Marcus Corp Q3 FY2024 Earnings Call

Good morning, everyone, and welcome to The Marcus Corporation Third Quarter Earnings Conference Call. My name is Lydia, and I'll be your operator today. 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 The Marcus Corporation. At this time, I'd like to turn the program over to Mr. Paris for his opening remarks. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to our fiscal 2024 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, 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 third 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 at our website, marcuscorp.com, as an important source of information regarding our company. We also refer you to the disclosures we provided in today's earnings press release regarding the use of adjusted EBITDA, a non-GAAP measure used in evaluating our performance and its limitations. A reconciliation of adjusted EBITDA to the nearest GAAP measure is provided in today's release. All right. With that behind us, let's begin. This morning, I'll start by spending a few minutes sharing the results from our third 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 for the remainder of the year. We'll then open up the call for questions. Our highlights this quarter include strong operating performance, the completion of the retirement of our convertible debt and the return of capital to shareholders through share repurchases. I'll start with our operating results. This morning, we reported a record third quarter that exceeded our expectations, with both divisions contributing to our strong results. Last quarter, we noted that we believed we had turned a corner with improving theatrical content supply that began in June, and we entered the third quarter with strong momentum in July. Theatres' strong start to the quarter continued deep into the summer with a string of great box office performances that played well in our markets and delivered year-over-year growth in August and September. Our hotel division's Milwaukee properties benefited from the Republican National Convention, which drove strong revenue growth and profitability for the quarter. Both of our businesses outperformed their industries to deliver record revenue, operating income and adjusted EBITDA for our fiscal third quarter, resulting in total company third quarter records for the same measures as well as record net earnings. This is the first quarter that our theatre division and the total company has exceeded pre-pandemic revenue and profitability, marking a major milestone in the extended industry recovery. I'll start with a few highlights from our consolidated results for the third quarter fiscal 2024. We generated consolidated revenues of $233 million, an over 11% increase with revenue growth in both divisions. We delivered $32.8 million of consolidated operating income and $52.3 million of adjusted EBITDA. Below operating income, we incurred $1.4 million of debt conversion expense associated with the repurchase of $13.5 million of our convertible senior notes that we announced at the end of the quarter. I'll recap the economics of our convert repurchases and this quarter's financing transactions in a moment. But in terms of the impact on our results, the repurchases and related noncash tax effect resulted in a combined negative impact to net earnings of $1.5 million or $0.05 per share in the third quarter and $16.5 million or $0.52 per share for the first 3 quarters of fiscal 2024. The unusual accounting for this transaction mirrors our prior repurchases last quarter and further details on the repurchases and related capped call unwinds are described in today's earnings release. Excluding the impacts of the convertible debt repurchases, net earnings for the third quarter of fiscal 2024 was $24.8 million or $0.78 per share. Turning to our segment results. I'll start with the record results in Theatres. Our third quarter fiscal 2024 total revenue of $143.8 million increased 13.6% compared to the prior year third quarter. While we had planned for the second half of the year to be significantly stronger than the first half, we also expected the third quarter to be a challenging comparison given the box office success of Barbie and Oppenheimer during the third quarter last year. A strong slate of blockbuster films that featured a film mix that was favorable to our markets brought huge audiences out to our theatres and drove our