Marcus Corporation (The)

Good morning everyone and welcome to the Markers Corporation second quarter earnings conference call. My name is Lydia and I'll be your operator today. At this time all participants are in listen only mode and 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, 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.

Thank you. Good morning and welcome to our fiscal 2024 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 2024 second quarter results and in the risk factors section of our fiscal 2023 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. The reconciliation of adjusted EBITDA to the nearest GAAP measure is provided in today's release. Okay, with that behind us, let's begin. This morning, I'll start by spending a few minutes sharing the results from our second quarter. and discuss our balance sheet, liquidity, and recent financing transactions. 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 in the second half of the year. We'll then open up the call for questions. This morning, we reported a quarter that, as we expected, got off to a slow start, but picked up momentum and significantly improved as we moved further into the summer season. In theaters, the lingering effects of content supply challenges from the Hollywood strikes created a slower than normal start to the summer movie season in April and May. We then turned a corner in June with better content supply, and we saw audiences return for the big screen theatrical experience in big numbers. In hotels, we once again continued our trend of gains in group business and delivered a quarter with solid growth in revenue, occupancy, rev par, and earnings. I'll start with a few highlights from our consolidated results for the second quarter fiscal 2024. We generated consolidated revenues of $176 million, a decrease of $31 million, or 15%, compared to the prior year quarter, with revenue growth in our hotels and resorts division offset by revenue decrease in our theater division. We delivered $2.2 million of consolidated operating income and $22 million of adjusted EBITDA. Operating income was negatively impacted by a non-cash impairment charge of approximately $500,000 related to a leased theater location that we closed during the quarter and which is excluded from adjusted EBITDA. Below operating income, we incurred $13.9 million of debt conversion expense associated with the previously announced repurchase of $86.4 million of our convertible senior notes. I'll discuss our balance sheet and recent financing transactions further in a few minutes But I'll briefly explain the non-recurring debt conversion expense now. The required accounting for the repurchase transaction results in this charge to earnings for the premium paid above the principal value of the repurchased convertible notes. Conversely, the benefit for the cash value we received from the related proportionate unwind of our capital call transactions, which economically offsets the vast majority of the premium we paid to repurchase the convertible notes, is accounted for as a $12.9 million increase in equity that does not run through earnings from an accounting perspective. In other words, in terms of the economics of the transaction that was recognized in the second quarter, the net cash premium to repurchase the convertible notes was really $1 million. In addition to that unfavorable accounting treatment, our income tax expense for the quarter was negatively impacted by 1.1 million for the related non-cash tax impacts of the capped call unwind. In total, our net loss for the second quarter was negatively impacted by 15 million, or 47 cents per share, from the convertible debt repurchases and related transactions. As we have reported in the release, on the overall convertible debt repurchases and capped call unwind transactions, From a cash perspective, we were able to retire 86.4 million of convertible notes for only 87.9 million. Excluding the impacts of the convertible debt repurchases, our net loss for the second quarter of fiscal 2024 was 5.2 million or 17 cents per share. Turning to our segment results, I'll start this morning with our hotels and resorts division. Revenues were 74.5 million for the second quarter of fiscal 2024 an increase of 6.3% compared to the prior year. Total revenue before cost reimbursements increased over 3.4 million, or 5.6% over the second quarter of last year. REVPAR for our comparable owned hotels grew 6.5% during the second quarter compared to the prior year, growing at five of our seven owned hotels. The RevPAR increase resulted from an overall occupancy rate increase of 4.5 percentage points with an average daily rate or ADR that was down just slightly negative two tenths of a percent over the prior year. Our average occupancy rate for our own hotels was 72.7% during the second quarter of fiscal 2024. Our properties continue to perform well against both the competition in our markets and the industry as a whole. According to data received from Smith Travel Research, comparable competitive hotels in our markets experienced RevPAR growth of 4.6% for the second quarter of 2024 compared to the second quarter of fiscal 23, indicating that our hotels