Marcus Corporation (The)

Good morning everyone and welcome to the Markets Corporation second quarter earnings conference call. My name is Brica and I'll be your moderator 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, Chairman, 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.

Good morning and welcome to our fiscal 2023 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 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 second 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 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. All right, with that behind us, let's begin. This morning, I'll start by spending a few minutes sharing the results from our second 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 revenue and earnings growth with healthy customer demand and solid operational execution in both of our divisions. In theaters, strong increases in both our average ticket price and average concession revenue per customer, coupled with a film slate featuring an increased number of wide release films to drive the division's growth. In our hotel division, Comparable hotel revenues grew, and we continue to see year-over-year improvement in both occupancy and average daily rate. I'll start with our consolidated results. Total revenues were $207 million in the second quarter, an increase of 4.3% compared to the prior year quarter. Operating income was $20.8 million in the second quarter, an increase of 10.1% compared to the second quarter of fiscal 2022. Low operating income, the one item to highlight is our second quarter interest expense decreased by approximately $1 million, or 24%, as a result of our lower overall debt level, which was approximately $35 million, or 16% lower than the end of the second quarter last year. Net earnings for the second quarter were $13.5 million, an increase of over 50% compared to the second quarter last year. Finally, adjusted EBITDA for the second quarter was $38.7 million, a 3.7% increase from the prior year's second quarter. We provided a breakdown of our second 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 both of our businesses, partially offset by the negative earnings impact of our sale of the Skirvin Hilton late last year. Turning to our segment results, In theaters, our second quarter fiscal 2023 admission revenue increased 9.4% compared to the second quarter of 2022, with strong growth in our per capita revenues offsetting a decrease in comparable theater attendance of 3.8%. The decrease in attendance primarily resulted from lower performances from the top three blockbuster films this year compared to the top three films last year during the second quarter, which was led by Top Gun Maverick, partially offset by an 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 once again included a more balanced mix of smaller and mid-sized films. According to data received from Comscore and compiled by us to evaluate our fiscal 2023 second quarter results, United States box office receipts increased 13.6% during our fiscal 2023 second quarter compared to U.S. box office receipts during fiscal 2022. Our comparable theater admission revenue growth of 9.7% lagged by approximately 3.9 percentage points, which we believe was attributable to a film mix that was more appealing to audiences in other parts of the U.S. outside of our primarily Midwestern markets. We also believe that a dry May and June with few rainy days in the Midwest kept customers outside enjoying early summer weather and negatively affected attendance. Our average admission price increased by 14.2% during the second quarter of fiscal 2023 compared to last year. The increase in average admission price in the quarter was primarily driven by, one, the favorable impact of full scheduled pricing actions taken during fiscal 2022 and at the beginning of 2023 in response to inflation, and two, by the impact of the changes to our Value Tuesday promotion effective at the end of the first quarter of this year. Looking forward, As we have now lapped the one-year mark of the pricing changes we implemented in mid-June last year, we expect our average admission price growth rate to moderate in the third quarter this year, while still growing from the impact of pricing changes implemented at the beginning of 2023 and the Value Tuesday pricing changes. This was the first full quarter of the Tuesday changes, so we will continue to see this benefit to average admission price through the first quarter of next year. Our average concession food and beverage revenues per person at our comparable theaters increased by 7.3% during the second quarter of fiscal 2023 compared to last year's second quarter. The increase in our concession food and beverage per caps was driven by higher check averages, including the impact of higher menu prices compared to the second quarter of last year. as we are still seeing the impact of inflationary price increases implemented during the last year. In addition, the changes to our Value Tuesday promotion, which replaced a free complimentary size popcorn with a 20% discount on all food and non-alcoholic beverages, positively impacted per caps as our customers bought more items with the 