Marcus Corporation (The)

Good morning everyone and welcome to the Markers Corporation third quarter earnings conference call. My name is Nadia and I'll 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 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, and good morning, and welcome to our fiscal 2022 third 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 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 are cautioned 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 third quarter results. and in the risk factors 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 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 to our website, 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. Now, with that behind us, let's begin. This morning, I'll start by spending a few minutes sharing the results from our third quarter with you and 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 are seeing ahead. We'll then open up the call for questions. This morning we reported another quarter of progress on our recovery path with both businesses generating improved results year over year and both of our businesses outperforming their competition. In hotels, leisure travel remained strong while our group business continued its comeback, a trend we started to see during the second quarter. On the theater side, we continued to see strong enthusiasm from our customers who turned out for the movies that we had but as we expected, we were challenged by a limited number of film releases during the quarter. Consolidated revenues increased nearly 26% over the prior year, growing from $146 million last year to nearly $184 million in the third quarter this year. Consolidated adjusted EBITDA increased from $24 million last year to nearly $28 million this year. We provided a breakdown of our third quarter numbers by segment in our press release, where you can see that in the third quarter, our hotel division provided a majority of the $31 million of adjusted EBITDA from the divisions prior to unallocated corporate expenses. As we will discuss today, our hotels business had a phenomenal quarter that exceeded all of our expectations. The low operating income, our third quarter interest expense, decreased by approximately $900,000, 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 a decrease in gains on sales of assets this quarter compared to last year. Turning to our segment results, our hotels and resorts division revenues were $82 million for the third quarter of fiscal 2022 as we continue to see strong seasonal demand for leisure travel and improving conditions for group events and business travel. The division delivered 19.1 million of adjusted EBITDA, which is a record third quarter for any fiscal year. Total revenue before cost reimbursements increased over 12 million, or 20.4% over the third quarter of 2021. REVPAR for our eight owned hotels grew 19.8% during the third quarter compared to the prior year. We continue to believe comparing our results to pre pandemic levels in fiscal 2019 helps provide perspective on the recovery of the business. And after two years on this journey, we are pleased to now be reporting growth over pre pandemic levels. Third quarter total revenue before cost reimbursements for the division grew 8.9% above 2019 levels, a post pandemic high. Similarly, RevPAR for our owned hotels increased 5.3% during the third quarter compared to the same quarter during fiscal 2019, marking the first quarter of RevPAR growth compared to pre-pandemic periods. Breaking out the third quarter numbers for the eight comparable hotels more specifically, our overall RevPAR increased during the fiscal 2022 third quarter compared to fiscal 2019, was due to a 16.6% increase in our average daily rate, or ADR, partially offset by an overall occupancy rate decrease of approximately 8 percentage points. Our average fiscal 2022 third quarter occupancy rate for our owned hotels was 75%. 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 an increase in rev par of 3.9% during our fiscal third quarter compared to the third quarter of fiscal 19, indicating that our hotels once again outperformed by approximately 1.4 percentage points during the third quarter. Further, when comparing our rev par results to comparable upper upscale hotels throughout the United States, The industry experienced an increase in rev par of 3.5% during our fiscal third quarter compared to the third quarter of fiscal 2019, indicating that our hotels also outperformed the segment by approximately 1.8 percentage points during the third quarter. Finally, as group business returns, our banquet and catering operations continue to drive growth in food and beverage revenues. which were up 28.2% in the third quarter of fiscal 2022 compared to the prior year, and were up 6.3% compared to the third quarter of fiscal 2019. Shifting to theaters, our third quarter fiscal 2022 admission revenues increased 29% compared to the third quarter of 2021, a period that was still impacted by customer comfort concerns with returning to theaters and day and date releases of films. All of the top five movies in the third quarter of 2022 debuted with an exclusive theatrical window compared with three of the top five movies releasing day and date to streaming services in the prior year quarter. When compared to 2019, our third quarter fiscal 2022 admission revenues were down 29.1%. According to data received from Comscore and compiled by us to evaluate our fiscal 2022 third quarter results, United States box office receipts decreased 32.1% during our fiscal 2022 third 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 three percentage points during the third quarter of fiscal 2022. Our average admission price increased by 0.8% during the third quarter of fiscal 2022 compared to last year. This increase was primarily the result of targeted emission price increases implemented during the second quarter in response to cost inflation and was negatively impacted by an unfavorable mix of lower-priced matinee tickets due to a mix of films that played more to family audiences. In addition, on September 3rd, Our circuit participated in the first National Cinema Day in the U.S., an industry celebration of moviegoing that included $3 promotional ticket pricing. While the day was a success in driving attendance with over 8 million customers participating nationally, the promotional pricing from the event resulted in a 3.2 percentage point headwind to our year-over-year average admission price increase for the third quarter. Average admission price during the third quarter grew by 9.3% compared to the third quarter of 2019. Our average concession food and beverage revenues per person at our comparable theaters decreased by 2.6% during the third quarter of fiscal 2022 compared to last year and was also negatively impacted by a higher mix of