outperformance for the quarter. Comparable theatre admission revenue increased 9.5% over the third quarter of 2023, with comparable theatre attendance increasing 7.1%. According to data received from Comscore and compiled by us to evaluate our third quarter results using our comparable fiscal weeks, United States box office receipts increased 3.8% during our fiscal 2024 third quarter compared to U.S. box office receipts during our fiscal 2023 third quarter, indicating that our theatres outperformed the industry by approximately 5.7 percentage points. We believe that our box office outperformance during the third quarter was primarily attributable to a favorable film mix compared with the third quarter of fiscal 2023. We achieved our above our historical average market share for each of our top 6 movies in the quarter, which were Deadpool & Wolverine, Despicable Me 4, Twisters, Beetlejuice Beetlejuice, Inside Out 2, and It Ends With Us. In addition to the favorable film mix, we believe several changes that we made earlier in the year to Value Tuesday with the return of free popcorn and our new $7 Everyday Matinee promotion positively impacted our improvement in performance in the quarter. Our average admission price increased by 2.6% during the third quarter of fiscal 2024 compared to last year. The increase in our admission per caps was positively impacted by an increase in the percentage of PLF and evening ticket sales during the third quarter of 2024 compared to the third quarter last year, which offset the impact of various pricing promotions during the quarter that were used to drive attendance. Concession, food and beverage revenues were up nearly 14% with per capita concession, food and beverage revenues increasing by 7.9% during the third quarter of fiscal '24 compared to last year's third quarter. The increase was primarily due to pricing changes implemented during 2023 and by an increase in the number of concession, food and beverage transactions per ticket sold or our hit rate. Our top 10 films in the quarter represented approximately 83% of the box office in the third quarter of '24 compared to 73% for the top 10 films in the third quarter last year. The more concentrated film slate resulted in an over 2 percentage point increase in overall film costs as a percentage of admission revenues. On the higher revenues, theatre division adjusted EBITDA was a third quarter record $33.2 million, an increase of 24.3% compared to the prior year quarter. Adjusted EBITDA margin during the third quarter of fiscal 2024 was 23.1%, which was not only 200 basis points higher than our third quarter margins last year, it was also higher than our 22.3% adjusted EBITDA margin in the third quarter of 2019. This quarter demonstrates that despite cost inflation over the last several years, we can get back to our old margins and profitability when the film product is consistently there driving box office, even with 22% less attendance than the third quarter of 2019. Turning to our Hotels & Resorts division. Revenues were $88.7 million for the third quarter of fiscal 2024, an increase of 8.1% compared to the prior year. Total revenue before cost reimbursements increased over $6.9 million or 9.6% over the third quarter of fiscal '23. RevPAR for our comparable owned hotels grew 9.8% during the third quarter compared to the prior year, growing at 4 of our 7 owned hotels. RevPAR increase resulted from an average daily rate or ADR that was up 9.6% over the prior year with an overall occupancy rate that was essentially flat. Our average occupancy rate for our owned hotels was 76.7% during the third quarter of fiscal 2024. The Republican National Convention held in July significantly impacted the results at our 3 Milwaukee hotels, resulting in an approximately $3 million increase in revenue during the 5 days of the convention. The RNC primarily had the effect of increasing average daily rates with limited impact on occupancy during our normally peak summer period. Excluding the impact of the RNC for the 3 Milwaukee hotels, the average daily rate during the third quarter of 2024 was effectively flat compared to the prior year quarter and RevPAR grew approximately 1%. Our properties continue to perform well against the industry as a whole. When comparing our RevPAR results to comparable upper upscale hotels throughout the United States, the upper-upscale segment experienced an increase in RevPAR