results with you. So let me start my remarks with our theater division. Chad went over the numbers with you, including our continued increases in per-person revenues, our outperformance in the industry, and strong cash generation with nearly $29 million of adjusted EBITDA in the quarter. Our customers showed up in huge numbers, proving once again that consumer demand for the immersive theatrical moviegoing experience remains strong. There were several key themes this quarter that stood out. First, this was the first quarter since the pandemic began where we had a consistent string of theatrically released films. Second, the content this quarter included something for everyone, and it brought back audiences that hadn't yet come back until now. Of course, there were the blockbusters that everyone's heard about by now, led by Top Gun Maverick. Not only is Top Gun already a top 10 grossing film of all time, but perhaps more importantly, its opening weekend was more than 50% comprised of people over 35. For anyone who follows our industry, this is not the norm for a movie with a box office of this size, and it's an indication of audience interest for a broad variety of movie types and genres. And of course, There was no better way to see Top Gun than on the big screen. Other blockbusters delivering strong performances included Doctor Strange and the Multiverse of Madness and Jurassic World Dominion. Additionally, there were several family films that did well during the quarter, including The Bad Guys, Sonic the Hedgehog 2, and Lightyear. The performance of these films demonstrated that families were ready to come back to the movies this summer. And this trend continued into the early third quarter with Minions, The Rise of Groot, Paws of Fury, and DC League of Super Pets. It was only a quarter ago when industry skeptics pointed out, families haven't gone back to the movies. It didn't surprise us that when we finally had family movies to show, this audience came back to the movies in force. Finally, we had a series of mid-sized films that appealed to diverse audiences and performed really well. Downton Abbey, a new era, premiered to a box office audience that was estimated at 48% over 55 years of age and 73% women. Elvis attracted not only the audience that grew up with his music, but also drove box office because younger audiences embraced the film on a rising star. And everything, everywhere, all at once played strong through most of the quarter, exceeding everyone's expectation, and actually it just crossed $100 million in total box office. What a great milestone that is. The performance of these films continues to demonstrate the important role that theatrical exhibition plays in the overall economic success of film content over its lifetime And customers continue to show they want to see films on the big screen. We were thrilled to see the success of these films and the overall improvement in the quantity of films we brought to audiences this quarter. All of the top five films in the quarter debuted with an exclusive theatrical run prior to release on streaming services, compared to where we were a year ago, when three of the top five films in the second quarter were released day and date. We continue to work with our studio partners to increase the number of films released theatrically and work with additional content providers to take advantage of the unique theatrical experience to showcase some of their best content. We believe exclusive theatrical runs can deliver an important incremental revenue source for content providers. Not only do we believe this, the data increasingly backs this up. One need only look at the recent debut of films like Dr. Strange and Sing 2, respectively number one and two ranked streaming films a few weeks ago. Not only did these films deliver important theatrical revenue to their studios, they also delivered top-notch streaming performance. And even more impressive, was that Singto's theatrical debut was about six months ago. It's clear from data like this, films of all sizes benefit their studios from a multi-layered approach to distribution that includes theatrical. As I have shared before in my updates, our recovery is not going to be a straight line. While the second quarter steadily ramped up with increasing quantities of films and box office during the quarter, we expect the third quarter will follow the opposite pattern with a stronger film slate in the first half of the quarter that softens heading into the early fall, before increasing once again in the fourth quarter. Several films have already played well in the third quarter, including Minions, The Rise of Gru, Thor, Love and Thunder, Nope, and DC League of Super Pets, and we are excited for the release of Bullet Train this weekend. As Chad mentioned in his remarks, we implemented several pricing changes to mitigate the impact of cost increases we've seen in both labor and the cost of food. These changes were rolled out in June and benefited a portion of the quarter. Our approach with these price changes has been very targeted and focused in areas where our customers have shown a strong preference and willingness to pay a premium for certain days of the week or show times or for a premium entertainment experience on our premium large format screens. This is an ongoing effort and we will continue to test different dynamic pricing models in different markets as we further optimize pricing. In addition, we continue to offer attractive discount opportunities for our value-oriented customers as we work to bring customers back to the movies. Last quarter, I mentioned our new subscription programs we launched earlier this year in select markets known as MovieFlex and MovieFlex+. We believe these subscription programs are a way to drive recurring traffic through our theaters And we're testing a unique approach designed to promote attendance for some of the smaller films that play an important supporting role around tentpole features, as well as extend the length of runs of more popular films. While the program remains very much a work in process that we will continue watching and tweaking, we are seeing positive signs. For example, MovieFlex Plus members are 150% more likely to see a small or mid-sized film than our control group. We believe the program is a potential opportunity for distributors to extend theatrical runs for larger films and promote smaller and mid-sized films by offering them in the Movieflex Plus library. We have