outperformed their competitive set by 1.9 percentage points. When comparing our RevPAR results to comparable upper upscale hotels throughout the United States, The upper upscale segment experienced an increase in rev par of 3% during our second quarter compared to the second quarter of fiscal 23, indicating that our hotels outperformed the industry by 3.5 percentage points. The trend of strong group business continued in the second quarter, with group rooms increasing to 44.6% of our total room mix during the second quarter of 2024, compared to 40.1% in the prior year quarter. The slight decrease in ADR resulted from an increase in our group rooms as a percentage of our overall room revenue mix, with growth in midweek group rooms sold, which generally increases occupancy at lower rates. We also continued to benefit from improvements to our revenue management strategy at certain properties to drive higher midweek occupancy at lower daily rate offerings to optimize overall room revenue and REVPAR. our success in growing group business and better revenue management drove our outperformance over our peers in the quarter. With the continued growth in group business and events, our banquet and catering operations grew with food and beverage revenues up 3.8% in the second quarter of fiscal 2024 compared to the prior year. Finally, hotels adjusted EBITDA grew to 11.4 million during the second quarter on the higher revenues. Turning to theaters, Our second quarter fiscal 2024 total revenue of $101.5 million decreased 25.9% compared to the prior year second quarter. Comparable theater admission revenue decreased 28.8% over the second quarter of 23, with comparable theater attendance decreasing 26.3%. According to data received from Comscore and compiled by us to evaluate our fiscal 2024 second quarter results using our comparable fiscal weeks, United States box office receipts decreased 26.8% during our fiscal 2024 second quarter compared to U.S. box office receipts during our fiscal 2023 second quarter, indicating our performance was approximately two percentage points below the industry. Looking by month, We underperformed in April and May, and then significantly outperformed the nation in June. We believe that our lower box office performance during the second quarter was primarily attributable to an unfavorable film mix compared with the second quarter of fiscal 2023, which included 12 weeks of the Super Mario Brothers movie, a film where we significantly outperformed our average market share in the prior year. While the second quarter this year also included the opening of a great blockbuster family film, where we are also enjoying high market share, Inside Out 2. With only two weeks of the film's run falling in our second quarter, much of this outperformance will benefit our third quarter. In addition to the improvement in film mix in June, we believe several changes that we made to promotions during the quarter positively impacted our improvement in performance in June, which Greg will discuss further. Our average admission price decreased by 3.1% during the second quarter of fiscal 2024 compared to last year. The decrease in our admission per caps was primarily due to the introduction of several promotions we introduced early in the summer to encourage movie going and drive attendance. These changes include our new $7 everyday matinee promotion for seniors and children and changes to our Value Tuesday promotion that reintroduced a free complimentary sized popcorn for MMR loyalty members, resulting in higher attendance on Tuesdays at a lower ticket price as compared to other days of the week. In addition, average admission price was negatively impacted by a decrease in the percentage of 3D and PLF ticket sales during the second quarter of 2024 compared to the second quarter last year, which was favorably impacted by high 3D ticket sales from Super Mario Brothers, and more films that played on PLF screens at higher attendance levels. Our average concession food and beverage revenues per person increased by 2.3% during the second quarter of fiscal 2024 compared to last year's second quarter. The increase was primarily due to pricing changes implemented during 2023 and by an increase in the number of concession items purchased per customer. Craig Vaughn, Our top 10 films in the quarter represented approximately 73% of the box office in the second quarter of fiscal 2024 compared to 80% for the top 10 films in the second quarter last year. Craig Vaughn, The less concentrated film slate resulted in an approximately two percentage point decrease in overall film cost as a percentage of admission revenues. On the lower revenues, Theater Division adjusted EBITDA during the second quarter of fiscal 2024 was $15.1 million compared to $31.3 million in the prior year quarter. Shifting the cash flow in the balance sheet, our cash flow from operations was $36 million in the second quarter of fiscal 2024 compared to $55 million in the prior year quarter, with a decrease in cash flow from operations primarily due to the lower EBITDA. Total capital expenditures during the second quarter of fiscal 24 were 19.8 million compared to 7 million in the second quarter of