Marcus Corporation (The)

Good morning everyone and welcome to Marcus Corporation's fourth quarter earnings conference call. My name is Drew and I will be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of the conference. If at any time during the call you require assistance, please press star zero and an operator will be happy to assist you. As a reminder, this conference is being recorded. Joining us today are Greg Marcus, Chairman, President, and Chief Executive Officer, and Chad Parris, Chief Financial Officer and Treasurer of 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, Drew. Good morning and welcome to our fiscal 2025 fourth 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 headings forward-looking statements in the press release we issued this morning announcing our fourth quarter results and in the risk factor section of our 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, the copy of which is available on the investor relations page of our website at investors.marcuscorp.com. All right, with that behind us, this morning I'll start by spending a few minutes sharing the results from our fourth quarter in the full year and discuss our balance sheet, liquidity, and capital allocation, and then I'll turn the call over to Greg we'll focus his prepared remarks on where our businesses are today and what we see ahead for 2026. We'll then open up the call for questions. This morning, we reported a quarter of solid execution and results with both divisions delivering year over year revenue and earnings growth and outperforming their industries. In theaters, a film slate that featured a favorable film mix coupled with strong per cap growth drove meaningfully improved market share. In hotels, Our renovated properties were winning in their markets, attracting increased leisure demand at higher rates that drove our REVPAR outperformance, capping a record revenue and EBIT a year for the division. Turning to the numbers and starting with a few highlights from our consolidated results for the fourth quarter of fiscal 2025. We generated consolidated revenues of $193.5 million, a 2.8% increase compared to the fourth quarter last year. with revenue growth in both divisions. Our fourth quarter operating income of $1.7 million was negatively impacted by $5.2 million of non-cash impairment charges in the theater division, which are excluded from adjusted EBITDA. Excluding the charges, our fourth quarter operating income was $6.9 million, growing 5.2% compared to operating income of $6.6 million in the fourth quarter of fiscal 2024, excluding impairment charges and non-recurring expenses in the prior year. We delivered 26.8 million of consolidated adjusted EBITDA, a 3.6% increase over the prior year fourth quarter. There is one unusual item in the fourth quarter below operating income that impacted our net earnings and earnings per share that I'd like to highlight. Our fourth quarter and full year income tax benefit includes an approximately 7.6 million or 24 cents per share benefit from federal and state historic tax credits earned related to the completion of the Hilton Milwaukee renovation. The impact of the credits is excluded from our adjusted EBITDA operating results. For the full year, fiscal 2025, consolidated revenues increased just over 3% from the prior year with revenue growth in both divisions. Consolidated operating income for the year was $17.1 million. Excluding the fourth quarter feeder's impairment charges, full year operating income was $22.2 million compared to operating income of $25.9 million in fiscal 24, excluding impairments and non-recurring expenses in the prior year. Finally, adjusted EBITDA for the full year decreased 3.1% to $99.3 million. Turning to our segment results, I'll start with theaters. Our fourth quarter fiscal 2025 total revenue of $123.8 million increased 2.2% compared to the prior year fourth quarter. It is important to note the shift in our fiscal calendar favorably impacted our revenue and attendance comparisons over the prior year periods. Our fiscal year ended on December 31 this year compared to December 26 in fiscal 2024, resulting in five additional days in our fiscal fourth quarter during the busy week between the holidays compared to the prior year. while removing four days in late September when business is slower and resulting in one net additional operating day for the quarter. The shift in our fiscal calendar and additional days between the holidays had a 6.8 percentage point favorable impact on admissions revenue growth and a 6.1, or excuse me, 6.4 percentage point favorable impact on attendance growth compared with the prior year fourth quarter. Comparable theater admission revenue increased 6.1% over the fourth quarter of 2024 with a more favorable mix of family films that played well in our markets. On a calendar quarter basis in both periods, comparable theater admission revenues decreased 0.7%. Comparable theater attendance decreased 5.7% in the fourth quarter of fiscal 2025 compared with the prior year fiscal fourth quarter. While on a calendar quarter basis in both periods, comparable theater attendance decreased 12.1%. Average admission price increased 12.7% during the fourth quarter of fiscal 2025 compared to last year and was positively impacted by strategic ticket price optimization actions implemented during peak demand periods, changes to promotions during the holiday periods, and a higher mix of 3D tickets. According to data received from Comscore and compiled by us to evaluate our fiscal 2025 fourth quarter results using our comparable fiscal weeks, U.S. box office receipts decreased 1.5% during our fiscal 2025 fourth quarter compared to U.S. box