Marcus Corporation (The)

Good morning everyone and welcome to the Marcus Corporation first quarter earnings conference call. My name is Maxine 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 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. 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, operator, and good morning, and welcome to our fiscal 2023 first 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 2023 first quarter results and in the risk factors section of our fiscal 2022 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, 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 GAAP measure is provided in today's release. All right, with that behind us, let's begin. This morning, I'll start by spending a few minutes sharing the results from our first quarter with you and I'll 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 revenue growth as we continue to see demand improvement from customers in both of our divisions. In theaters, a significantly better first quarter film slate with a greater number of wide releases drove significant attendance and revenue growth, leading our overall improved results. In our hotel division, comparable hotel revenues grew as we continued to see year-over-year improvement in both occupancy and average daily rate. Consolidated revenues were $152 million in the first quarter, an increase of 15.1% compared to the prior year quarter. Consolidated adjusted EBITDA for the first quarter was $9.5 million, a 182% increase from the prior year's first quarter. We provided a breakdown of our first quarter numbers by segment in our press release, and as we will discuss today, our earnings growth in the quarter was driven by strong results from our theaters business. Below operating income, the one item to highlight is our first quarter interest expense decreased by approximately $1 million, or 26%, as a result of our lower overall debt level, which was approximately 72 million or 28% lower than the end of the first quarter last year. Turning to our segment results, our first quarter fiscal 2023 admission revenue increased 24% compared to the first quarter of 2022, with an attendance increase of 13.9% driven by a significant increase in the number of wide-release films debuting in the quarter, which Greg will discuss further. The film slate for the quarter not only featured more wide releases, but included a more balanced mix of smaller and mid-sized films that exceeded our and industry expectations and attracted diverse audiences. According to data received from Comscore and compiled by us to evaluate our fiscal 2023 first quarter results, United States box office receipts increased 26.3% during our fiscal 2023 first quarter compared to U.S. box office receipts during fiscal 2022. While our performance lagged by approximately 2.3 percentage points, we believe this was attributable to the Omicron variant of COVID-19 more significantly impacting other regions of the country during the first quarter of fiscal 2022 resulting in a higher percentage of box office growth in 2023 nationally than our primarily Midwestern markets. We believe this is supported by our strong results last year when we outperformed the U.S. average box office by 4.7 percentage points during the first quarter of fiscal 2022 as compared to U.S. box office receipts during the first quarter of fiscal 2019. Our average admission price increased by 8.8% during the first quarter of fiscal 2023 compared to last year. The increase in average admission price in the quarter was primarily driven by an increase in our 3D ticket sales for Avatar the Way of Water, which like the fourth quarter of last year, accounted for approximately half of the admission per cap increase and represented 11% of tickets sold in the first quarter of 2023. In addition, strategic pricing actions taken during fiscal 2022 in response to inflation contributed to the balance of the increase in our admission per caps. Our average concession food and beverage revenues per person at our comparable theaters increased by 5% during the first quarter of fiscal 2023 compared to last year's first quarter. The increase in our concession food and beverage per caps was driven by three items. First, more customers bought concessions, food and beverage. We refer to this as our hit rate, which we define as the ratio of concession, food and beverage transactions to box office transactions. Second, customers bought more, resulting in higher check averages. We believe customers are buying more as they make an experience of going to the movies. and in part due to a new food and beverage menu introduced in the fourth quarter of last year, which we believe has positively impacted check averages. And third, prices were higher compared to the first quarter of last year, as we are still seeing the impact of inflationary price increases implemented during 2022. Our top 10 films in the quarter represented approximately 74% of the box office in the first quarter of fiscal 2023, compared to 85% for the top 10 films in the first quarter last year. While