Marcus Corporation (The)

Good morning everyone and welcome to Marcus Corporation's third quarter earnings conference call. My name's Lydia and I'll be your operator today. At this time, all participants are in listen-only mode. We'll 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 Paris, Chief Financial Officer and Treasurer of Marcus Corporation. At this time, I'd like to turn the program over to Mr. Paris for his opening remarks. Please go ahead, sir.

Good morning, and welcome to our fiscal 2025 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, which may be identified by our use of words such as believe, anticipate, expect, or other similar words. Our forward-looking statements are subject to certain risks and uncertainties which may cause our actual results to differ materially from those expected or projected in our forward-looking statements. These statements 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. 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 third quarter results and in the risk factor section of our fiscal 2024 annual report on Form 10-K, which you can access on the SEC's website. Additionally, we refer you to the disclosures and reconciliations we provided in today's earnings press release regarding the use of adjusted EBITDA, a non-GAAP financial measure, in evaluating our performance and its limitations a copy of which is available on the investor relations page of our website at investors.marcuscorp.com. All right, with that behind us, let's begin. I'll start this morning by spending a few minutes sharing the results from our third quarter and then discuss our balance sheet liquidity and capital allocation. 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 a quarter with solid results overall, despite somewhat mixed results in our divisions relative to our expectations. In hotels, we exceeded our expectations and were able to overcome a very challenging prior year comparison to deliver revenue growth and outperform our competitive sets. In theaters, we saw a less concentrated film slate with several films that performed well relative to our own expectations, But the slate lacked a major breakthrough tentpole that we've seen in the third quarter the last couple of years. During our seasonally busiest quarter, our teams in both businesses remain focused on serving our guests with excellence to deliver memorable experiences. I'll start with a few highlights from our consolidated results for the third quarter of 2025. Consolidated revenues of $210 million were down 9.7% compared to the prior year quarter. Operating income for the quarter was 22.7 million, a decrease of 10.1 million compared to the prior year quarter. Consolidated adjusted EBITDA for the third quarter was 40.4 million, a decrease of 11.9 million compared to the third quarter of fiscal 2024. Net earnings for the quarter were 16.2 million, or 52 cents per share, and were favorably impacted by a non-recurring gain on a property insurance settlement of $3 million or $0.10 per share net of tax. Excluding the impact of the gain, net earnings for the third quarter were $13.2 million or $0.42 per share compared to prior year third quarter net earnings of $24.8 million or $0.78 per share, excluding the impacts of our convertible debt repurchases last year. The change in our fiscal year and quarters had an immaterial impact on our third quarter results with one additional operating day during the quarter in fiscal 2025 compared to last year. Turning to our segment results, I'll begin this morning with our theater division. Third quarter fiscal 2025 total revenue of $119.9 million decreased approximately 16% compared to the prior year third quarter. primarily due to weaker performances from the top films in the quarter compared to the top films in the quarter last year and less carryover of films that released in the second quarter compared to last year's carryover. Comparable theater admission revenue for the third quarter decreased 15.8% and comparable theater attendance decreased 18.7% compared with our fiscal third quarter 2024. While our market share in the third quarter of 2025 was in line with our historical third quarter share, including our third quarter share in 2023, this year's film mix did not help us. Notably, the film slate did not include a family animated film in the top five movies of the quarter, a genre that our circuit typically outperforms in. When using our comparable fiscal days, U.S. box office receipts decreased 12% during our fiscal 2025 third quarter compared to U.S. box office receipts during our fiscal third quarter last year, indicating our admissions revenue performance trailed the industry by 3.8 percentage points. We believe that our lower box office performance relative to the nation during the third quarter was primarily attributable to our strong performance in the third quarter last year, when our circuit outperformed the national box office growth by nearly six percentage points. As you may recall, a year ago, our third quarter 2024 box office results benefited from a favorable film mix in which