office receipts in the fourth quarter of 2024, indicating our theaters lead the industry outperforming by approximately 7.6 percentage points. We believe our outperformance is primarily attributed to our strategic pricing actions, as well as a favorable film slate that featured multiple titles appealing to family audiences, a genre where our circuit typically performs well. Per capita concession food and beverage revenues increased by 7.2% during the fourth quarter of fiscal 2025 compared to last year's fourth quarter, which was driven by increases in incidence rate, higher merchandise sales, and concessions pricing changes. Our top 10 films in the quarter represented approximately 70% of the box office in the fourth quarter of fiscal 2025, compared to approximately 75% for the top 10 films in the fourth quarter last year, with the slightly less concentrated film slate resulting in less than one percentage point decrease in overall film costs as a percentage of admission revenues for the fourth quarter. For the full year, film cost as a percentage of admission revenues was flat compared to fiscal 2024. On the higher revenues, theater division adjusted EBITDA was $24.1 million, a just under two percentage point increase compared to the prior year quarter. Turning to our hotels and resorts division, the fourth quarter capped another record year for division revenue and adjusted EBITDA. Revenues before cost reimbursements were $60.4 million for the fourth quarter of fiscal 2025, a 5% increase compared to the prior year. The shift in our fiscal calendar and net one additional operating day in the quarter had an insignificant impact on the hotel division revenues and results. REVPAR for our owned hotels grew 3.5% during the fourth quarter compared to the prior year, growing at three of our seven owned hotels. The REVPAR increase was driven by a 1.2 percentage point decrease in our occupancy rate compared to the fourth quarter of fiscal 2024 with our average occupancy rate for our own hotels at 60.2% during the fourth quarter fiscal 2025. Average daily rates grew 5.6% during the fourth quarter compared to the prior year quarter as our newly renovated hotels continue to attract demand and drive higher rates. Our properties continue to perform well against the industry as a whole. Based on data from STR, when comparing our REVPAR results to comparable upper upscale hotels throughout the U.S., the upper upscale segment experienced an increase in REVPAR of 0.8% during the fourth quarter compared to the fourth quarter of fiscal 2024, indicating that our hotels outperformed the industry by 2.7 percentage points. Comparable competitive hotels in our markets experienced a REVPAR decrease of 2% for the fourth quarter of fiscal 2025 compared to the fourth quarter of fiscal 2024, indicating that our hotels outperformed their competitive set by 5.5 percentage points. We believe our outperformance versus the competitive set is primarily due to strong demand for our renovated hotels, as well as a heavier mix of transient leisure demand at higher rates. Group demand remained generally steady during the fourth quarter of 2025, with group rooms representing 35% of our total room mix in the fourth quarter of fiscal 2025, compared to 36% of our room mix in the fourth quarter last year. Our group mix in the fourth quarter of 2024 benefited from group business related to the election, with our group mix in the fourth quarter of 2025 reverting to more typical levels. Finally, hotels' fourth quarter adjusted EBITDA was $7.3 million, an increase of 3.4% compared to the prior year quarter, driven primarily by higher revenues. Shifting the cash flow and the balance sheet, our cash flow from operations was $48.8 million in the fourth quarter of fiscal 2025, compared to $52.6 million in the prior year quarter. with the decrease in cash flow from operations due to unfavorable working capital changes related to the timing of payments relative to our fiscal year end. For the full year, cash flow from operations was $84.2 million compared to just under $104 million in fiscal 2024, which was also impacted by unfavorable timing of working capital payments at the end of fiscal 2025 compared to favorable timing of working capital payments at the end of fiscal 2024. Total capital expenditures during the fourth quarter of fiscal 2025 were $22.4 million compared to $25.4 million in the fourth quarter of fiscal 24, which was primarily comprised of Hilton Milwaukee renovation project payments and maintenance projects in both businesses. Total capital expenditures for fiscal 2025 were $83.2 million compared to $79.2 million in fiscal 2024. During the fourth quarter, we repurchased approximately 118,000 shares of our common stock for 1.8 million in cash. This brings our share repurchases for 2025 to just over 1.1 million shares for approximately 18 million in cash, or approximately 3.6% of our outstanding shares at the beginning of the year. Our cumulative buybacks since resuming share repurchases in the third quarter of 2024 are now over 1.8 million shares, or approximately 5.7% of our outstanding share count when we began, returning nearly $28 million in capital to shareholders. In total, over the last two years, we have returned over $45 million in capital to shareholders through share repurchases and dividends paid during fiscal 2024 and 2025. Our balance sheet remains well positioned as we head into 2026, We ended the fourth quarter with over $23 million in cash and over $230 million in total liquidity with a debt to capitalization ratio of 26% and 1.5 times net leverage. As we look forward, I'd like to provide an overview of our current capital allocation priorities for 