20% discount. We also expect our average concession, food, and beverage revenues per person to grow at a more moderate rate beginning in the third quarter this year. Our top 10 films in the quarter represented approximately 82% of the box office in the second quarter of fiscal 2023, compared to 84% for the top 10 films in the second quarter last year. While there was an overall larger slate of films in the quarter, there was not a lower concentration among the top performers at higher film costs, resulting in an overall film cost as a percentage of admission revenues that was essentially flat. Theater division adjusted EBITDA of $31.3 million during the second quarter of fiscal 2023 increased 8.7% compared to the prior year second quarter on our higher revenues. Finally, during the quarter, we closed three underperforming theaters as part of our ongoing evaluation of individual theater performance and our footprint. closure of these locations is accretive to earnings and cash flow and the results of these theaters are excluded from our comparable theater financial metrics that i discussed today turning to our hotels and resorts division revenues were 70.1 million for the second quarter of fiscal 2023 an increase of 1.5 percent compared to the prior year the sale of the skirvin hilton late in the fourth quarter of fiscal 2022 had a $4.4 million negative impact on revenues in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022. Excluding this impact, comparable hotel revenues in the second quarter of fiscal 2023 increased 5.5 million or 8.5%. Total revenue before cost reimbursements at our seven comparable owned hotels increased over 4.1 million or 7.2% over the second quarter of last year. RevPAR for our comparable owned hotels grew 9.1% during the second quarter compared to the prior year. According to data received from Smith Travel Research, comparable upper upscale hotels throughout the United States experienced an increase in RevPAR of 4.8% during our second quarter compared to the second quarter of fiscal 2022. indicating that our hotels outperformed the industry by approximately 4.3 percentage points. When comparing our REVPAR results to comparable competitive hotels in our markets, the comparable competitive hotels experienced an increase in REVPAR of 10.1% for the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022, indicating that our hotels underperformed their competitive set by approximately 1 percentage points. As we discussed on our first quarter call, 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 are catching up, resulting in rev par growth rates that were higher than our owned hotel portfolio. In other words, competitive hotels in our markets had more opportunity to grow year over year off a lower base last year. Breaking out the second quarter numbers, for the comparable owned hotels more specifically, our overall rev par increase during the fiscal 2023 second quarter compared to the second quarter of fiscal 2022 was due to a 4.5% increase in our average daily rate, or ADR, and an overall occupancy rate increase of 2.9 percentage points. Our average fiscal 2023 second quarter occupancy rate for our owned hotels was 68.2%. Finally, our banquet and catering operations continued to perform well. Food and beverage revenue at our comparable owned hotels was up 6.4% in the second quarter of fiscal 2023 compared to the prior year. Hotel division adjusted EBITDA was negatively impacted by approximately 900,000 from the sale of the Skirvin compared to the second quarter of last year. Excluding this impact, comparable hotel adjusted EBITDA in the second quarter of fiscal 2023 increased 400,000 or 3.8% on higher revenues. Shifting to cash flow in the balance sheet, our cash flow provided by operations was 55 million in the second quarter of fiscal 2023, an increase of 6.3 million or 12.9% compared to the prior year second quarter. Total capital expenditures during the second quarter of fiscal 2023 were $7 million compared to $9.8 million in the second quarter last year and were impacted by timing of cash payments for projects compared to the prior year. A large portion of our capital expenditures during the second quarter were invested in the guest rooms renovation at the Grand Geneva Resort and Spa with the balance of capital expenditures going to maintenance projects in both businesses. Based on our current expectations for the timing of capital projects, we now expect capital expenditures of 40 to 50 million for fiscal 2023, a decrease from our prior estimate of 60 to 75 million. The decrease in our estimate is the result of a change in timing for a potential hotel renovation project, which we continue to evaluate and we no longer expect to begin in fiscal 2023. We ended the second quarter with $44.6 million in cash and over $265 million in total liquidity with a debt to capitalization ratio of 28% and net leverage of 1.5 times net debt to adjusted EBITDA. Our balance sheet remains strong, which we view as a strategic advantage that provides flexibility and allows us to move quickly to invest in growth for the long term when actionable opportunities are identified. With that, I will now turn the call over to Greg.