we achieved above our historical average market share for each of our top six movies in the quarter, including several films such as Inside Out 2, Despicable Me 4, and Twisters, where we significantly outperformed our typical share. Our admissions revenues did benefit from several pricing changes that we discussed with you last quarter, with average admission price increasing 3.6% during the third quarter of fiscal 2025 compared to last year. Our admission per caps were favorably impacted by strategic pricing changes, including adjustments to our everyday matinee program and pricing surcharges on select high demand summer blockbuster films. In addition, admission per caps were also favorably impacted by a higher percentage of our attendance on PLF screens compared to last year's quarter. We also grew our average concession food and beverage revenues per person at our comparable theaters, which increased by 2.1% during the third quarter of fiscal 2025 compared to last year's third quarter, and was driven by an increase in merchandise sales and pricing. Our top 10 films in the quarter represented approximately 72% of the box office in the third quarter of fiscal 2025 compared to 83% for the top 10 films in the third quarter last year. The less concentrated film slate featuring fewer blockbuster films compared to the more concentrated slate in the third quarter last year resulted in an approximately three percentage point decrease in overall film costs as a percentage of admission revenues. Finally, theater division adjusted EBITDA during the third quarter of fiscal 2025 was 22.1 million, a 33% decrease over the prior year quarter, primarily due to the lower attendance volumes. Turning to our hotels and resorts division, total revenues before cost reimbursements were 80.3 million for the third quarter of fiscal 2025, a 1.7% increase compared to the prior year. Revpar for our comparable owned hotels decreased 1.5% during the third quarter compared to the prior year, which resulted from an overall occupancy rate increase of 1.7 percentage points offset by a 3.6% decrease in our average daily rate or ADR. Our average occupancy rate for our owned hotels was 78.4% during the third quarter of 2025. As you may recall, Our third quarter 2024 results benefited from the Republican National Convention and its significant impact on the results at our three Milwaukee hotels, resulting in approximately $3.3 million of incremental revenue. The RNC primarily had the effect of increasing average daily rates, and when we adjust out that one-time impact, we achieved some very impressive rate and rev par growth. When excluding the impact of the RNC on our three Milwaukee hotels from last year's results, our average daily rate during the third quarter of 2025 grew approximately 5% compared to the prior year quarter, and RevPar grew approximately 7.5%. According to data received from Smith Travel Research, comparable competitive hotels in our markets experienced a decrease in RevPar of 6.7% for the third quarter of 2025 compared to the third quarter of fiscal 24, indicating that our hotels outperformed the competitive set by 5.2 percentage points. We believe our outperformance resulted primarily from strong sales results with our group customer segment, as well as a strong summer season at Grand Geneva Resort and Spa, and higher results from the recently renovated properties in our portfolio. when comparing our REVPAR results to comparable upper upscale hotels throughout the US. The upper upscale segment experienced a decrease in REVPAR of 1.3% during our third quarter compared to the third quarter of fiscal 24, indicating that our hotels perform generally in line with the industry despite the growth headwind from the prior year RNC impact. and they outperformed the industry by nearly nine percentage points when adjusting for the estimated impact of the RNC on our RevPAR growth. With the strong growth in group business and events, our banquet and catering operations continue to grow with food and beverage revenues up 8.3% in the third quarter of fiscal 25 compared to the prior year, which includes the impact of the headwind from prior year RNC-related banquet and catering events. Finally, hotels adjusted EBITDA was essentially flat in the third quarter of fiscal 2025 compared to the prior year quarter, which we believe was a significant achievement given the changes in our revenue mix with a decrease in high rate, high margin rooms revenue in the prior year due to the RNC and the increase in comparatively lower margin food and beverage revenue. Shifting to cash flow in the balance sheet, our cash flow from operations was $39.1 million in the third quarter of fiscal 2025, compared to cash flow from operations of $30.5 million in the prior year quarter, with the increase in cash flow primarily due to differences in the timing of various working capital payments. Total capital expenditures during the third quarter of fiscal 2025 were $20.9 million, compared to 18.5 million in the third quarter of fiscal 2024. A large portion of our capital expenditures during the