Earnings Transcript for MCS - Q1 Fiscal Year 2024

Operator: Good morning, everyone, and welcome to The Marcus Corporation First Quarter Earnings Conference Call. My name is Lauren, and I will be your operator for today. [Operator Instructions] 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.

Chad Paris: Thanks, Lauren. Good morning, and welcome to our fiscal 2024 first 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 first 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 first quarter with you and discuss our balance sheet and liquidity. And then I'll 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 in which we expected to face significant headwinds. The first quarter is always a seasonally challenging quarter with slower leisure travel at our Midwestern hotels during the winter months and what is often a lighter movie slate coming out of Hollywood. In addition to the normal seasonality, this year, we knew we would face content supply challenges resulting from the prolonged movie production shutdown during last year's Hollywood strikes. With these challenges in mind, our teams were focused on closely managing our operations and the things that we can control. Our first quarter results were mixed in our 2 segments. Our hotel division delivered revenue, RevPAR and earnings growth on continued strength in our group business. While our theaters division was negatively impacted by the weaker film slate with significantly lower attendance, we managed expenses well on the lower revenues. I'll start with a few highlights from our consolidated results for the first quarter of fiscal 2024. Consolidated revenues of $138.5 million decreased $13.7 million or 9% compared to the prior year quarter, with revenue growth in our hotels and resorts division offset by the revenue decrease in our theater division. Operating loss for the quarter was $16.7 million, a decline of $7.7 million compared to the prior year quarter. Consolidated adjusted EBITDA for the fourth quarter was $2.3 million, a decrease of $7.2 million over the first quarter of fiscal 2023. Turning to our segment results. I'll start this morning with our hotels and resorts division. Revenues were $57.2 million for the first quarter of fiscal 2024, an increase of 2.5% compared to the prior year. Total revenue before cost reimbursements at our 7 owned hotels increased over $1.7 million or 3.8% over the first quarter of fiscal 2023. RevPAR for our comparable owned hotels grew 2.1% during the first quarter compared to the prior year, which resulted from an overall occupancy rate increase of 2.9 percentage points, partially offset by a 3.4% decrease in our average daily rate, or ADR. Our average fiscal 2024 first quarter occupancy rate for our owned hotels was 53.7%. The decrease in ADR resulted from an increase in our group rooms as a percentage of our overall room mix with growth in midweek group rooms sold, which generally increases occupancy at lower rates. Group rooms increased to 34.5% of our total room mix during the first quarter of fiscal 2024 compared to 28.9% in the prior year quarter. In addition, improved revenue management during slower weeks and midweek nights in the first quarter resulted in growing occupancy and RevPAR at lower daily rate offerings to optimize overall rooms revenue. Our success in growing group business and better revenue management was evident in our performance relative to our peers. According to data received from Smith Travel Research, comparable competitive hotels in our markets experienced effectively flat RevPAR growth of 0.1% for the fiscal first quarter of 2024 compared to the first quarter of fiscal 2023, indicating that our hotels outperformed their competitive set by 2.3 percentage points. When comparing our RevPAR results to comparable upper upscale hotels throughout the United States, the upper upscale segment experienced an increase in RevPAR of 2.0% during our first quarter compared to the first quarter of fiscal 2023, indicating that our hotels performed in line with the industry nationally. With the continued growth in group business and events, our banquet and catering operations continue to grow, with food and beverage revenues up 6.4% in the first quarter of fiscal 2024 compared to the prior year. Finally, hotels adjusted EBITDA increased slightly in the first quarter of fiscal 2024, an improvement of approximately $400,000 compared to the prior year quarter. Turning to theaters. Our first quarter fiscal 2024 total revenue of $81.3 million decreased 15.7% compared to the prior year first quarter. Comparable theater admission revenue decreased 13.8% over the first quarter of 2023, with comparable theater attendance decreasing 17.5%. Our first fiscal quarter began on December 29 and ended on March 28, and thus included 3 days between the holidays, but excluded the opening weekend of Godzilla x Kong