family films at daytime showings which resulted in purchases of less expensive food items and smaller average tickets compared to the third quarter of 2021. Promotional concessions pricing on National Cinema Day also unfavorably impacted food and beverage per caps compared to the prior year quarter. When compared to fiscal 2019, our per capita average concession food and beverage revenues increased by 21.2%. which we believe is the result of several factors, including our industry-leading mix of non-traditional food and beverage options, generally shorter lines at the concession stand, and the emphasis we are placing on ordering through our mobile app, as well as pricing changes. Due to the impact of three strong blockbusters during the third quarter of fiscal 2022, which were Minions, The Rise of Gru, Thor, Love and Thunder, and Top Gun Maverick, The third quarter box office was more weighted towards our top movies as compared with the third quarter of fiscal 2021 and fiscal 2019. These films resulted in higher overall film costs as a percentage of admission revenues. Film costs as a percentage of admission revenues increased significantly year over year due to a limited number of blockbusters last year, resulting in abnormally low film cost percentages in the prior year. and were generally only slightly higher than our costs in the third quarter of fiscal 2019 prior to the pandemic. Shifting to cash flow in the balance sheet, our cash flow from operations was $5.1 million in the third quarter of fiscal 2022 and $60.4 million year to date. Total cash capital expenditures during the third quarter of fiscal 2022 were $11.1 million, And for the first three quarters of fiscal 2022, total capital expenditures were $27.5 million. For both the third quarter and the year to date, the majority of our capital expenditures have gone to renovation projects in the hotels business with the balance going to maintenance projects in both businesses. We ended the third quarter with over $213 million in total liquidity. As previously announced, in 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. Following the term loan retirement, at the end of the third quarter, our debt-to-capitalization ratio was 33%, and our net leverage was 2.2 times net debt to adjusted EBITDA. Finally, in September, we paid our first quarterly dividend to shareholders since suspending the dividend at the onset of the pandemic. This morning, we announced that our board of directors has approved our next quarterly dividend, declaring a five cent dividend to common shareholders of record on November 25th to be paid on December 15th. We remain committed to returning capital to shareholders while maintaining the strength of our balance sheet and liquidity. With that, I will now turn the call over to Greg. Thanks, Chad.

Good morning. In our last update, we reported a quarter where both of our businesses had significant momentum, and we took a big step forward in our recovery. As we entered the third quarter, we saw the opportunity for continued year-over-year improvement. I'm pleased to report that we delivered a quarter that met our overall expectations, and in some cases exceeded them. In hotels, we continue to see group business return and demand from leisure customers remain strong. In theaters, our customers continue to come out to see the movies that we're playing, but our teams had to work hard to navigate a light film slate, particularly during the second half of the quarter. It is quarters like these that highlight the benefits of a diversified business strategy, which allows us to successfully manage around the bumps in the road in any one particular business. Since the pandemic began, I've said several times on these calls that our recovery journey will not be a straight line, but we will continue to make progress over time. Well, not as fast as last quarter, we continue to make progress this quarter and I'm pleased to share these results with you. I'll start with our hotel division. Chad 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 outperform both our industry and our competitive sets this quarter. Our hotels team delivered another record quarter with $19.1 million of adjusted EBITDA for the fiscal third quarter. A record for any third quarter, either pre or post pandemic. This follows a record second fiscal quarter, making for a record summer season in which our hotels division delivered nearly $31 million of adjusted EBITDA in the combined second and third fiscal quarters. This level of success speaks to both the high level of execution by our team and the quality of our hotel assets. Our own hotel portfolio includes special assets like the Grand Geneva Resort and Spa, which has performed so well throughout the pandemic by appealing to leisure customers and is now hosting a growing number of returning group events. While I hesitate to declare victory and a full recovery following the pandemic because there are parts of the business where there is still more recovery in front of us, particularly in the business travel segment, it's incredibly encouraging to be focused on growth with both total revenue and rev power growing above 2019 levels this quarter. As we have for the last year, we continue to see strength in leisure travel this quarter. But we're seeing a trend with the lines between leisure and business travel blurring to create a bleasure customer who's filling up weekend shoulder night demand. In addition, our group business, which includes association, corporate, and social events, continues to grow. So far, during the first three quarters in 2022, group customers have represented approximately 35% of our total rooms revenue compared with 29% during the same period last year and 39% in 2019 prior to the pandemic. Our group room revenue bookings for the remainder of fiscal 2022 or group pace in the year for the year is now running within 5% of where it would historically be at the same time in pre-pandemic years. Looking further ahead, Our group pace for physical 2023 compared to where we would historically be at the same time pre-pandemic is running behind our pace compared to this time last year, which we believe is likely due to the trend of shorter booking lead times for events which we have seen over the last year, because our pipeline for next year looks healthy. We're 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 group and business travel activity recovers. The growth in group business continues to drive strong banquet and catering revenue pace. We continue to experience very strong wedding and social event bookings, and some of the bigger events of the past are once again booking for the remainder of this year, 2023 and beyond. The customer segment that continues to lag in its return is the transient business traveler. This customer segment continues to slowly improve month by