fiscal 23. A large portion of our capital expenditures during the second quarter were invested in the hotel business with guest room renovations at the Pfister Hotel and meeting space and ballroom renovations at Grand Geneva Resort and Spa. The remaining balance of capital expenditures during the quarter were for maintenance projects in both businesses. Our capital investments and renovations projects have progressed as planned, and we continue to expect capital expenditures for fiscal 2024 of 60 to 75 million, recognizing that the timing of several of our planned projects are subject to change as 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 continue to update our capital expenditure estimates as the year progresses. We recently announced the completion of several refinancing transactions. First, as I mentioned earlier in the call, we entered into agreements to repurchase an aggregate 86.4 million of our convertible senior notes for cash consideration of 87.9 million, which is net of the cash we received from the proportionate unwind of the cap call transactions. We effected the repurchase over two tranches. The first $40 million tranche closed in the second quarter, and the second $46.4 million tranche closed in July during our third quarter. We believe the repurchase transactions significantly simplify our capital structure and eliminated potential future dilution at an attractive repurchase price. Following the repurchases, the remaining $13.5 million of convertible notes are a much smaller piece of our overall capital structure, and we expect to settle them with cash at or prior to their maturity in September 2025. Second, in July, we completed a private placement offering of 100 million of senior notes in two tranches, 60 million of 6.89% notes with final maturity in 2031, and 40 million of 7.02% notes with final maturity in 2034. The proceeds of this offering were used to fund the convertible notes repurchases and for general corporate purposes. This was our first return to the private placement debt market since the pandemic, and we were thrilled by the strong demand from new and existing debt investors for this oversubscribed debt offering. Through the completion of these financing transactions, we extended our weighted average debt maturity from 1.6 years to just over four years. We believe the successful execution of this financing once again underscores the importance of our core philosophies of maintaining a strong balance sheet with manageable leverage, ample liquidity, and owning our real estate. Our balance sheet remains strong, and we ended the second quarter with $33 million in cash and over $208 million in total liquidity, with a debt-to-capitalization ratio of 28% and net leverage of 1.9 times net debt to adjusted EBITDA. With that, I will now turn the call over to Greg.

Thanks, Chad. Good morning, everyone. Over the last few quarterly earnings calls, we've talked about our outlook for the year in terms of two storylines that we expected to play out over the short term. First, we expected two different trends in our divisions, with hotels continuing to grow with steady occupancy growth and events in our markets that we would benefit from. while we expected theaters to be impacted by product supply challenges following last year's Hollywood strikes. Second, in theaters, we expected the year to be a tale of two halves, with the most significant impact of the product supply shortages felt in the first half of the year, with stronger product returning in the second half of the year, building momentum heading into 2025. This has played out as expected, though when you peel back the onion, there are surprises both positive and negative within the quarter. While the second quarter started out very slowly in our theater division in April and May, we really started to see an inflection point in June with films that drew large audiences and even broke box office records. In hotels, we got off to a strong start that carried through to deliver a great quarter, which we expect to be followed by an even better third quarter given the events we have going on in our markets. While the quarterly comparisons to last year have been tough, they were not a surprise. We see improvement coming in the second half of the year, and our long-term outlook for both businesses remains positive. I'll start today with our hotel and resorts division. You've seen the segment numbers, and Chad shared some additional detail on the performance metrics, including our outperformance to the comp sets and upper upscale hotels nationally. Overall, the quarter was solid with several highlights. First, we continue to win group business that is filling in midweek occupancy and it helped grow our overall occupancy to nearly 73%. This is our highest occupancy level in the second quarter since the pandemic, and while it isn't quite all the way back to the typical second quarter pre-pandemic average of around 77%, we continue to get closer. Our average daily rates were effectively flat in the second quarter compared to the second quarter last year, and we held ADR despite the increase in group business, which is typically at lower rates. In addition, we continue