Good morning, everyone, and welcome to the Marcus Corporation Second Quarter Earnings Conference Call. My name is Crystal, 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 this conference [Operator Instructions] As a reminder, this conference is being recorded. Joining us today are Greg Marcus, President and Chief Executive Officer; and Doug Neis, Executive Vice President, Chief Financial Officer and Treasurer of the Marcus Corporation.

At this time, I'd like to turn the program over to Mr. Neis for his opening remarks. Please go ahead, sir..

Well, thank you, Crystal, and good morning, everybody. Welcome to our fiscal 2020 second quarter conference call.

As usual, I do need to begin by stating we plan on making 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, including, but not limited, to - the adverse effects of the COVID-19 pandemic on our theater, hotels and resorts businesses, results of operations, liquidity, cash flows, financial condition, access to credit markets and ability to service our existing and future indebtedness.

And the duration of the COVID-19 pandemic and related government restrictions and social distancing requirements and the level of customer demand following the relaxation of such requirements.

Our forward-looking statements are based upon our assumptions, which are based only upon currently available information, including assumptions about our ability to manage difficulties associated with or related to the COVID-19 pandemic.

The assumption that our theater closures, hotel closures and restaurant closures are not expected to be permanent or to reoccur, the continued availability of our workforce following the temporary layoffs we've implemented as a result of the COVID-19 pandemic and the temporary and long-term effects of the COVID-19 pandemic on our businesses.

Listeners are cautioned not to place undue reliance on our forward-looking statements.

Additional factors, 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 2020 second quarter results.

And in the Risk Factors section of our fiscal 2019 annual report on Form 10-K and the subsequent quarterly reports on Form 10-Q, including the Form 10-Q that we're filing today. All of which - you can access on the SEC's website. We'll also post all Regulation G disclosures when applicable on our website at www.marcuscorp.com.

With that behind us, let's begin. This will obviously not be a normal quarter for us. And our prepared remarks today will once again reflect that, as we spend less time looking back at this past quarter and spend most of our time looking ahead.

I will - still begin by spending a few minutes briefly sharing a few numbers with you, but then I'll pivot to more current topics such as our balance sheet and liquidity.

Once I do that, I'll turn the call over to Greg, who will focus his prepared remarks on where our businesses are today as we've begun reopening some of our properties, along with our plans for reopening the rest of our properties in the future.

When we open the call up for questions, we could certainly be - we'd certainly be happy to revisit the quarter and answer any follow-up questions, if needed. So you've seen the numbers. Essentially, you're looking at operating results with all of our businesses closed for the entire quarter.

On the theater side, our only revenues were from six theaters that opened on a very limited basis in June 2020, primarily to test new operating protocols; as well as five parking lot cinemas, which is our version of a drive-in, that we opened and operated during the quarter; and some limited online and curbside sales of popcorn, pizza and other assorted food and beverage items.

In the hotels and resorts segment, we still had three hotels opened at the very beginning of the quarter but had significantly reduced occupancies and they closed after the first couple of weeks.

We began reopening hotels towards the end of the quarter, beginning with the Pfister on June 8, followed by the Grand Geneva, the Hilton Madison and the Skirvin Hilton in subsequent weeks in June. As the press release notes, we did, once again, have several non-recurring items this quarter directly related to the impact of the COVID-19 pandemic.

We incurred approximately $3 million of additional property closure and subsequent reopening expenses with the majority of the expenses in our hotels and resorts division. A portion of these expenses represented payroll continuation and severance payments made to associates laid off as a result of the closures.

We also began incurring expenses this quarter related to extensive cleaning costs, supply purchases and employee training, among other items, related to the reopening of selected theater and hotel properties and implementing new operating protocols.

We included a non-GAAP reconciliation of our net loss and our adjusted EBITDA with our press release in order to show you the impact these non-recurring items had on our reported results. In that reconciliation, you also see a significant favorable adjustment for income taxes that needs to be addressed.

You will note that we reported a larger than might be expected income tax benefit this quarter. In fact, our effective income tax rate was 52.5% during the second quarter and 44% from the first half of the year.

Our fiscal 2020 income tax benefit was favorably impacted by an adjustment of approximately $17.6 million, resulting from several accounting method changes and the March 27, 2020 signing of the CARES Act.