third quarter were invested in the Hilton Milwaukee renovation, with the balance going to maintenance projects in both businesses. Our capital investments and renovations projects have progressed as planned, and we now expect capital expenditures for fiscal 2025 of 75 to 85 million. timing of several projects will impact our final capital expenditure number for the year looking ahead as we get past the heavy part of the reinvestment cycle that we are in this year with our current hotel portfolio we see a meaningful step down in capital expenditures in 2026. our preliminary expectation is for approximately 50 to 55 million of capital expenditures in 2026 with this range subject to adjustment for the final timing of payments for our 2025 projects. We ended the third quarter with approximately $7 million in cash and over $214 million in total liquidity with a debt to capitalization ratio of 26% and net leverage of 1.7 times. Finally, in today's earnings release, we announced that during the third quarter, we repurchased approximately 600,000 shares of our common stock for $9.1 million in cash. This brings our share repurchases this year to just over 1 million shares or approximately 3.2% of our outstanding shares at the beginning of the year. Our cumulative buyback since resuming share repurchases in the third quarter of 2024 are now over 1.7 million shares or approximately 5.3% of our outstanding share count when we began, returning nearly 26 million in capital to shareholders. Our strong balance sheet and confidence in our businesses gives us the ability to continue pursuing growth investments while returning capital to shareholders through our quarterly dividend and opportunistic share repurchases. We will continue to allocate capital with a balanced approach that supports our strategic priorities while pursuing investments that provide the most attractive returns to shareholders. Greg will further discuss our capital allocation approach and today's announcement of an increase in our share repurchase authorization. And with that, I will now turn the call over to Greg. Thanks, Chad.

Good morning, everyone. When we were together last quarter, we shared that our summer was off to a solid start in both of our businesses. In theaters, a more diverse film slate was bringing out audiences for a series of solid performances. In hotels, we were gaining momentum as we entered the third quarter and were well positioned with several newly remodeled properties in our portfolio. As the rest of the third quarter played out, we saw some divergence between the results of our two divisions. In theaters, we saw a late summer movie season that included several films that performed well and met our own expectations, but it lacked a runaway hit blockbuster film that we've had the last couple of years, and the film mix was challenging for our markets. In hotels, our team executed exceptionally well, capitalizing on both group and leisure demand, and delivered a quarter that outperformed our competitors in the nation. overcoming a very difficult comparison to our record third quarter results last year. As I will discuss today, while the overall result was a mixed quarter compared to our own expectations, there were many positives that we think will benefit us in the long term. I'll start with our theater division. In a quarter where there has been much industry discussion about a national box office that was down nearly 12%, I'd like to step back for a moment with some perspective and start with a few things that we thought were positive. First of all, we had good product supply, with 32 wide releases in the third quarter this year compared to 29 last year. The film slate was less concentrated, and many of the smaller, mid-sized pictures actually performed better on average than they performed last year. When you get past the top six movies in the quarter, the average box office gross per film for the next 14 films in the top 20 was up over 11%. We believe this illustrates that there is an important role for small and mid-sized films in theatrical photography. Contrary to some of the narrative in the trade press, audiences want to come out to see these movies in theaters. Second, there were several films that outperformed expectations. James Gunn's Superman opened to $125 million domestically, achieving over $350 million in box office during its domestic run and grossing over $600 million globally. More importantly, the success of this DC franchise film sets up a promising outlook for future sequels with more DC adventures on the horizon. Zack Kreger's horror hit, Weapons, crossed $100 million in domestic box office in just two weeks, on its way to over $150 million for the run. Conjuring, Last Rites, smashed box office records with both the highest domestic and global opening for a horror film, going on to become the highest grossing film in the Conjuring series. Demon Slayer Infinity Castle broke the anime record with a $70 million domestic opening and has continued to play strong to become the highest grossing international movie ever in the U.S. with a