Gregory S. Marcus: Thanks, Chad. Good morning, everyone. We entered the year with a mixed short-term outlook in our 2 businesses. In hotels, we saw a continuing trend of strong group bookings, an overall healthy economy with steady travel demand, significant events and demand drivers in our markets and several recently renovated properties in our portfolio with strong positioning in their markets. By contrast, in theaters, we know we would have to navigate a short-term content supply disruption resulting from the shutdown of movie production during the 2023 Hollywood strikes that would likely create challenges for several quarters. As I shared on our last call, January and February got off to a slow start. And while I'm happy to share that March was better, it was still a tough quarter for the movies. We anticipated these short-term challenges in our industry, and we manage the business accordingly. While the comparisons to last year are certainly tough, the overall company first quarter results are actually slightly better than what we expected. We often get asked why we have these 2 different businesses. And this quarter, along with the last several years, have really illustrated the benefits of our diversified business model that can provide a counterbalance when we encounter periodic bumps in one of our businesses. While the short-term expectations for our theater and hotel divisions are going to differ this year, our long-term outlook for both businesses remains positive and optimistic, and we expect growing momentum in the back half of the year. 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 our in-line performance with upper upscale hotels nationally. As we've discussed in past years, there is significant seasonality in our hotel business, given that most of our company-owned hotels are located in the Midwest. We often lose money in this division during the winter months. And in the first quarter of fiscal 2024, we were at breakeven EBITDA, an improvement over our prior year EBITDA loss. There were a few notable trends in the quarter that I would like to highlight. I'll start with what we're seeing with average daily rates. Our average daily rates were down 3.4% in the first quarter compared to the first quarter last year, and the drivers of this are due to 3 factors

Operator: [Operator Instructions] Our first question comes from Eric Wold from B. Riley Securities.

Eric Wold: A few questions kind of based on some of the comments you made in your pre -- your opening remarks. I guess, one, other than the -- for the theater segment, other than the spending patterns around tickets and mostly concessions that are kind of influenced directly by the film slate. Can you talk about anything you're seeing from your theater customers in terms of their willingness to spend or changing their spending patterns? Any shifts in ticket price, any movements around upgrade, days of the week they visit, basket size [indiscernible], anything that would kind of give you more or less confidence in kind of the health of the consumer as you kind of enter hopefully a strengthened film slate in the coming quarters?

Gregory S. Marcus: Yes. It's -- look, it's hard to actually tell -- like, for example, do we know what days of the week they shift into, we don't know necessarily. We're not seeing a lot of -- it's hard to see where they've necessarily shifted from one or the other. We can see a little in our data from our loyalty stuff to see where people are moving. But look, I think the bigger thing that we want to be thoughtful about as we look forward and that is that the movie business tends to be a really -- if there is going to be weakness, and I think the jury is out. But if there's going to be weakness, the movie business tends to benefit from that in that, [ they all saying, ] 6 out of the last 8 recessions, the movie business got better. And that's -- because we become the most attractively priced out-of-home entertainment option for people. And so for us, we then make sure that our pricing is appropriate to capture that customer who may be feeling some economic stress and being smart about how we do that. But we don't have any -- it's still a little early.

Eric Wold: Got it. Okay. And then, Chad, you talked about, the theater segment -- sticking with the theater segment still, you talked about some of the market share loss around Dune 2, given the strength of IMAX and what IMAX did to kind of really promote and market that film as shot with IMAX cameras and the best way you could see it and all that. Knowing that IMAX's goal over the coming years, and they've got an increased slate of films shot with IMAX cameras that will be coming out later this year and into next year, even if we get a more robust film slate overall that can be playing in your PLF and you've got more versatility there, is there a risk of sustained share shift if that becomes an increasing part of IMAX's strategy and the studio strategy to use IMAX in that way?