One of the provisions of the CARES Act allows our 2019 and 2020 taxable losses to be carried back to prior fiscal years, including years during which the federal income tax rate was 35% compared to the current statutory federal income tax rate of 21%.

Excluding this favorable adjustment to income tax benefit, our effective income tax rate during the first half of fiscal 2020 was 22.8%.

We anticipate that our effective income tax rate for the remaining quarters of fiscal 2020 may be in the 29% to 30% range due to an expected taxable loss during fiscal 2020 that will continue to allow us to carry back a portion of the loss to years that had a 35% federal income tax rate.

Of course, our actual fiscal 2020 effective income tax rate may be different from our estimated quarterly rates depending upon actual facts and circumstances. And this benefit won't just reduce our reported net losses that we may incur. We believe it will also result in significant liquidity benefits both this year and next year.

In the coming days, we're filing income tax refund claims of $37.4 million, with the primary benefit derived from the accounting method changes I just referenced, and new rules for qualified improvement property, or QIP, and net operating loss carrybacks that came out of the CARES Act.

We also expect to apply a significant portion of our anticipated tax loss to be incurred in fiscal 2020 to prior year income, which may also result in a refund that we expect may approximate $21 million in fiscal 2021 when our fiscal 2020 tax return is filed, with possible tax loss carryforwards that may be used in the future as well.

Shifting gears away from the earnings statement just for a moment. Our total cash capital expenditures during the first half of fiscal 2020 totaled approximately $16 million compared to approximately $60 million last year which included the cash component of the Movie Tavern acquisition.

Most of this year's dollars are spent in the theater division on several projects that we started during the first quarter, and we continue to have most future capital expenditures on hold for the time being. Now before I turn the call over to Greg, let me also briefly comment on our balance sheet and liquidity position.

I'll remind you, once again, that we entered this crisis from a position of strength. Our debt to capitalization ratio at the end of 2019 was a very modest 26%.

Net of a larger cash balance on our balance sheet than what we would normally carry, our net debt to capitalization ratio at the end of the second quarter, even after having essentially all of our businesses shutdown for the entire quarter, was still a very low 32%.

Of course, we also own the underlying real estate for seven of our company-owned hotels and the majority of our theaters, representing over 60% of our screens and an even larger percentage of our revenues and cash flow, thereby reducing our monthly fixed lease payments.

This is a significant advantage for our company relative to our peers, as it keeps our monthly fixed lease payments relatively low and provides significant underlying credit support for our balance sheet. We even have some surplus real estate that could be monetized in future periods if opportunities arise.

As we've previously reported, in light of the COVID-19 pandemic, we've been working to preserve cash and ensure sufficient liquidity to endure the impacts of the global crisis, even if prolonged.

As you know, on April 29, 2020, we amended our existing credit agreement and issued a new $90.8 million 364-day senior term loan A to further support our already strong balance sheet. As of June 25, 2020, we had a cash balance of approximately $80 million and approximately $90 million of availability under our $225 million revolving credit facility.

So you can do the math. Our adjusted EBITDA during the quarter was a negative $30 million or about $10 million a month.

Even when you add interest expense to that number and maybe just a little bit of CapEx with a combined $170 million in cash and revolving credit availability, plus income tax refunds that may total as much as $58 million combined in 2020 and 2021, you can see why we continue to indicate that we believe the additional financing positions us to continue to sustain our operations well into fiscal 2021, even in the very unlikely scenario that the majority of our properties remain closed.

And that doesn't even consider the possible sale of surplus real estate or additional financing, if needed. We believe we continue to be in a strong position. With that, I'll now turn the call over to Greg..

initially reducing each theater auditorium's capacity by 50% and implementing a checkerboard seating pattern that will allow guests to reserve seats together with two empty seats between groups to allow for proper social distancing in accordance with CDC guidelines; staggering showtimes limit the number of people in common areas of theater and allowing extra time between shows for thorough cleanings; requiring mask to be worn by guests, except for when they are eating or drinking in the auditoriums; conducting associate wellness checks and requiring the use of face masks as well as gloves as appropriate during the associate shift; increasing frequency of cleaning, especially high-touch surfaces; providing hand sanitizer throughout the theater; and introducing signage to encourage proper social distancing; encouraging guests to purchase their tickets online or via the Marcus Theaters app; and encouraging low contact food ordering through our proprietary Marcus Theatres app and website with food orders picked up in a designated area within the theater.