more work to do to further develop the program, including campaign tickets and family offerings, but we are making progress and we are working hard to create a program that is a win-win for everyone while enhancing the depth and breadth of content. Now I'll turn to our hotel division. Chad shared some of the numbers with you, including comparisons to our pre-pandemic fiscal 2019 numbers and the fact the data indicates that we once again outperformed our competitive sets this quarter. I want to start by recognizing our hotel's team for delivering a record $11.8 million of adjusted EBITDA for the second fiscal quarter, a record for any second quarter either pre- or post-pandemic. Revenues were at 92% of 2019 levels on the same hotel basis, and the breadth of the recovery we are now seeing is broadening beyond the leisure traveler, whom, as you know, have really led the way for the last year. As we shared in our last few calls, we saw the improvement in group booking trends earlier in the year, and we're now seeing that business comes through as group and corporate events return. To provide some perspective on the change in the mix of our business during the second quarter of 2022, our non-group business, which includes leisure travel, represented approximately 63% of our total rooms revenue. This compares to 75% for non-group rooms revenue a year ago in the second quarter of 2021. and 57% for non-group rooms revenue prior to the pandemic in the second quarter of 2019. Overall, our business is starting to shift back closer to a more normal mix, which was in line with our expectations. As I've said in the past, we believe we have special assets that make our portfolio unique. These assets allowed us to successfully pivot to serve an increasing number of leisure customers during the pandemic, and our team is now successfully executing our plan to optimize revenue management and deliver outstanding service to returning business travelers and group events. Our group room revenue bookings for fiscal 2022, commonly referred to in the hotels and resorts industry as group pace, is now running with an 8% of where it would historically be at this time in pre-pandemic years and is up significantly from where we were at this time last year and from the prior quarter. We are encouraged by the increased amount of activity and leads we are experiencing and our sales teams remain focused on continuing to close the gap as business travel activity recovers. Banquet and catering revenue pace for fiscal 2022 is also trending similar to the improvement in group pace. While still running behind where we would typically be at this same time in prior years, we are closing the gap and pace has sequentially improved from the first quarter of this year. We continue to experience very strong wedding bookings and some of the bigger events of the past are once again booking for the remainder of this year, 2023 and beyond. In general, the overall demand environment remains supportive of strong average daily rates and we continue to see occupancy pace build even with higher rates. We are pleased with the continued strength of our average daily rate during the second quarter, growing more than 24% over last year and over 9% compared to 2019 rates of the quarter. As we stand here today, we are not yet seeing indications of consumer demand slowing or macroeconomic softness. As we look forward, we expect continued progress in the overall recovery of the industry, particularly for group and business travel. With that said, we know that our properties will face a difficult comparison to our third quarter results last year, which included non-recurring business from the Ryder Cup, the Milwaukee Bucks Playoff Championship run, and Summerfest, which shifted from the third quarter last year to mostly the second quarter this year. Overall, we generally expect our revenue trends to track or hopefully continue to exceed the overall industry trends for our respective markets. As in the past, our results from this division will vary quarter by quarter due to the seasonality our properties historically experienced. But on a relative year-over-year basis, we look forward to continued improvement during this ongoing recovery. Finally, I want to briefly remark on financial milestones that Chad discussed in his remarks. We've always believed in maintaining a strong balance sheet with a manageable amount of debt, including owning the majority of our assets. We believe that core philosophy played a large part in our ability to successfully navigate the pandemic and contributed to the speed in which we were able to restore the balance sheet to the point we are today. We will continue to pursue growth and investment opportunities in our businesses that generate strong returns for shareholders, whether those opportunities are through investments in our existing assets or through acquisitions. To the extent that we generate cash flow in excess of our investment and liquidity requirements, we will also return capital to our shareholders. The Marcus Corporation has a long history of returning capital to shareholders, either through dividend or share repurchases, and our board has been committed to reinstating a dividend when we reached the point where we had sufficient liquidity. retired the incremental term loan we took on during the pandemic, and when we had the confidence in the recovery of our businesses. We are excited to announce today that we have reached that point, and we are thrilled to begin returning capital to our shareholders again. As you know, we view the world through a long-term lens. We're excited to report these great results to you today, but we also recognize that our recovery path is not a straight line. Our rate of improvement will vary from quarter to quarter as we expect it to next quarter, but I'm confident that we will continue to make consistent long-term progress. We manage the business day to day, but at the same time, we look at the overall performance of our investments with a much longer lens. Finally, I'd like to once again express my appreciation for our dedicated associates at the Marcus Corporation. Their outstanding work and commitment to serving our customers is responsible for our success, and we appreciate all that they do every day. So on behalf of our board of directors and our entire executive team, Thank you to all of our associates. With that, at this time, Chad and I would be happy to open the call up for any questions you may have.