to benefit from optimizing our revenue management strategies like properties. We've been aggressive on daily rates during low demand periods to drive occupancy and maximize revenue with our available room night capacity. The net result has been successful in growing our occupancy and overall rev part. Finally, We did continue to see some modest rate softening among leisure customers in the quarter at some of our properties, which was offset by rate growth in other segments. Our banquet and catering business continues to benefit from the strength in our group business with food and beverage revenues growing 3.8% in the second quarter of 2024 compared to the second quarter last year. As we look ahead, group bookings remain strong with our group room revenue bookings for the remainder of fiscal 2024 Our group pace in the year for the year, running approximately 11% ahead of where we were at this time last year, excluding the impact of the Republican National Convention in Milwaukee. Looking further ahead, our group pace for fiscal 2025 is running over 36% ahead of where we were at this time last year. Banquet and catering pace for the remainder of fiscal 2024 and 2025 is similarly ahead of where we were at this time last year. Our newly renovated meeting spaces and ballrooms at Grand Geneva Resort and Spa and at the Pfister have contributed to our success in winning groups and event bookings. The guest room renovation of the historic building at the Pfister Hotel was completed on schedule with all rooms back in service in time for the RNC. We plan to complete the last phase of the hotel renovation with a refresh of the lobby and public space later this year. The investments we have made in our properties put us in a great position to win in our markets. As we all saw a few weeks ago, Milwaukee recently hosted the Republican National Convention, and our three downtown hotels, the Pfister, St. Kate, and Hilton Milwaukee City Center, all played a big role in welcoming an estimated 50,000 visitors to the city. During the five nights of the event, we hosted convention attendees and many VIPs in a complete sellout of our over 1,250 rooms at these three hotels, with 19 convention events in our ballrooms and meeting spaces. In terms of financial impact to our third quarter, the RNC generated over $3 million in incremental revenue for the division over our volumes during the same week last year. This was a milestone event for the city with national media coverage that highlighted our great hospitality and all the things that make this city great. While the event certainly will be a net positive to our third quarter results, more importantly, we believe the event showcased the city's ability to successfully host large-scale conventions and events with venues including Baird Center, the expanded convention center that opened earlier this summer, and Pfizer Forum. We are optimistic that the success of the RNC will have a long-term positive impact on event bookings and hospitality demand in the market in future years. Turning to theaters, as I mentioned in my opening comments, we saw a significant difference in the performance of the division in April and May compared to June, both in terms of the overall box office in each month and in terms of our performance relative to the nation. The National Box Office had its biggest monthly decline of the year in April of approximately 38%, and then sequentially improved each month as we had more and better films to play. And Marcus Theater's box office comparisons followed that national trend. Chad went through our results for the quarter, including our circuit underperformance, underperforming the change in the National Box Office by two percentage points in the second quarter compared to last year. However, as Chad mentioned, While we started the quarter slowly, we finished strong. Looking by month, we underperformed in April and May, and then significantly outperformed the nation in June by over nine points for the month. There are several changes that occurred that we believe drove this positive trend that has now continued into July. First, I'll start with the changes that we made. On our last call, I noted with a softer film slate, we were refocusing on driving attendance, keep customers coming to the movies, and making sure we had a compelling offering for everyone. particularly our value-oriented customers. In May, we rolled out our Everyday Matinee promotion, which offers a $7 ticket for kids and seniors for any shows starting before 4 p.m. on a standard screen seven days a week. In addition, we continued to evolve our Value Tuesday promotion. We didn't make any further changes to admission prices on Tuesday. In May, we reintroduced a free complimentary-sized popcorn. for all MMR members, replacing the prior Tuesday promotion of a 20% discount on all food and non-alcoholic drink for MMR members. These changes are designed to drive attendance and appeal to value-oriented customers by making sure that moviegoing remains the most affordable out-of-home entertainment option. Based on the first two months of results, the changes appear to be contributing to our improved performance. Second, the mix of films shifted