We expect policies and guidelines will continue to evolve with time and will be assessed and updated on an ongoing basis. Our goal is to build consumer confidence and trust as quickly as possible, and I am pleased to share that we have received extremely positive comments from the guests who have been coming to our 6 test theaters.

Our team has done an excellent job executing on new protocols. Something that's come up before, but is worth repeating is that the reduction in capacity does not necessarily translate to an equal reduction in potential revenues.

Reduced capacity may potentially impact attendance on $5 Tuesdays and in opening weekends of major new film releases, but other showings may be relatively unaffected given normal attendance counts.

And based upon our past experience, we believe the customers impact almost $5 Tuesdays in opening weekends may adapt to reduce seat availability by shifting their attendance to different days at different days and times of day.

In addition, as new films are first released, we anticipate that indicating a larger number of auditoriums to the blockbuster films to increase seating capacity for those movies. We believe that the exhibition industry has historically fared well during recessions.

Should one occur as a result of the COVID-19 pandemic, we remain optimistic that the industry will rebound and benefit from pent-up social demand as home sheltering subsides and people seek togetherness with an attempt to return to normalcy.

A return to normalcy may span multiple months driven by staggered theater openings due to government limits, reduced operating hours, lingering social distancing requirements and a gradual ramp-up of consumer comfort with public gatherings.

There are significant number of films scheduled to be released during the remaining months of the year that may generate substantial box office interest, including multiple films that were originally scheduled for the first half of fiscal 2020. We listed some of those films in our press release.

The anticipated film slate for 2021, which will also now include multiple films originally scheduled for 2020 is currently expected to be very strong. Just as we've had to adapt our plans in the past month, we recognize that we will need to be prepared for new challenges and opportunities in the weeks and months ahead.

I'm certain that Rolando Rodriguez and his incredibly talented team will be prepared to adapt and manage us through this reopening process and ultimately deliver a truly great movie-going experience to our guests. Normally, I would end my prepared remarks at this point and open the call up for questions.

But first, I want to address the elephant that entered the room last week.

There's been some speculation that the COVID-19 pandemic may result in a change in how film studios may distribute their product in the future, including accelerating the release of films on alternate distribution channels such as premium video-on-demand, or PVOD, and streaming services.

Of course, that speculation increased exponentially last week when AMC and Universal announced the deal they negotiated that would, according to report, significantly shrink the window for select films to be released on PVOD. So I suspect you might wonder what we think about that. So to begin with, let me say this.

Our relationship with the film studios are very important to us. We are partners in an $11 billion to $12 billion U.S. exhibition industry and an over $40 billion industry worldwide. It's an established fact, the film studios derive a significant portion of their return on investment in film content from theatrical distribution.

In the past months, while theaters have been closed, studios have continued to acknowledge that there's no economic model to recover the size of the investment in the big theatrical move without theatrical revenue, and their actions to delay the vast majority of new films until theaters reopen rather than release into the home is a direct confirmation of that.

Thus, we believe both studios and exhibition are aligned in their interest to preserve the theatric experience for our value customers. We believe an appropriate theatrical window is an integral part of that aligned interest.

Second, I will say upfront that we never have conducted our negotiations with the studios in public, and we don't intend to start now. We will continue to talk to our studio partners about terms, windows, financial models, et cetera, as we always have, but in private as it should be.

While speaking specifically to PVOD, what I'm about to say next applies to any changes in the financial and our distribution model of our business. Our position has always been that like in any successful negotiation, any change in the existing model needs to be a win-win-win for the studios, the exhibitor and the customer.

Our common goal should be to grow the size of the pie. I also think it's important to put all this PVOD talk in perspective.

While acknowledging the consumer behavior can and will change periodically, history suggests that the normal conditions when all forms of entertainment are available to the consumer, the market for PVOD may not be particularly deep.

I think everyone would acknowledge that these last 4 months were not normal with theaters essentially 100% closed and other forms of out-of-home entertainment also not available to consumers. And I would suggest this period tell us very little about the depth of a $20 PVOD market. We are in the business of out-of-home entertainment.

Just as I mentioned earlier in my hotel remarks that we believe people want to travel and congregate. We firmly believe that human beings have an innate desire to get out of the house and interact with people. We seek social experiences.