Thanks, Chad. Good morning, everybody. When we were last together for our quarterly update, we knew that the ingredients were there to set up for a good second quarter. In our theater division, the Super Mario Brothers movie started the quarter off with a huge positive surprise. And we had a promising slate of films in front of us for the summer. Our hotels division was well positioned to serve our customers with excellence heading into the peak summer travel season in the Midwest. I'm happy to report that excluding the impact of the divestiture and hotel division, both of our businesses contributed to our revenue and earnings growth this quarter. Our overall execution was strong, and while there were some surprises along the way, both positive and negative, our teams were ready for our returning customers this summer. The second quarter that we are reporting today continues our trend of year-over-year improvement, 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, with our admission revenues per person growing over 14% year over year. As I shared on our call last quarter, we expected that our strategic pricing initiatives would favorably impact our admission per caps and total admission revenue throughout 2023, and they certainly are. The impact of the changes to our Value Tuesday promotion were in full effect during the quarter, with admission per caps also benefiting from the impact of pricing changes made late in the second quarter last year and at the beginning of this year. As we have shared, we were thoughtful and diligent in making these pricing changes and tested several different versions of the program before rolling out our new Value Tuesday program across our circuit in late March this year. I am pleased to share that our experience with the changes to Value Tuesday are producing the results we expected. We believe the changes have not negatively affected attendance on Tuesdays in any meaningful or even measurable way. With a $6 admission for members of our free to join Magical Movie Rewards loyalty program and $7 admission for non-loyalty customers, we continue to offer a significant discount on Tuesdays to regular pricing the rest of the week and provide a great value compared to other entertainment options. We remain committed to our value-oriented customers And we believe our new Value Tuesday offering continues to deliver a great value for our customers while making the program even better. Second, our new 20% discount on all concessions, food and non-alcoholic drinks for MMR loyalty members on Value Tuesdays is resulting in higher concessions, food and beverage per caps, which were up 7.3% during the second quarter of 2023 compared to the second quarter last year. We are seeing customers not only buy popcorn in place of the free complimentary sized popcorn offered under our old Tuesday program, but we're also seeing an increase in sales of other food and beverage menu items that are now offered at a 20% discount on Tuesdays instead of full price. 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 attendance was down in the second quarter compared to the prior year due to lower performances from the top films, we are encouraged by the improvement in the number of wide releases during the quarter, which again grew considerably from 19 last year to 29 this year. Not all wide releases deliver the same results, and this quarter featured a few positive surprises along with a few that missed the mark. While the misses are disappointing, it is not unusual. Some films work better than expected, and some do not. What is more important in the long run was that the quarter featured a more steady supply of two or more wide releases each weekend for audiences to come out to see, and that helps rehabituate moviegoing. As we look ahead, the third quarter in our theater division is once again off to a great start with a positive surprise, Sound of Freedom, another film that has blown away expectations and has played extremely well in our Midwest markets. Mission Impossible, Dead Reckoning Part 1 followed with a solid performance, and then came Barbie and Oppenheimer, the phenomenon otherwise known as Barbenheimer. These two great films, along with the others, delivered the fourth largest domestic weekend box office ever, and we were ready for them. I'm particularly proud of how well our team created excitement in our theaters. From the creation of incredible lobby displays to Barbie blowout parties with early access screenings at 65 of our locations with bars and lounges serving alcohol, our associates delivered a great experience that helped build excitement and buzz for these films. And what happens when you combine Sound of Freedom and Mission Impossible with the opening of Barbie and Oppenheimer in theaters the same week? We had our busiest week since the opening week of Star Wars, The Rise of Skywalker in December of 2019. The impressive performance of these films underscored an audience appetite for diverse, non-superhero narratives, and it was a great reminder to all of us in the entertainment industry of the power of theatrical exhibition and building awareness of great movies. I also want to highlight an important example of how our investments in premium large format screens provided a significant operational advantage that continues to pay dividends for us. Not only do we have a PLF screen at 80% of our theater locations, we actually have multiple PLFs at 73% of those PLF theaters. This allowed us to play both Barbie and Oppenheimer on two or more PLFs in the same location on opening weekend and maximize our PLF gross box office. In addition, because our PLF screens are almost entirely our proprietary ultra screens and super screens, we had the scheduling flexibility to split show times in our single PLF locations. In short, we didn't have to choose which film to play on our PLFs. By both. As a result, on opening weekend, 39% of our Barbie gross box office and 50% of our Oppenheimer gross box office was on PLF screens. We view this as a significant advantage, and