of 1.4% during our third quarter compared to the third quarter of fiscal 2023, indicating that our hotels outperformed the industry by 8.4 percentage points, including the benefit of the RNC. According to data received from Smith Travel Research, comparable competitive hotels in our markets experienced RevPAR growth of 12.4% for the fiscal third quarter of 2024 compared to the third quarter of fiscal 2023, indicating that our hotels underperformed their competitive set by 2.6 percentage points. We believe our lower performance compared to the comp set was primarily due to our higher mix of contractual airline crew business at lower rates, which we believe did not impact competitive hotels during the RNC. Group demand continued to grow during the third quarter of 2024, particularly during midweek with group rooms increasing to 47.3% of our total room mix and 43.1%, excluding the RNC groups during the third quarter of fiscal 2024 compared to 40.7% in the prior year quarter. An increase in our group rooms as a percentage of our overall room revenue 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. With the continued growth in group business and events, including the RNC, our banquet and catering operations grew with food and beverage revenues up 10.2% in the third quarter of 2024 compared to the prior year. Finally, on the higher revenues, hotels adjusted EBITDA grew to a third quarter record, $23.1 million, increasing 18.7% during the third quarter compared to the prior year quarter. Shifting to cash flow and the balance sheet. Our cash flow from operations was $30 million in the third quarter of fiscal 2024 compared to $21 million in the prior year quarter, with the increase in cash flow from operations primarily due to the higher EBITDA. Total capital expenditures during the third quarter of fiscal 2024 were $18.5 million compared to $10 million in the third quarter of fiscal 2023. A large portion of our capital expenditures continue to be invested in the hotel business during the quarter, including our renovations at The Pfister Hotel and meeting space renovations and associate housing construction at Grand Geneva Resort & Spa. The remaining balance of capital expenditures during the quarter was for maintenance projects in both businesses and construction related to the relocation of our corporate and divisional headquarters offices. Our capital investments and renovations projects have progressed as planned, and we now expect total capital expenditures for fiscal 2024 to end up at approximately $70 million to $75 million. As I mentioned earlier in the call, during the third quarter, we entered into an agreement to repurchase $13.5 million aggregate principal amount of our remaining convertible senior notes for $15.5 million of cash consideration, net of the cash received from the unwind of the capped calls in a transaction that closed in October. This marks the retirement of substantially all of the $100 million convertible in 2025, with the overall program resulting in the repurchase of $99.9 million of convertible notes for net cash of $103.3 million. We believe the repurchase transactions eliminated potential future dilution at an attractive price to retire the debt and significantly simplified our capital structure. In addition, as we mentioned on our last call, early in the third quarter, we also completed a private placement offering of $100 million of senior notes, which were used to refinance the convertible notes repurchased and extend maturities. The notes were issued in 2 tranches, $60 million of 6.89% notes with final maturity in 2031 and $40 million of 7.02% notes with final maturity in 2034. With the completion of these financing transactions, our balance sheet is well positioned as we head into 2025. We ended the third quarter with $28 million in cash and over $248 million in total liquidity with a debt-to-capitalization ratio of 27% and net leverage of 1.7x net debt to adjusted EBITDA. Finally, as we announced in today's press release, during the quarter, we once again began repurchasing shares, buying approximately 693,000 shares of our common stock for $9.7 million in cash. Our strong balance sheet and confidence in our businesses gives us the ability to continue investing in our businesses and pursuing growth 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 long-term returns to shareholders. With that, I will now turn the call over to Greg.