2026. While we will continue to invest in maintaining our portfolio of high quality assets in both of our businesses, we expect a meaningful step down in capital expenditures in 2026 as we move past the heavy reinvestment cycle of the last few years in our hotel division. In fiscal 2026, we expect to continue to make maintenance and ROI investments in hotels, as well as investments in maintaining and enhancing the customer experience in theaters. For fiscal 2026, we expect total capital expenditures of $50 to $55 million based on our current portfolio of assets. with approximately 25 to 30 million in hotels and 20 to 25 million in theaters. The timing of our planned capital projects may impact our actual capital expenditures during fiscal 2026, and we will continue to provide updates as the year progresses. We expect this decrease in capital expenditures to result in a significant increase in free cash flow in 2026, which will be allocated to opportunistic growth investments and returning capital to shareholders. While we often don't control the timing or availability of deals, we continue to actively search for opportunities to deploy capital to grow our businesses, and we are disciplined in our approach. We remain committed to returning capital to shareholders. In fiscal 2025, we return $27 million, or approximately 32% of our cash from operations, to shareholders through our quarterly dividend and share repurchases. We plan to grow the dividend over time and opportunistically repurchase shares when we generate cash in excess of our near-term ability to reinvest or deploy for strategic growth. With that, I will now turn the call over to Greg.

Thanks, Chad. Good morning, everyone. With Chad covering many of the details of the quarter, I'd like to start today by reflecting a bit on the year, as is often the case. With our two divisions, the story of the year was a bit mixed. We delivered another record year in our hotel division while successfully executing on some very big projects that we expect to have long-term returns. In theaters, while the box office came up short of expectations for the year, audiences continued to come out and have strong demand for the theatrical experience when we have periods of steady product supply. Because of the hits-driven nature of the business, the difference between a decent year and what would have been considered a great success was essentially one or two films that didn't hit as expected. For our company specifically, our fourth quarter results were quite strong, with both businesses outperforming their industries. In theaters, a diverse film slate with family content that played well in our markets helped us achieve strong market share. In hotels, strong leisure demand, particularly at our recently renovated Athens, helped us end the year on a high note. More importantly, We exit the year with good momentum, and as we look ahead to 2026, we are encouraged by the growth opportunities that we see ahead. I'll start today with our theater division. Chad went over the numbers for the quarter with you, including our strong per-cap growth for both concessions, food and beverage, as well as average ticket price that drove our outperformance for the quarter. Overall, the fourth quarter film slate featured a diverse mix of films across genres that appealed to wide ranges of audiences that was particularly appealing to families. which played well in our Midwestern markets. We achieved above average market share for seven of the top ten films in the quarter, with particularly strong share from Wicked for Good, Zootopia 2, Avatar Fire and Ash, Black Phone 2, and The Housemaid. The second tier of films beyond the top ten also made important contributions to the overall box office. With mid-sized films like Regretting You, One Battle After Another, Marty Supreme, and Song Sung Blue delivering compelling stories, that audiences wanted to experience on the big screen, not sitting at home on their couch. The well-rounded holiday slate offered something for everyone, and it is a great example of when our industry is at its best. While we had great blockbuster films like Avatar and Wicked that drew big crowds, the box office was so much more than the tent poles. With multiple films working at once that appealed to different types of audiences, our market share was also strong with several movies in the second tier of films including double our normal market share for the Milwaukee-based hometown favorite story, Songs on Blue. While the overall industry box office was softer than anticipated, we continue to believe this is largely a function of product supply and individual film performance. October was impacted by softer carryover from September releases than we saw last year, as well as a few titles that didn't hit as we hoped. The November slate had one less tentpole film over the Thanksgiving holiday compared to 2024. when the box office included Wicked, Moana 2, and Gladiator 2. When we had a more robust film slate in December, we again saw audiences come out as we would expect. This dynamic continues to illustrate the importance of maintaining consistent and steady product supply that is balanced throughout the year to support the momentum of moviegoing. As Chad discussed, we saw strong per capita growth during the quarter, with average ticket prices benefiting from our ongoing price optimization efforts. As we've discussed throughout 2025, this has been an evolving effort to strike the right balance between capturing price during peak demand periods, as we did during the busy holiday periods in the fourth quarter, and maximizing attendance by having various price points for different types of customers. In