Chad Paris: Yes. I mean, this -- Dune was a pretty unique movie, Eric, in the magnitude of the shift that we saw. And when we look back at films that were similar last year, we didn't see that shift. And then when we look at the other films that would be a good fit for PLFs in the first quarter, which -- that's a limited sample size, we didn't see it at all. In fact, we saw it go back to historical norms. So as I said in my prepared remarks, it really gets amplified when we don't have a lot of PLF content. And we -- as you know, we have such a high penetration of PLFs across our circuit that we do really well when there's more than one big film to show in any given quarter, and we just didn't have that this quarter. So we'll continue to monitor the dynamics here. But they've -- I would just say they've had that strategy with other films last year. Oppenheimer was one that I would point out. And even with Ghostbusters, it was -- it had similar -- shown an IMAX-type promotion, and we didn't see it there. So we'll continue to monitor it, but we feel pretty good about how our PLFs are set up in the customer experience.

Eric Wold: Helpful. And then last question for me. I guess more of a corporate philosophical question. I mean, the stock price is at kind of the lowest level it's been in 10 years, excluding the pandemic hit. I guess, given the optimism you guys have, and I think we all have on the box office recovery path post this strike-impacted year along with your ability to kind of continue to grow the hotel segment. When do buybacks become a better use of cash flow? I know there is some uncertainty around CapEx needs with the hotel segment and one of your properties there. But just thinking about when does that become a better use of capital than maybe something else given what we could see in the coming years from both of your segments?

Chad Paris: Yes. I guess I'll start with, I think you're right. We certainly have strong conviction and optimism long term on both of these businesses. But we are weighing several things on capital allocation. The $60 million to $75 million of CapEx this year is certainly significant and a big ramp-up in the hotel business, and we've got some other reinvestments to consider as we head into next year also in the hotel business. But it creates a unique opportunity down here at the share price, and we want to clean up the capital structure. So there's a few different ways that you can look at share repurchases, and we've got to convert that is coming due next year that we're going to want to deal with over the course of the next 1.5 years. So those are all the things that we're thinking through, but we do have an open authorization on share repurchases and opportunistically that's always an option for us.

Operator: Our next question comes from Jim Goss from Barrington Research.

James Goss: All right. One question on the hotel side with this conversion and purchase in Minneapolis to the Tapestry Collection. I'm not so familiar with that particular brand. I think you mentioned it was a luxury lifestyle hotel. I wonder if you could talk about that in terms of the pricing level and the incremental benefit you think you're going to be able to get out of that particular property?

Gregory S. Marcus: Well, the Tapestry Collection hotel is -- Tapestry Collection, it's Hilton. The goal is to get into the -- on the Hilton reservation system and on the Hilton loyalty program. So that's -- and that's one of their, what they call, soft brand. So it's not -- doesn't have the Hilton -- it's not called the Hilton, but it's Tapestry by Hilton, so it's pretty close. And again, it gets the benefits of being in their system. And we don't discuss specific hotel projections and increases, but trust that we expect that by moving to a stronger system, we expect that, that will drive increased performance.

James Goss: Okay. And One follow-up on the -- to Eric's question about Dune. I was wondering if you feel that particular movie had more of an urban focus. And to the extent that most of the competition you would have with IMAX would be in a smaller subsector of your markets where that would be a conflict. Do you think that's part of the issue, too, that it's just the nature of the film itself relative to your markets?

Gregory S. Marcus: Yes. Absolutely. We believe -- and we believe, generally, we've had some -- one of the things contributing this quarter was just a film mix stuff. When you get to the smaller films, they don't play as well in the Midwest. And Dune is not a smaller film. But again, that one had more -- when you get more urban focus, that's not where we shine. And so it's -- you're right, we were facing headwinds from that. And we even saw -- we have an IMAX in a pretty isolated market and its performance was not as robust as some of the other ones. So we have some insight into what's going on with IMAX because we do have a few of them. But it performed really well on IMAX, but it was -- that was one time one analyst wrote something about a tax treatment we got. Asked the question, is it an aberration or a revelation? I'm not sure it's a revelation.