Thanks, Chad. Good morning, everyone. Last quarter, we talked about the improving trends we were seeing, including a stronger film slate and what felt like a turning point in June. The third quarter had a strong start in July, and we anticipated a good quarter in both of our businesses. I’m pleased to report that the positive trends continued, and our teams achieved record results in both divisions, marking a record third quarter for the company overall. This success contributed to record revenue, operating income, and adjusted EBITDA in theatres, surpassing our previous pre-pandemic records from the third quarter of 2019. Although the long-term recovery for the theatre industry has been complex with several short-term disruptions, this quarter showed significant progress, and we are clearly gaining momentum as we move toward 2025. Our hotel division also set third-quarter records, driven by the Republican National Convention in Milwaukee, which significantly boosted average daily rates and highlighted the potential for future events in this market to increase room demand. While growth and recovery in our industry aren't always linear and not every quarter will break records, this quarter felt very strong, and I’m excited to share our third quarter results. Starting with our theatre division, as Chad mentioned, we outperformed the industry by nearly six percentage points this quarter, and there are several factors contributing to that. The film slate was exceptional and resonated with our audience, especially in July, thanks to a solid lineup of family content like Inside Out 2, which became the top movie of the year with over $650 million in domestic box office revenue, along with Despicable Me 4 attracting families to theatres. The film Twisters also resonated well with Midwest audiences, and Beetlejuice performed strongly as well. We exceeded our typical market share with the blockbuster Deadpool & Wolverine, which had a stellar opening and went on to become the highest-grossing R-rated film of all time. This film also set several records for Marcus Theatres, topping our highest-ever grossing weekend summer film opening between May and August, along with our highest-ever PLF grossing opening weekend for a summer film. The boost in box office performance this quarter compared to last year was largely driven by the top five films, but we also had more films available, with 30 wide releases this year versus 24 last year. Our focus on driving attendance by offering appealing experiences, especially for value-oriented customers, has been instrumental in our success. Changes to our Value Tuesday promotion, including reintroducing free popcorn for all MMR members, have helped maintain customer engagement. Our Everyday Matinee promotion, which offers $7 tickets for kids and seniors for any shows before 4:00 p.m. on standard screens seven days a week, has also contributed to higher attendance. Our marketing and film teams are continuously collaborating to launch creative promotions designed to encourage moviegoing and attract customers who might not regularly attend. This summer, we introduced the Marcus Mystery Movie promotion, where on two Mondays each month, customers can attend a 7:00 p.m. screening of a movie before its official release for just $5, with the film's title remaining a mystery until showtime, except for its rating and whether it's a horror film. Although it's early in the Mystery Movie program, it has positively impacted our Monday attendance. Customers have provided very positive feedback, and the promotion has generated buzz on social media. The aim of these initiatives is to enhance attendance and cater to value-oriented customers to ensure that moviegoing remains an affordable form of entertainment. As Chad noted, we saw meaningful growth in per capita spending on both admissions and concessions, which we believe benefited from the quality film slate and several changes in promotions and pricing. Looking ahead to the end of the year, we see a strong slate for the holidays. Although October started slower than we hoped, we’re excited about upcoming films such as Gladiator II, Moana 2, Wicked, and several others crammed into 2025, which is shaping up to be a very strong year for cinema. Now turning to our Hotel & Resorts division, as you observed in the segment numbers, our team performed exceptionally well during the busy months, driven greatly by the Republican National Convention. Due to the event in July, we provided operational highlights on our last call. The sell-out of 1,250 rooms at our three downtown Milwaukee hotels at premium rates allowed for roughly a nine-percentage point increase in average daily rates for the quarter, contributing an additional $3.3 million in revenue compared to the same week last year. While events like the RNC aren't yearly occurrences, we believe its success highlights the city's capability to host major events, which will positively influence future bookings. Excluding the RNC's impact, we still executed well during our busiest quarter, with average daily rates remaining about flat compared to last year, and RevPAR improving modestly. Group business is becoming a larger part of our total mix, accounting for 43% compared to 40% last year. However, leisure customer demand remains softer, reflecting the trends we've observed throughout the year at some properties, which we've offset with increased group business and a slight uptick in business travel. Our hotel marketing team is also creatively adjusting strategies and offering promotions and packages to draw leisure customers in this softer environment to boost occupancy. Looking ahead, our group bookings are strong, with group room revenue running about 11% higher than last year. For fiscal 2025, we're over 30% ahead of last year for non-RNC-related group business. Banquet and catering bookings are also trending positively. I must highlight the recent accolades received from Conde Nast Traveler and other industry outlets, which recognize our hotels' quality. These achievements reflect the hard work of our entire staff, and I extend my gratitude to the hotel team for another outstanding quarter. In closing, I want to briefly discuss our financial strategy. We were glad to repurchase almost all of our remaining convertible notes, finalizing our capital structure. Retiring the $100 million in convertible debt for $103 million was a smart move, and I want to thank Chad for his leadership during that process. With the convertible notes behind us, we moved to repurchase over 2% of our outstanding shares, maintaining a balanced approach to capital allocation that supports growth opportunities while also returning capital to our shareholders. As we’ve discussed, we’re reinvesting in our assets, and our management team is focused on finding growth opportunities. With our solid balance sheet, we see the share repurchases as an attractive return for shareholders. We'll continue to evaluate investment options with a focus on maximizing returns. I want to again express my appreciation for all our dedicated associates at The Marcus Corporation. While we often discuss our business investments, we must remember that our people are our greatest asset, and they demonstrated that once more this quarter. Thank you to all our associates on behalf of our Board and executive team. Chad and I are now happy to take any questions you may have.