addition to optimizing price, we are focused on other opportunities to grow per capita sales. During the quarter, we made progress testing several initiatives that we will believe will be drivers of per capita growth in 2026. First, during the fourth quarter, we began rolling out a new queuing line system that consolidates multiple concession lines into a single line that then is served by multiple concession attendants. The single line moves faster, improving customer perception, and the queue is lined with merchandise displays that enhance product visibility and are proving effective at increasing per capita candy and merchandise sales. We deployed the new queuing process and displays at 14 test locations in the fourth quarter, and we anticipate continuing to roll these out to additional locations in the first half of this year. Second, we continue to focus on improving the customer experience by looking at every step in the customer journey. For a significant majority of our customers, their first interaction with us is the digital ticket purchase. And while we've offered web and mobile app-based ticketing for many years, we saw an opportunity to improve this purchase experience. We've completely redesigned our digital ticketing experience to make the purchasing experience as easy, fast, and frictionless as possible. In November, we launched a new digital ticketing experience for mobile web browsers and our mobile app, followed by the launch of an entirely newly designed MarcusLeaders.com website in early February. The new site simplifies finding the movie, theater, and show times that work for customers, while speeding up the process of seat selection and payments. We're very encouraged by the early feedback from customers and we are well positioned for the ramp up in business as we head into spring and summer movie season. Third, we are working on improving the digital ordering experience for our best-in-class menu of expanded food and beverage options. Again, the goal here is simple. We're going to make the ordering process as easy and frictionless as possible. We know from experience that when customers order concessions, food and beverage on our mobile app, they buy more as they are consistently presented with upsell and cross-sell offers. We're working to significantly improve our mobile web ordering experience for those customers who want a fast digital ordering experience but haven't yet downloaded our app. In December, we began testing NCQR code food and beverage ordering for delivery to seats at two of our dine-in movie tavern locations and expanded this test to three more locations in January. The QR code ordering is simple and fast with integrated digital wallet payment options that significantly speed up the transaction process. The early results have shown encouraging growth in F&B per caps at these locations, and we are in the process of rolling out QR code ordering to all our 20 movie tavern and dining theaters. This will be followed by a redesigned food and beverage digital purchase experience in our mobile web and app for all locations later this year. For those customers who prefer the more traditional purchase experience at the box office, concession stand, and our bars and restaurants, We began rolling out new tap-to-pay terminals in the fourth quarter, and we expect to have the rollout complete at all points of sale by the end of the first quarter. We expect these investments in technology will not only make the purchasing process easier for our customers and enhance per caps, but we expect to get additional data and insight into our customers and their preferences through the new payment technology we are integrating across our various sales channels. We expect to leverage these insights to better tailor our communications and marketing with more customized offers that highlight coming events of interest. We believe it's very important to have programs that promote and incentivize repeat movie going, and we've created several with this goal in mind, including Marcus Passports, Marcus Mystery Movie, and Marcus Movie Club. These programs can also have the added benefit of bringing customers out to see a broader range of small and mid-sized films, in addition to the blockbuster films, which we believe supports a healthier overall exhibition ecosystem. While these programs offer a lower ticket price in the short term, we believe they are important drivers of long-term future attendance. In November, we reached the one-year anniversary of Marcus Movie Club, our subscription program that offers monthly or annual memberships with several great benefits for customers, including a 20% food and beverage discount, access to additional companion tickets for $9.99, and waived digital ticketing convenience fees. After our first year of Movie Club, We added free Marcus Mystery Movies as a new benefit for members, and we continue to look for ways to drive membership and usage of the program. Approximately 38% of members have selected the annual membership, which we believe supports our long-term goal of driving repeat moviegoing. Marcus Movie Club is one of several programs that promote and incentivize repeat moviegoing, including Marcus Passports, Marcus Mystery Movie, and our loyalty program, Marcus Magical Movie Rewards. which now has 6.9 million members. As we look ahead, we are very excited by a 2026 movie slate that includes several potentially very strong titles, including Spider-Man Brand New Day, the Super Mario Galaxy movie, Moana, Tumanji 3, Toy Story 5, Minions and Monsters, The Odyssey, The Mandalorian and Grogu, Dune, Messiah, Dune Messiah, I'll get that right, and Avengers Doomsday, just to name a few. There