James Goss: Okay. Also, I wanted to ask about the impact of the footprint optimization you've executed over recent years, along with the rest of the industry. I think you've been a little more aggressive than some. And I wonder what sort of headwind do you think that might characterize or you might be able to quantify in terms of the revenues you've been able to generate out of the theaters. Has that been significant, do you think? Maybe this is a Chad question.

Chad Paris: Yes. No, I'll take that one, Jim. The -- so just to clarify, when we talk about our growth rates and our comparisons year-over-year, those are same-store numbers. And so I'll start with that. Then generally, in the locations that we've closed, we often have other theaters in the market. And what we're really doing is consolidating customers into other capacity in the market. Now is there -- are there some customers who may not come anymore because the theater that we closed was really close to them and they have to drive another 5 miles to get to our next closest theater. Yes, there's some -- there may be some level of that. But our general view is that our recapture of displaced customers is quite good. So that all goes into our analysis as we think about pruning the portfolio and looking underperforming locations. And our conclusion on the bottom line is that it's accretive to earnings and a bit of a headwind, perhaps top line revenue, but we try to recapture as many of those customers as we can.

Gregory S. Marcus: And generally -- remember, the stuff that we're closing, not exactly robust numbers, that there's not a lot to -- generally, not a lot to capture, to be honest.

James Goss: Okay. And one last one. A number of the companies in your sector have been talking more about alternative content. And I'm just wondering in terms of your particular markets, if there are any particular types of content that you might put on, say, during the week, in particular, that might resonate best with your particular customers.

Gregory S. Marcus: Again, Midwest, the faith-based stuff works better with our customers. Some of the retro stuff is, like, we did a Harry Potter series that really performed nicely on our -- with our new passport, to be honest. And we talked about that in a prior call. So it really -- it depends, but that tends to be what does perform better for us. But we've had some -- we're playing more stuff. We're throwing a lot of spaghetti at the wall right now to find out what sticks and stuff will stick and some stuff is sticking.

Operator: [Operator Instructions] Our next question comes from Mike Hickey from The Benchmark Company.

Michael Hickey: Greg, you mentioned maybe some softening on the hotel side tying in to weakness in ADR. You said it wasn't too early to be a trend here. And I get the seasonality piece, but obviously, you're probably adjusting for that. But could you just sort of give us a little bit more insight into what piece of that market is softening and what implications it could have and adjustments you would make if it does become more of a trend?

Gregory S. Marcus: Well, let me be careful. One of the things -- I think that we may have not been -- I mean, I'm not have been as clear. When I say we were -- our -- when we change some strategy, I would potentially say, at least my revenue management people would say to me that maybe we got a little too aggressive with some things last year that we sort of -- we re-strategized and changed our approach on a few places. That's not really reacting to the market so much as who's reacting to what we had done last year and looked back and said, gee, in a low demand period, we probably weren't -- we probably were too aggressive so we altered our strategy and it paid off. The -- and the other thing, as we said in the call -- as we said in the remarks, part of it is a mix issue. If we're going to see a move from transient -- leisure transient to more of a group mix, we are going to sacrifice a little bit of rate, but we're going to also pick up ancillary revenue banquets and catering things like that. So those are trades that we're making that are really strategic, not so much saying that we're seeing a weakness in the customer. But look, if there's a weakness in the customer, we're going to react to what's going on in the market. We're going to watch what's happening. I think historically, we've looked back over time and cutting rates generally does not solve the problem because it doesn't generate more demand, it's just share shift. So --and one of the things that the industry seemed to be very good about through the pandemic was they didn't just cut rates. And so -- because it ended up being a zero-sum game. And my hope would be if there is a softening, it's not then the response is, well, let's all just cut rates and to try and -- because it won't be -- it won't drive demand. But we'll have to look at what's [indiscernible] to the market.