according to ComScore data, on opening weekend, our circuit led the industry in gross box office PLF percentage on Barbie by a factor of over two times, so that 40% is two times better, 40% of our Barbie box, two times better than the rest of the industry, and came in second among all U.S. exhibitors and gross box office PLF percentage on Oppenheimer. As we look ahead to the film slate for the rest of the year, while there's a lot to be excited about, we acknowledge that the writers' and actors' strikes have disrupted film production and may impact the future release calendar. While the timing of a resolution and the ultimate impact of the strikes is difficult, if not impossible to handicap, I'd like to share my perspective with you. Here is what this isn't. This isn't anyone questioning whether people want to go to the theater anymore, determined that they're going to watch everything while bolted to their sofa. This isn't Hollywood saying that they're shifting movies to streaming, nor suggesting the future is day and date releases. This isn't people locked in their homes and our facilities closed or people concerned to be around one another. What this is is a labor dispute that will cause some interruptions in supply. Does a business on the mend need this? No, of course not. But we can work through it and it doesn't come close to what we just went through. I guess if we were a company with much higher levels of debt, I might worry a bit more. But we are not. Today we look around and we see Barbenheimer, a theatrical event that became the only thing in pop culture that people were talking about for weeks and still are. These films, once again, prove the value of the theatrical piece of the ecosystem many times over. Audiences have spoken and they want to go to the movies. Thankfully, this is not a demand problem. It's a supply chain disruption. Of course, a disruption from the strikes is not helpful, and we don't yet know what the extent of the impact will be. While there will likely be shifts in the film release calendar, we believe it is a short-term dispute that will ultimately be resolved. As metaphorically speaking, mom and dad are fighting, but they have no choice but to live in the same house. In the long run, I am far more encouraged by the examples that Mario, Spider-Man, Barbie, and Oppenheimer and others provide in illustrating the importance of theatrical to this industry. 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 Hilton late last year. We were happy to see the calendar turn past Memorial Day for what is really the start of our busy summer season. There are a few highlights in the quarter that I'd like to point out. Overall, revenue before cost reimbursements at our comparable properties grew over 7.2% 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 six of our seven hotels and occupancy growth at four out of seven hotels, resulting in overall Revpar growth of 9.1%. As Chad mentioned, while we outperformed the normal upper upscale Revpar growth, we underperformed the Revpar growth of our competitive sets. As was the case last quarter, it was ultimately because occupancy at our hotels recovered faster in 2022 than the competitive hotels in our markets. 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 market. Group demand in the quarter continued to increase with weekday and weekend growth increasing our group rooms revenue to approximately 40% of our total rooms revenue in the second quarter of fiscal 2023 compared to approximately 38% in the second quarter last year. This compares to our pre-pandemic group mix of approximately 43% in the second quarter of 2019. Group booking trends remain positive with our group room revenue bookings for the remainder of fiscal 2023 or group pace in the year for the year running approximately 8% ahead of where we were at the same time last year. Group pace for fiscal 2024 is running approximately 7% ahead of where we were at the same time last year for fiscal 2023. In addition, banquet and catering pace for the remainder of fiscal 23 and fiscal 24 is similarly running ahead of where we were at this time last year. Industry outlook for group events remains strong, with Nolan, an industry provider of data insights on meetings and hospitality, reporting June 2023 meeting and event volume was up 30% over June 2022. Leisure demand remains healthy, particularly on the weekends, while showing signs of normalizing to pre-pandemic levels on weekdays following record demand in fiscal 22, with higher weekday demand due to extended leisure stays. Finally, Chad mentioned our investments during the quarter and renovations at our owned hotels, and last quarter I shared that we completed the guest room renovation at the Grand Geneva Resort and Spa. The finished product was ready just in time for our peak summer season, and the customer feedback has been great. In June, our team quickly moved to begin our next major project, the renovation of the Pfister, with the first phase commencing with the meeting space. We are renovating the ballrooms one at a time to minimize the disruption to operations, and we completed the renovation of the 130-year-old Imperial Ballroom in time for its first post-renovation event just over a week ago. And I will tell you, the results of restoring this historic ballroom are stunning. And this is just the beginning of what is to come over the next several months at the Pfister. Following the renovation of the meeting space this fall and winter, we will renovate the guest rooms and the historic tower of the hotel, followed by a lobby renovation next spring. Before we open up the call for questions, I once again thank all the people that worked so hard every single day, making ordinary days extraordinary for our guests. We talk a lot about the investments that we make in our business. We can never lose sight of the fact that our people are our most important asset, and they proved that once again this quarter. With that, at this time, Chad and I would be happy to open the call up for any questions you may have.