Greg, Chad, congratulations, guys. What a great quarter. Well done. Just 2 questions. First one, Greg, on the consumer. I know you're pretty close to your consumers. Do you think you're benefiting from sort of a trade down here? Obviously, we've seen the inflation impact, broadly speaking, on the consumer and the economy. And when you sort of reflect on your pricing. You don't give attendance, but pricing, I'm guessing per ticket sort of sub-10, concessions sub-8. So you're sort of getting a few hours outside the home plus food for under $20. So the value proposition, I guess, in this market seems remarkable, especially when you consider, as you alluded to, the '25 slate that has got a lot of exciting movies, and I think sentiment overall for moviegoing has increased. So I'm just curious if you think you're sort of benefiting in that broad scenario I just outlined. And then the second question would be on capital allocation. You seem way ahead of your peers here, and you did mention a buyback, which is exceptional to see. I'm curious how you're thinking about M&A. I mean, obviously, you've not looked away from it. Are you seeing activity? Do you feel like you're in a position now to be opportunistic? I know you did one theatre deal, I think, last quarter, but how you're sort of thinking about the opportunity to sort of grow your asset base given where you are in your capital allocation recovery?

You raised a great point about the broader economy and its effects. I can't say for certain what will happen, and I wish I knew. We've often noted that during 6 out of the last 8 recessions, the theatre business improved because it's the most affordable form of entertainment outside the home. When people want to go out but don’t want to spend too much, that's when we benefit. I believe it's a mix of many factors, including our product offerings. While I’d love to take credit for our success, I think we just got lucky to some degree. They say luck is where opportunity meets preparation, and we were prepared. We made significant operational changes, like revamping our Tuesday promotions 1.5 years ago, reintroducing free popcorn, and ensuring our pricing was family-friendly. Those were vital adjustments alongside other marketing efforts and plans for more. Additionally, we had a year where we made some changes and knew we needed to catch up. I agree with your observation that a slowing economy could positively impact theatre exhibition on a macro level. Regarding M&A, we are open to it and will always approach it thoughtfully. Although I haven't heard much activity lately, I've noticed some buzz here and there. Many seem to be waiting for stability before making decisions. Much of what we would consider involves longstanding family-owned businesses. They received significant support during the recent challenges, which helped them avoid making pressured decisions. Now, they're assessing their situations, and once they feel stable, they might look to make changes. However, as of now, there's not much going on.

By the way, that Mystery Movie, genius idea. Congrats, man. So good luck, guys.

Two questions. I guess, one, obviously, you talked about some of the share gains and outperformance in the quarter with some of it was driven by the changes you made to Value Tuesday and the $7 Matinee. Anyway, Chad, to estimate what that might have benefited in the quarter? I know it's tough to figure out if someone shifted for another day to that or whatnot, but maybe just kind of some guesstimate of what it may have been. And then remind us when you lap those changes in the coming quarters? And I have a follow-up as well.

Yes, Eric, thanks for the question. It’s challenging to dissect and analyze the impact of the recent changes after rolling them out on Value Tuesday. However, we have received overwhelmingly positive customer feedback, as reflected in our NPS scores and various anecdotal responses. This has successfully attracted some of our value-oriented customers, boosting attendance and encouraging them to make additional purchases while in the theater. Overall, this has been beneficial for us. Additionally, the film slate this quarter played a significant role, particularly with genres that resonated well with our audience. As for your last question, we will reach the anniversary of the recent changes in May next year, and we anticipate continued year-over-year benefits for some time.

Got it. Regarding the last question about mergers and acquisitions, specifically on the hotel side, you've mentioned before the possibility of engaging in more on-balance sheet transactions with hotels when it makes sense. What would you need to observe in that context? Of course, identifying an appealing target and opportunity is key. Generally, what factors would influence your decision? For instance, how much would interest rates need to decrease, or is the current market situation simply not presenting any attractive options?

I believe your last point touches on the current slow market for transactions. Many assets are held by individuals who purchased them when interest rates were lower and likely incorporated lower cap rates into their projections. As a result, they are hesitant to sell unless absolutely necessary. The economy has been stable, allowing them to hold on to these assets. However, if interest rates decrease, it could lead to a more active market as people may begin to engage in transactions again.

I am following up on the improving attendance trends within the theatre sector. I was curious if you believe you have regained all the market share you lost. If not, do you think that is something you can build up to? Additionally, I want to know if people returning to theatres are those who previously thought cinema prices were too high or if they are coming from more competitive markets.

Pat, I assume you're referring to the Tuesday changes specifically. Yes. I mean I think it's really more of the latter, tough to tell, but it's more about the customer that either comes or doesn't come. But in many of our markets, I don't think it's really so much as they're going to one theatre operator versus another. The Tuesday changes are directed at deeply value-driven customers. And we're trying to make sure that there's a price point on a day of the week or a certain showtimes, whether it's our Everyday Matinee program that appeals to them. And it's not just day of the week, it's also making sure that there's non-PLF options available at good showtimes alongside the PLF options. So for somebody who maybe doesn't want the PLF upcharge, those options are available to them. And when they look at the total ticket, the total cost of going out to the movies, inclusive of food and beverage and the experience for the family that we've driven or we've provided an offering that is attractive for them and gets them to come out. So I think it's more about coming versus not coming.

Okay. Have you started to introduce more merchandise or collectible items into the concession offerings, or is it mainly that people are finding the combined value of the movie and concessions appealing?

Not a ton of merchandise on a stand-alone basis, Pat, but we have had an increase in things like souvenir cups and souvenir popcorn tubs that do create a must-have item associated with some of these films, and we do think that, that's helped drive concession purchases, but not a ton of stand-alone merchandise. We'd like to thank you once again for joining us today, and we look forward to talking with you again in February when we release our 2024 fourth quarter results. Until then, thank you, and have a good day.

This concludes our call. Thank you for joining. You may now disconnect your lines.