to genres that played well in our markets in May and including Inside Out 2, If, and Bad Boys Ride or Die, all of which outperformed our normal market share. We expected that the increase in promotions would create a headwind to our admission per caps, which were down 3.1% in the second quarter, and were also impacted by a challenging comparison with high 3D ticket sales for the Super Mario Brothers movie last year. In terms of the quantity of wide release films in the second quarter, We had a similar number of titles with 28 wide releases in the second quarter of fiscal 2024 compared to 29 in the second quarter last year. However, similar to what we saw in the first quarter, the second quarter slate this year was weaker overall with lesser performances and fewer blockbusters with an average opening weekend US box office gross per wide release film that was 28% lower than the same average in the second quarter last year. Only Inside Out 2 opened to over $100 million in the second quarter this year, compared to three films with an opening over $100 million and a fourth film, The Little Mermaid, coming very close with a $95 million opening during the second quarter last year. In June, we saw that once again, when quality product supply is there, audiences still want to come out to see films on the big screen. Inside Out 2 delivered the second highest grossing opening weekend animated film of all time and has gone on to become the highest grossing animated film of all time. overtaking other Pixar blockbusters, including Incredibles 2 and Frozen 2, with a domestic box office that now stands at over $600 million during its six-week run. The momentum continues into July with the releases of Despicable Me 4, Twisters, and Deadpool and Wolverine. With last weekend's highest R-rated opening of all time, Deadpool and Wolverine broke several records for market leaders as well, becoming our highest ever grossing weekend summer film, opening between May and August, and our highest ever PLF grossing opening weekend summer film. As we look ahead to the rest of the year, we see a stronger second half. This fall, we are excited about Beetlejuice, Beetlejuice, Joker, Folly Ado, and Venom, The Last Dance, among others. For the holidays, we look forward to films such as Gladiator 2, Moana 2, Wicked, The Lord of the Rings, The War of the Rohirrim, Kraven the Hunter, Mufasa, and Sonic the Hedgehog 3. As we look further ahead to next year, the slate for 2025 is stacked with several very strong franchises, including Superman Legacy, Captain America, Mission Impossible, Jurassic World, Karate Kid, The Fantastic Four, Snow White, Wicked 2, and Avatar 3, just to name a few. As we look at the product supply ramping back to and potentially exceeding 2023 levels in 2025, and further growth beyond, we remain very positive and optimistic about the long-term future for the industry and our theater business. Finally, I'd like to briefly talk about growth in theaters. While over the last few years we've closed several underperforming theater locations as we optimize our footprint, we continue to look at opportunities to grow this business in attractive locations and with a financial model that makes sense. We recently announced the addition of a new theater to our circuit at the shops at West End and St. Louis Park. a suburb of Minneapolis, Minnesota. This is our eighth location in Minnesota and our closest to Minneapolis, and it's a great example of what we think is possible when we work closely with landlords to reposition a theater, in this case, an attractive lifestyle center in a good market that we know. We reopened the theater as the Marcus West End Cinema in early July, bringing all of our great offerings and programs to customers on day one, including our magical movie rewards loyalty program, Marcus Passport, Value Tuesday, and Everyday Matinee. We look forward to making further improvements to the theater with the landlord in the months to come. Finally, I would like to briefly comment on the financing transactions that Chad covered earlier. As you can tell, we've been busy the last several months developing and executing a financing plan to extend and simplify our capital structure. And I would be remiss if I didn't congratulate Chad on leading a complex refinancing that we believe will be a huge positive for our shareholders in the long term. We often get questions on capital allocations our priorities and how we think about the mix of paying a dividend and share repurchases. One of the ways we viewed repurchasing a substantial portion of our convertible debt was that we were indirectly buying back our equity by limiting potential future delusion. We are continually evaluating where we can best deploy capital with each investment decision, whether for growth, maintaining our assets, or returning capital to shareholders through dividends or through our current share repurchase authorization of 2.4 million shares. In this regard, we are optimistic and opportunistic, and will deploy capital where we see the best returns. 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 they do every day. As we say so often, 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.