there was an overall broader slate of films in the quarter, there was not a lower concentration among the performers at the top at higher film costs. And the rest of the slate performed better than last year's first quarter, resulting in an overall film cost as a percentage of admission revenues that was essentially flat. Tony Doan- Turning to our hotels and resorts division revenues were 55.8 million for the first quarter of fiscal 2023 an increase of 6% compared to the prior year. Tony Doan- The sale of the skirvin hilton late in the fourth quarter of fiscal 2022 had a $3.5 million negative impact on revenues in the first quarter of fiscal 2023 compared to the first quarter fiscal 2022. Excluding this impact, comparable hotel revenues in the first quarter of fiscal 2023 increased $6.7 million or 13.6%. Total revenue before cost reimbursements at our seven comparable owned hotels increased over $4.8 million or 11.5% over the first quarter of fiscal 2022. Typically, the first quarter is impacted by our normal seasonal winter headwinds at our predominantly Midwestern portfolio of owned hotel properties. And while this winter was certainly no exception, demand was also negatively impacted by an unusual lack of snowfall that limited the ski season at our Grand Geneva Resort and Spa. We did continue to see improved conditions for group events compared to the first quarter last year. RevPar for our comparable owned hotels grew 17.5% during the first quarter compared to the prior year. Breaking out the first quarter numbers for the comparable owned hotels, more specifically, our overall REVPAR increase during the fiscal 2023 first quarter compared to fiscal 2022 was due to a 6.6% increase in our average daily rate, or ADR, and an overall occupancy rate increase of approximately 5 percentage points. our average fiscal 2023 first quarter occupancy rate for our owned hotels was 50.8%. According to data received from Smith Travel Research, comparable competitive hotels in our markets experienced an increase in rev par of 25.6% for the fiscal first quarter of 2023 compared to the first quarter of fiscal 2022. Again, our competitors are playing a bit of catch-up. We believe that after our owned hotels outperformed the comparable competitive hotels with significant market share gains during 2020, 2021, and 2022, the comparable competitive hotels have begun to catch up, resulting in RevPar growth rates that were higher than our own hotel portfolio. With this said, the RevPar index for our hotels remains in excess of 100, indicating that we continue to take more than our share of the market while normalizing closer to our pre-pandemic index levels, which historically ran above 100. In addition, the impact of the slow ski season, which has a greater impact on room demand at Grand Geneva during the winter months, allowed other hotels in our competitive set that are not reliant on the ski season to capture some market share during the quarter and resulted in our lower rev par growth. Finally, Our banquet and catering operations continued to perform well. This is reflected in our food and beverage revenues, which were up 4.7% in the first quarter of fiscal 2023 compared to the prior year. The hotel adjusted EBITDA was negatively impacted by approximately $500,000 from the sale of the skirvin compared to the first quarter of last year. As we compare our adjusted EBITDA to the first quarter of last year, It's important to point out that in the first quarter of 2022, our expenses benefited from operating the hotels below our targeted staffing levels due to labor shortages in the first half of last year. With an improving labor market, we have been able to sustain more appropriate staffing levels for the current demand and occupancy levels, resulting in a negative impact to adjusted EBITDA from higher labor costs with increased staffing levels compared to the prior year first quarter. We continue to work through finding the right balance of labor, and there were some pockets of labor staffing inefficiencies in the first quarter resulting from a softer first quarter than expected at some properties. With this said, while our staffing levels are higher than last year, they are below our pre-pandemic levels. It is also important to highlight that we have seen a significant improvement in customer satisfaction scores compared to our scores last year in the first quarter, when we were short staffed, and we believe customer satisfaction is key to the long-term performance of our upper upscale hotels and resorts. In addition, in the first quarter of 2022, adjusted EBITDA benefited from an all-hotel buyout at one of our condo hotel properties, an event that doesn't happen every year and did not recur in the first quarter of 2023. Finally, the first quarter of 2023 was negatively impacted by unfavorable timing of maintenance and repairs compared to the prior year. Shifting to cash flow in the balance sheet, our cash flow from operations was a use of cash of $7.7 million in the first quarter of fiscal 2023 compared to cash provided by operations