domestic run now over $132 million. These were all great results for these films, and they illustrate the audience's appeal for a wide range of content across genres. So where did the summer box office come up short compared to last year? We think it ultimately comes down to a couple of simple factors. First, we didn't have a breakout smash hit this year that was the must-see film of the summer, as we've seen in the last two years. The number one film in the third quarter last year was Deadpool and Wolverine, And in 2023, it was Barbie, with both films grossing approximately $630 million domestically in the quarter. As I discussed earlier, the number one film in the quarter this year, Superman, was a great success for many reasons, but at $350 million, its gross was approximately $280 million lower. We've been in this industry for a long time, and this dynamic with varying levels of box office hits from year to year isn't new. It's just the nature of our business. Second, in the third quarter, the summer box office was lighter on family films, a genre we typically outperform. Last year, our top five films in the third quarter included Despicable Me 4 at number two, and Inside Out 2 as the number five film, which was a second quarter release that carried over and held strong in the third quarter. To contribute $183 million to the third quarter domestic box office. This year's third quarter did not have a family animated film in the top five and didn't benefit from carryover of family films released in Q2. Again, this isn't really a new phenomenon, but it did create a tough comparison to last year, particularly for our circuit, which historically has outperformed on family films. Chad discussed the factors we believe are impacting our box office growth relative to the nation. And while we underperformed the nation by just under four percentage points, this was primarily due to our strong outperformance in last year's third quarter, coupled with a film mix this year that didn't include many family films. I'm pleased to share that we continue to make progress on optimizing prices to capture a premium during peak periods and maintain the right balance of value-oriented options for more price-sensitive customers during lower demand periods. As expected, our admission per caps improved during the third quarter as we implemented blockbuster pricing on high-demand films and continued to adjust pricing for our everyday man neighbors. We expect continued growth in our admission per caps for the next several quarters. We're looking forward to an exciting fall and holiday film slate with Wicked for Good, Zootopia 2, Five Nights at Freddy's 2, The SpongeBob Movie, Search for SquarePants and Avatar, Fire and Ash, just to name a few. Advanced ticket sales of Wicked for Good have been strong and are currently trending over three times ahead of pre-sales for last year's Wicked. As we look ahead to next year, The 2026 film slate features major franchises including Spider-Man Brand New Day, the Super Mario Galaxy movie, Moana Jumanji 3, Toy Story 5, Mega Minions, The Mandalorian, and Grogu, Dune, Messiah, and Avengers Doomsday, just to name a few. There are many more great films coming noted in today's earnings release. The 2026 film slate continues to fill in, and the early indications is that while there are a similar number of franchise films in 2026 compared to this year, the grossing potential of the 2026 franchises is greater based on their historical predecessor box office performances. The 2026 slate currently includes four films where the predecessor earned over $500 million at the domestic box office compared to only one such film in 2025. Moving to 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 competitive sets. We expected this quarter to be a challenging comparison to last year for the hotel division, given the significant impact the RNC had on our Milwaukee hotels in the third quarter last year. And I'm thrilled to share that our team met the challenge and delivered absolute growth to overcome the tough comp. The RNC was an extraordinary event for our largest market, and when we back out the RNC impact from our prior year results, our core business performed very well. In particular, two of our newly renovated properties, Grand Geneva Resort and Spa and Pfister Hotel, benefited from our investments in renovations and great execution by our teams to deliver outstanding results this quarter. There were several notable items in the quarter that I'd like to highlight. Average daily rates during the quarter were generally strong, with rate growth at four of our seven hotels when adjusted for the prior year RNC impact. We have been successful in achieving higher rates at our hotels with newly renovated room product, including the Pfister, Grand Geneva Resort and Spa, and Hilton Milwaukee. Occupancy remains strong, with occupancy growth at six of our seven hotels. The combination of strong ADR and occupancy growth resulted in our properties once again outperforming the competitive sets, with impressive rev par growth of 7.5% when adjusted for