are many more great films coming, noted in today's earnings release. The current slate has a stronger mix of tentpole films, and the grossing potential of 2026 franchises is greater based on their historical predecessor box office performances. Looking even further ahead, the early look at the 2027 film slate also looks strong with major franchises, including Shrek 5, Star Wars Starfighter, Minecraft 2, Frozen 3, The Batman Part 2, Sonic the Hedgehog 4, Spider-Man Beyond the Spider-Verse, The Legend of Zelda, Avengers Secret Wars, and many more. We are excited about the momentum that is building in theaters and the film slate ahead in the coming years. And we remain very positive and optimistic about the long-term future for the industry and our theater business. Moving to our hotel and resorts division. You've seen the segment numbers and Chad shared the highlights of our performance metrics for the quarter, including our outperformance to the comp sets and upper upscale hotels nationally. So I'll focus my comments on the year overall and looking ahead. We're pleased to report that after another strong quarter to end the year, our hotels team delivered another record-breaking revenue and adjusted EBITDA year in fiscal 2025. This is quite the achievement, given that we are comparing against a record fiscal 2024 that benefited from the Republican National Convention and election-related business that did not recur in 2025. It's even more impressive considering that we also completed the largest hotel renovation project in our history at the Hilton Milwaukee. which disrupted operations and negatively impacted results for the significant number of rooms at the hotel out of service during the first half of the year. Even with the negative impact of the renovation, our rampart growth outperformed our competitive set for the year by 1.2 percentage points, and we really saw an inflection point once we completed the renovation, as we outperformed the competitive sets by over 5 percentage points in the second half of the year. The demand environment was mixed in 2025, with group demand generally remaining strong, particularly at our properties that play well to group business. Leisure demand was mixed across our portfolio in 2025 compared to last year, with some markets seeing softness while others were positive. Demand remained strongest at the upper end of the market. Thus, our upper upscale properties are performing well in an environment where consumers continue to gravitate toward premium experiences. The Hilton Milwaukee renovation wrapped up in the fourth quarter with the lobby and lounge, marking the end of a renovation that updated 554 guestrooms, ballrooms, meeting space, and public common spaces. It looks fantastic, and it is a convention center hotel that Milwaukee can be proud of. While we have made significant capital investments in our hotels over the last few years, we have also been disciplined with the returns required for these projects. Hilton Milwaukee is a good example of our approach. as we chose not to renovate the 175-room West Wing of the hotel and remove the rooms from the Hilton system at the end of December. In mid-January, we reopened the West Wing as the Mark Hotel, an independent select service hotel connected to the Baird Center via Skywalk. The rebranding and repositioning to create a new hotel with a different type of product allows us to continue to operate with minimal capital investment. As Chad discussed, the heavy part of the capital investment cycle that we've been going through the last few years is now behind us, We are winning in our key markets with our newly renovated room product and meeting space, and we've been able to capitalize on that opportunity. As we look ahead to 2026, we're very excited to open our new 11-hole short golf course at the Grand Geneva, known as WeNip. We completed the construction and the growing phase of the course in the late season last year, and play will begin this spring. We believe the course will allow us to capitalize on a growing segment of golf with a great complementary option to our two existing eights and whole courses on the resort, the Brute and the Highlands. With customers looking for distinctive experiential destinations, this added amenity aligns with industry trends, and we expect the short course to enhance the overall appeal of the resort to both leisure customers and group customers looking to mix in another social activity with conferences, training events, and outings. As we look ahead, our outlook for 2026 remains positive with our expectations for low single-digit Rev Park growth. led by modest growth in group business and steady leisure and business travel. Group bookings remain healthy with our group room revenue bookings for fiscal 2026, or group pace in the year for the year, running approximately 3% ahead of where we were at this time last year. Looking a bit further out to 2027, group pace is slightly behind where we were at this time last year for the next year out, although this far out, the timing of bookings can vary significantly. Banquet and catering pace for 2026 and 2027 is ahead of where we were at this time last year. Based on the current demand environment and our future bookings, our outlook for 2026 remains positive. We are excited about the opportunities for future growth in the hotels business, and I would like to congratulate Michael Evans and our hotels and resorts team for delivering a great and record year. 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 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. With that at this time, Chad and I would be happy to open the call up for any questions you may have.