of $6.5 million in the prior year quarter. which included approximately $28 million of non-recurring income tax refunds and government grants. Excluding the one-time benefit from receipt of these items in the prior year, cash flow from operations improved approximately $14 million or 64%. As a reminder, our cash flow from operations in the first fiscal quarter It's historically impacted by seasonal changes in working capital resulting from the slowdown in our businesses following the peak holiday season and by the timing of various year-end accounts payable and compensation payments. Total capital expenditures during the first quarter of fiscal 2023 were $9.5 million compared to $3.1 million in the first quarter of fiscal 2022. A large portion of our capital expenditures during the first quarter were invested in renovation projects in the hotels business, with the balance going to maintenance projects in both businesses. At this early stage of the year, I have no reason to make any major adjustments to our previous estimate for capital expenditures for fiscal 2023 of 60 to 75 million, recognizing that the timing of several of our planned expenditures are still just estimates at this time. We are still finalizing the scope and timing of various projects, and the actual timing of these projects will impact our final capital expenditure number for the year. We will update our capital expenditure estimates as the year progresses. We ended the first quarter with $10 million in cash and over $223 million in total liquidity, with a debt-to-capitalization ratio of 30% and net leverage of 2.1 times net debt to adjusted EBITDA. We continue to believe in maintaining a strong balance sheet with a manageable amount of debt, including owning the majority of our assets. We view the strength of our balance sheet as a strategic advantage that provides flexibility and allows us to move quickly to invest in growth for the long term when actual opportunities are identified. With that, I will now turn the call over to Greg.

Thanks, Chad. Good morning, everyone. Today is May 4th. A very important date to Star Wars fans out there because, as they say, may the fourth be with you. We entered the year with a plan for growth and with the optimism that 2023 was expected to deliver another year of improvement in our businesses. During the last couple of years working through the pandemic, the pace of progress between our two businesses has been different and changes from quarter to quarter. Throughout 2022, our hotels division led the recovery back to pre-pandemic levels, revenue levels. and delivered a record year, while our theaters division has had an extended recovery that continued into 2023. The first quarter generally played out as we expected 2023 to develop overall, with theaters leading the growth and improvement in our results, and with the hotels still growing comparable revenues, but at a more moderate rate of growth than in fiscal 2022. With the normal seasonal headwinds in our hotel business, the first quarter is always challenging, so it's incredibly helpful when we're able to get off to a good start as we did this quarter. The first quarter that we are reporting today continues to make year-over-year progress, and we're pleased to be sharing these results with you. I'll start with Theaters. Chad went over the numbers with you, including our continued significant increases in per-person revenues. As we shared with you on our last call, Our theater division got off to a much better, to a much stronger start than last year, with higher attendance driven by a significantly stronger film slate, led by carryovers, Avatar, The Way of Water, and Puss in Boots, The Last Wish. We were pleased to see the quantity of wide-release films with exclusive theatrical windows increase significantly, with 21 wide releases in the first quarter of fiscal 2023, compared to 12 in the prior year's first quarter. Wide release films are what really drives our theater business. And we've talked in the past about the importance of having a more consistent cadence of new theatrical wide releases to re-habitualize audiences to movie going. This year's release calendar started a run of more steady weekly theatrical releases that began earlier in the year compared to the first quarter of last year. It was also helpful that a number of films outperformed industry expectations for both their openings and their overall runs. We were particularly thrilled to see this outperformance come from a variety of genres and mid-size films, including Megan, A Man Called Otto, Annie for Brady, and Cocaine Bear. Having a balanced film slate that includes a healthy portion of box office coming from these mid-size films is critically important to the overall ecosystem of film entertainment. Chad shared that our admission revenues per person grew nearly 9% year over year, half of which was attributable to an increase in 3D ticket sales driven by Avatar. I'd like to provide an update on our various strategic pricing initiatives that contributed to the other half of the