month, and according to industry data, U.S. business travel in May through July this year was approximately 75% of 2019 levels, with an industry outlook of a recovery to 80% in 2023. In general, the overall demand environment remains supportive of strong average daily rates, and we continue to see occupancy pays build while holding on to higher rates. We were pleased with our average daily rate during the third quarter, which grew approximately 4% over last year. Despite the year-over-year headwind resulting from our three Milwaukee market hotels benefiting from three large event demand drivers at high rates in the third quarter last year that did not recur in 2022, average daily rate for the third quarter increased approximately 17% compared to 2019 rates for the quarter. As we stand here today, we are not yet seeing indications of consumer demand slowing or macroeconomic softness. According to a recent travel industry survey, 91% of surveyed travelers have trips planned in the next six months. And in the same survey, 82% indicated they plan to spend more or about the same on travel this holiday season. Throughout this year, we have made investments in renovation projects at the Grand Geneva Resort and Spa, with preparations now beginning for the final phase of our room renovations coming this winter. We will also begin making significant investments in several of our other hotels to enhance the guest experience And we expect these investments to continue to drive our outperformance in the years to come. My congratulations to Michael Evans and our hotels and resorts team for delivering a great quarter. Shifting to our theaters division, I'd like to begin by congratulating Mark Rams on his promotion to president of Marcus Theaters. Mark brings many years of industry experience and knowledge, a passion for the movies and theatrical exhibition, and an understanding of the Marcus culture to his new role. I know Mark is proud to lead a great team of dedicated theater associates. I'd also like to congratulate Rolando Rodriguez on his retirement and thank him for his many contributions to our company, the movie theater industry, and the communities we serve. Moving to the quarter, Chad went over the numbers with you, including our continued increases in per person revenues and our outperformance of the industry. As I shared on our last call, we expected the third quarter to follow the inverse pattern of the second quarter. starting with a strong film slate in July with several films releasing and others carrying over from the prior quarter and continuing to show well, followed by a softening film slate in the late summer heading into the fall. This lull in the movie release calendar resulted from several films shifting back due to production delays and a post-production backlog. The box office followed the pattern we expected, and while the movies we had played to healthy audiences, the limited quantity of films caused a sidestep in our recovery path. With that said, there are several bright spots that I would like to highlight. First, our audience continues to broaden with family audiences out in force this quarter. Our number one movie for the quarter was Minions, The Rise of Gru, with DC League of Super Pets coming in at number seven. For pundits who don't think families want to go out to the movies, they were our number one customer in theaters this quarter. In addition, Customers showed that when we have movies and genres other than superhero films, they came to theaters to see them too. Films like Elvis, Where the Crawdads Sing, and Nope all resonated with audiences and performed well in the theaters. Top Gun Maverick soared for the entire summer, playing exclusively in theaters for 88 days before its PVOD, Premium Video On Demand, release, and continuing to play in theaters through Labor Day to become the only film in cinema history to secure the number one box office spot domestically. on both Memorial Day and Labor Day. The experience of immersive sound and the big screen cannot be duplicated on the couch in your living room. So customers just kept coming, some to see it a second and third time in the theater, driving Maverick to generate the fifth highest domestic box office gross of all time. I've talked in the past about our belief that exclusive theatrical runs elevate a studio's brands, generating a buzz for a film that sets up subsequent windows and maximizes the value of content. Top Gun Maverick is perhaps the best example of this yet, becoming Paramount's number one best-selling digital sell-through title ever in the U.S. in its first week of PVOD and digital release in late August. This was followed by a DVD and Blu-ray release earlier this week, while Maverick remains the number one movie on iTunes. All of these windows added to Maverick's huge box office success before its eventual streaming release on Paramount+. Earlier this month, our Magical Movie Rewards program added its 5 millionth member. This program has increased customer loyalty and grown sales while providing a range of benefits for ARC members. These perks, combined with the overall movie-going experience, drive attendance and repeat business. In fact, loyalty members make up nearly half, 46%, of our overall attendance and on average visit the theater four times per year. Our loyalty program also provides us with valuable insight into customer preferences. For example, we know that our loyalty members are more than twice as likely to purchase advance tickets to a movie, and we know that the loyalty program encourages e-commerce as 62% of our online ticket sales are purchased by loyalty members. This program has been a great asset to us, and we will continue to develop and leverage our growing member base in the future. As we look forward, The film slate's picked up with several films that have already played well in the fourth quarter, including Black Adam, Smile, Halloween Ends, and Ticket to Paradise. And like so many of our customers, we're excited for the release of Black Panther, Wakanda Forever, one week from today, and Avatar, The Way of Water on December 16th. As Chad discussed in his remarks, today we announced our second quarterly dividend since reinstating the dividend last quarter. The Marcus Corporation has a long history of returning capital to shareholders and and we remain committed to paying a dividend. As you know, we view the world through a long-term lens. Our rate of improvement will vary from quarter to quarter as it did this 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 look at the overall performance of our investments with a goal of long-term sustained growth and industry outperformance. 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. They are our most important asset. 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 up the call for any questions you may have.