Michael Hickey: Yes. So it sounds like the -- I mean, it's a weird quarter, like you said, I mean, a winter in Milwaukee is not maybe the best leisure travel. But that said, is it the leisure piece that was sort of holding and then group was picking up? Or is it just leisure was down a bit in the quarter? Is that sort of the takeaway?

Chad Paris: Mike, I would say, certainly, leisure was down in our overall mix because just of how much more group we were driving into the middle of the week. In terms of demand side, leisure was holding, but if you think about the last couple of years, we've had really strong rate growth, particularly being driven by leisure customers. And those growth rates are sequentially coming down as we kind of normalize here. So I -- our expectation for the year was low single-digit kind of overall RevPAR growth. And it's probably going to come more from a little bit of occupancy than -- this year than it is going to be the ADR that's driving it as it has the last couple of years. But yes, leisure is the pocket that is probably not going to be as strong as it was, not saying that it's weak.

Michael Hickey: Okay. And then on your gross profit within your concession business, looks like sort of you and your peers that are showing some pressure there, there looks like you're down nearly 6 percentage points in your concession gross profit in the quarter. So just curious if you could sort of dig in there. And if what that means, I guess, is a trend moving forward. And I guess you look at your hotel, food and beverage, and it looks like your margin there is actually holding up really well year-over-year. I think maybe it expanded. So it looks like it's sort of just on your theater concession side where you're feeling some pressure. Just curious with that. Why? And what sort of trend we should extrapolate, if any, from that?

Chad Paris: You should not extrapolate a trend from that. The -- in the theater -- the way we report the theater concessions numbers, we did make some immaterial changes on how we classify some of those expenses in other areas of the P&L and just line them up better with how we think they should be reported. And again, immaterial, but that's really all that's driving the change. It's not an underlying change in the profitability of our concessions business.

Gregory S. Marcus: And by the way, on the hotel side...

Michael Hickey: Okay. I mean...

Gregory S. Marcus: On the hotel side, you get a [ mixed FYI ]. That's the benefit of a mix shift, too, because the leisure customer is eating in our outlets. The -- when you get to more of a group mix, you're getting more in the banquets and catering business, which is just a more profitable food and beverage operation.

Michael Hickey: Yes. All right. Just to confirm, the -- your gross profit margin in concessions in 1Q is 57%. That's down from 63% prior year, and your average margin prior year was 61.5%. So should we model that closer to the 57% moving forward given the category shift here? Or is that going to go back up to above 60%?

Chad Paris: You can model it at the 57% because that's where it will continue to come through going forward. But there is an offset in other operating expenses that will run rate at a lower number.

Michael Hickey: Okay. But it should be about the net neutral then you're saying? Or is there a [ discretionary ] pressure on...

Chad Paris: Exactly. Net neutral on [ total profitability ].

Michael Hickey: Okay. Last question, just on your convertible note, you have some time to deal with that, but just curious the scenarios you're thinking through. And how you think about managing the potential dilution from that note?

Chad Paris: Yes. So you're right. We do have some time, 1.5 years until we really have to move on this. Although, on dilution, I don't think people should be really worried about it because we've got a cap call transaction -- a derivative over the convert that mitigates the dilution below [ 17.75 ], I think is where it is currently. That number changes a little bit as we pay dividends. But at the current share price, investors should not be expecting dilution from that. And I think we'll continue to look at what's the right time to take it out, Mike, but it will -- high-level thinking on it is it will be cash rather than shares in terms of how we settle this.

Operator: Thank you. At this time, it appears there are no other questions. So I'd like to turn the call back to Mr. Paris for any additional or closing remarks.

Chad Paris: Great. Thanks, Lauren. We'd like to thank everybody for joining us again today, and we look forward to talking to you once again in early August when we release our second quarter results. Until then, thank you, and have a great day.

Operator: That concludes today's call. You may disconnect your line at any time.