admission per cap increase in the quarter, and those initiatives that we expect will impact per caps throughout 2023. As we approach ticket pricing, we're always trying to balance supply with demand to optimize price and maximize attendance. Our company has a long history with revenue management and hotel business, where we are essentially pricing rooms dynamically every day, also known as delivering the right price to the right customer at the right time. We try to apply that philosophy to our theater business. While we don't go as far with dynamic pricing in our theater business, over the last nine months we've made several adjustments to pricing for peak demand periods, while also continuing to provide discounts for our value-oriented customers. These changes include tilt pricing with higher ticket prices on holidays and weekends, as well as lower ticket prices on certain weekdays such as Student Thursday, Young at Heart, Senior Friday, Matinees, and of course, our hugely popular and newly rebranded Value Tuesday. We left the industry in 2013 when we launched our first Tuesday discount program known as $5 Tuesday. The concept was simple. Sell a roughly 50% discounted ticket on a weekday with otherwise low attendance with the goal of appealing to value-oriented customers who'd stopped coming to the movies at our regular prices. To make it an even better deal, we provided a free complimentary-sized popcorn. What we quickly discovered was that there was a significant group of price-sensitive customers who stopped coming to the movies or never came at all, who had become regular moviegoers at this price point. And it became an important component of our customer base. I'm proud to say that we've been committed to our value-oriented customers since the launch of our Tuesday discount program. And we held the Tuesday ticket price at $5 for a long time, nearly 10 years. Last year's inflation put pressure on our costs across the business. We started to explore how to adjust our Tuesday pricing while still providing a great value for our customers and making the program even better. We tested several different Tuesday changes in different markets beginning in October last year, and we were pleased to roll out our new Value Tuesday program on March 28th. Our new program features $6 admissions for members of our free-to-join Magical Movie Rewards loyalty program, $7 admissions for non-loyalty customers, 50% off surcharges for our ultra-screen and super-screen premium large format tickets, and perhaps, most importantly, 20% off all concessions food and non-alcoholic drinks for MMR loyalty members. Instead of a small free popcorn, which appeals to many, but not all, our customers can now enjoy all of our great menu items from Zafiro's Pizza to burgers, sandwiches, wraps, wings, and traditional concessions at a 20% discount on Tuesdays. Whether the customers pick up their order at a concession stand or have it delivered to their recliner seat for in-theater dining, they now can try all of our great food options at a great value. We believe that the expansion of Tuesday discounts to our entire food menu provides a more affordable offering that will increase the number of customers who are buying concessions, food and beverage, and also increase how much they're buying, with the goal of increasing our overall F&B per caps. While our new Value Tuesday program launched on the last Tuesday during the first quarter, in the week since its launch, the results have been positive. As we expected from our pilot tests, we have not seen a negative impact on attendance or market share as a result of the admission price changes. And we're seeing positive impacts on our per caps. Anecdotally, customers have been pleasantly surprised when they learn of our new expanded discounts on food and beverage. As we look ahead, the second quarter in our theater division is off to a great start. And of course, I have to start with the Super Mario Brothers movie. Emphasis on the word super. It's a great film that has blown away all expectations, and it has played exceptionally well on our circuit with family audiences. Beyond just the smashing success of Mario, April has continued the recent trend of a more balanced, steady diet of wide-release films across several genres, with Dungeons & Dragons, Honor Among Thieves, Air, and Evil Dead Rise all exceeding expectations. Last week, Chad and I were with our theater team at CinemaCon, and there were a couple of key observations that we came away with. First, there was a significant increase in the excitement and energy around theatrical exhibition overall. The momentum in our industry feels much more positive than it did a year ago or even just a couple of quarters ago. And our studio partners delivered a message that reaffirmed the importance of theatrical exhibition to the overall film entertainment ecosystem and our role in elevating their content. We are encouraged by the additional releases that have been added to the film slate for 2023 in the recent months, and we're now projecting 100 to 110 wide