the prior year impact of the RNC. Group business during the quarter was stable, And as we approach the end of the year, our group room revenue bookings for full year fiscal 2025, or group pace in the year for the year, are running slightly behind where we were at this time last year, which includes the RNC group business last year. Even more encouraging, group room pace for 2026 is running approximately 14% ahead of where we were at this time last year for the next year out, with banquet and catering revenues similarly running ahead of last year's pace. The current state of our hotel business remains stable, consistent with our view last quarter while some markets have seen some more significant leisure softening our own portfolio has generally performed well these are transient demand remains soft in some markets around the country but our hotel portfolio has not seen significant signs of softening or significant cancellations of group business we believe our upper upscale positioning drive to market locations and a broad segmentation lessening our exposure to any one type of customer we'll see less volatility if further economic softening occurs. There remains an increased level of economic uncertainty compared to where we were a year ago, and if we begin to see softness, we are prepared to react and adjust quickly. Our operations team is continuously focused on labor efficiency, and we've developed a strong track record of successfully managing through a changing demand environment. Finally, I'd like to close with our views on capital allocation and returning capital to shareholders. The last couple of years, we've made significant reinvestments in our assets, and as Chad discussed, we expect to move past this heavy CapEx cycle next year as we shift back to a more typical maintenance and ROI CapEx mix. We're seeing great results from our renovated properties, and we believe these investments will continue to have attractive long-term returns. On the growth front, we continue to look for opportunities to deploy capital to grow both of our businesses with value-accretive investments. We have confidence in our businesses, and a strong balance sheet that allows us to move quickly when we see good opportunities. We have a history of executing when they arise. To the extent that we don't see attractive investments that are actionable, we expect to return excess capital to shareholders through share repurchases or dividends. As Chad described in greater detail, we've repurchased over 5% of our outstanding shares through opportunistic share repurchases since we began repurchasing shares in the third quarter of 2024. Between cash dividends and share repurchases, We have returned over $25 million, or approximately 80 cents per share, to shareholders in the last four quarters. This morning, we announced that our Board of Directors has approved a $4 million share increase in our current repurchase authorization, bringing our current share repurchase authorization to 4.7 million shares. In the absence of growth investments with attractive returns, we will continue to use this authorization to opportunistically repurchase shares and return capital to shareholders. this new authorization will give us the flexibility to move quickly as opportunities arise throughout our company's history we've taken a balanced approach of investing in long-term growth opportunities while returning capital to shareholders and you should expect us to continue to do both going forward it won't be all of one or the other we continue to pursue growth opportunities in both of our businesses and we're generally opportunistic investing where we see value and attractive returns whether it be in new deals or or in buying back our stock as we've done recently. Finally, tomorrow marks an important milestone in our history. On November 1st, 1935, my grandfather, Ben Marcus, founded what became the Marcus Corporation with the purchase of a single screen movie theater in Ripon, Wisconsin. During the month of November, we will celebrate the company's 90th anniversary, and our theme for the year has been the spirit of entrepreneurship, one of the guiding principles that my grandfather and dad instilled in all of us and our company's future will be built on that same entrepreneurial legacy. We are called on to push, change, and evolve because, as we know from our 90 years of history, the only constant has changed. I'm excited to celebrate our 90th anniversary with our associates, who, by the way, my grandfather taught us, are our most important asset, as we both recognize our achievements and look ahead to a future that will continue the legacy of these great businesses for many years to come. Before we open up the call for questions, I want to conclude my remarks by saying thank you to all the hardworking associates of the Marcus Corporation. I don't want to ever take for granted what each and every one of them does to contribute to the success of both of our businesses. Thank you. With that at this time, Chad and I would be happy to open the call up for any questions you may have.