release films for the year. Second, we got a closer look at the film slate for the rest of 2023 into 2024, and based on what we saw, we are really excited with what's coming. There really is going to be something for everyone from action films like Fast X, Indiana Jones and the Dial of Destiny, and Mission Impossible Dead Reckoning to family and animated films like The Little Mermaid, Elemental, and Haunted Mansion to superheroes like The Flash, Spider-Man Across the Spider-Verse, and Guardians of the Galaxy Volume 3, opening this weekend, plus so many more in genres like comedy, romance, drama, and horror. We believe it's going to be a great summer with films that will continue to bring audiences back to the theaters. Shifting to our hotel and resorts division, You've seen the segment numbers, and Chad shared some additional detail, including the bridge from our reported results to our comparable hotel results following the sale of the Skirvin Hotel late last year. Given that most of our company-owned hotels are located in the Midwest, we typically lose money in the division during the winter months, and the first quarter of fiscal 2023 was no exception. Add in a winter without snow in our neck of the woods, and you get a very disappointing ski season. So we certainly had some challenges in hotels for the quarter that the team worked hard to navigate through. There are a few highlights in the quarter that I would like to point out. Overall revenue before cost reimbursements at our comparable properties grew over 11% compared to the prior year. We continue to see strong average daily rates and improving occupancy. RevPar grew at all seven of our comparable owned hotels, with average daily rate growth at all seven hotels and occupancy growth at five out of seven hotels, resulting in overall RevPar growth of 17.5%. As Chad mentioned, while we underperformed the growth of our competitive sets, when you dig into why, it was ultimately because the occupancy at our hotels recovered faster in 2022 than the competitive hotels in our markets. In other words, competitive hotels in our markets were able to grow occupancy more than us this year compared to last year because of how far behind they were our occupancy rates last year. We still feel very good about the performance of our assets in their markets and their ability to take more than their share of the markets. Group business in the quarter continued to grow over the prior year, particularly midweek, and the bookings continue to look good. Our group room revenue bookings for the remainder of fiscal 2023, our group pace in the year for the year, are running ahead of where we were at the same time last year. Banquet and catering space pace for the remainder of fiscal 2023 is similarly ahead of where we were at this time last year. As we prepare to renovate the meeting and banquet space at Grand Geneva and the Pfister this year, we feel good about the outlook for group business. According to a recent Expedia survey, 71% of meeting planners surveyed indicated group travel is more important now than pre-pandemic. We believe our properties will be well positioned to capitalize on this trend. Leisure travel, which has been so strong for our own hotels since the beginning of the pandemic, did show some potential signs of softening. This is not particularly surprising given the cold winter and wet spring we experienced in the region, but we will continue to watch closely for further indicators of broader changes in leisure demand. Finally, Chad mentioned our investments in the quarter in renovations in our owned hotels. Yesterday, we announced the renovation and redesign of Grand Geneva Resort and Spa's 358 guest rooms will complete in time for Memorial Day weekend at the end of this month. This is the third investment in a series of recent extensive renovations for the resort. which included a lobby and lobby lounge renovation, plus the launch of a 60-seat outdoor dining venue in 2021, completely new guest room bathrooms, and heating and cooling for guest comfort in 2022. And now, newly transformed guest rooms and suites featuring a warm contemporary design. Starting this week, all guests checking in will enjoy the newly redesigned rooms. In the coming months, we will finish this phase of the resort renovation with redesigned meeting and event spaces. I've talked in the past about our special hotel assets that perform so well with leisure, group, and business travel customers. And Grand Geneva is a truly special asset that has appealed directly to the bleasure traveler that attends a midweek conference and stays for the weekend. We are thrilled to complete this project and open the refreshed rooms in time to deliver an exceptional experience to our guests this summer. I would 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. They are our most important asset. So on behalf of our board of directors and our entire executive team, thank you to all of our associates. And with that, at this time, Chad and I would be happy to open the call up for any questions you may have.