In fact, you could argue that this very same human characteristic is an underlying reason for the challenges our country continues to face during this pandemic, and it won't always be this way, whether it is improved treatments, a vaccine or in the near term, everyone just being smart and safe.

We will get to the other side of this, and we believe consumers will seek out those same out-of-home experiences they've always sought out in the past. We're already seeing signs of that in other countries.

And similar to pre-pandemic days, when they decide to stay home, they continue to have a fire hose of other entertainment options available to them at a price point significantly lower than $20. As you can tell, I'm passionate about the exhibition business.

We've made significant investments in our theaters over the last 6 years, and we believe we've built a theater circuit that is second to none in terms of the entertainment experience for our loyal customers.

We believe distributing films in a movie theater will continue to be an important component of their business model, and we look forward to a continued healthy relationship with them in the future.

In conclusion, in this rapidly changing environment, you can rest assured that we are continually reviewing the situation in both our businesses, and we will make changes to our plans as warranted. The company is built for challenging times like this.

Our leadership team, managers and associates have stepped up to the challenge in ways that go way above and beyond. And for that, we are most grateful. We also very much appreciate the confidence and support of our lenders and the investment community during this challenging time and always.

With that, at this time, Doug and I would be happy to open the call up for any questions you may have..

[Operator Instructions] And our first question comes from Mike Hickey from The Benchmark Company. Your line is open..

Obviously, feels like you've gotten through the crux of the issues here is sort of get on the offense on the reopening process. A lot of, I think, positive data you shared with us in terms of the hotels and group pace for 2021, et cetera, theaters. It looks like the vast majority will be open here pretty soon.

I realize maybe 2021, it's hard to balance in terms of where you are, I guess, relative to 2019. But I'm curious your view there? And then should - as we stretch out a little further to 2022, should we sort of think 2022 here is back to normal like 2019 or bigger? But your thoughts there would be appreciated.

Then I have a follow-up or two? Thank you..

I mean I'll start, Mike. And look I mean, we haven't even opened our theaters yet to speak of. I mean that's with new products. So we certainly have a lot to learn yet about what the pace of the recovery will be on the theater side once we reopen. As we said in our prepared remarks, there is - look, there's a lot of product.

And 2021 has a whole bunch of films that were originally scheduled for this year that, were moved in on top into a year that already had quite a few films that look very positive. So on that side, we're certainly very optimistic.

But look, until we get open, until we start seeing how this - how the customers respond to try to now compare 2021 to 2019, that's tough, as you can imagine. And I imagine that will be tough for anybody to try to do it right now. Certainly, on paper, we're going to have the goods to be able to deliver to the customer.

And so assuming that things continue to progress, we certainly think that as we get - as the year goes on, it will just progressively get better, but this will be a process. This won't be an overnight event..

Yes, I mean the only thing I would build on that, yes. I mean, I have no idea what's going to happen in the short-term. I have no idea, even in sort of the medium term.

What - will look like 2019 or better? But what I do know and what we've talked about here is that - and we're in this for the long haul is that people want to be to get - I mean you just look at the news. They're crazy. You can't keep them apart, unfortunately. As we talked about in our prepared remarks, it's just nuts.

Which as I said, which is short-term, not really a good thing, but long-term, it says human creatures are social animals and they want to be together, and they want to do things, and there will be pent-up demand. And I think that bodes well for the - for really all of our businesses. But in the short-term, who knows..

Fair enough thanks Greg. Just the last question, just sort of curious maybe what the demo looks like for the moviegoers coming back to your theaters? And sort of if I guess, the durability there, you think of that demand.

I imagine you sort of come back, you're dying to get out of the house, you want to do something theaters - or obviously, escape as it makes a lot of sense. But curious if you feel there's in that demand? Then wondering about when pricing will come back on the tickets that sort of comes back with the tent poles that are planned here pretty shortly.

And also wondering how your concession sales are gaining and how you expect they will trend, that's it from me guys? Thanks best of luck..

Yes, I can take that. The demos, I don't know the specific demos. I can speak anecdotally. I mean I've seen, surprisingly, all ages going into our theaters, the ones we've been testing. Again, I think the durability of people going will depend on so many things.

The environment, what's going on with the virus? What is - how the product is - at the end of the day, we're - and people who - when good product goes out. And I said we've been heartened to see what's happening in other - in international markets. The numbers are starting to pick up. They described it yesterday, I saw as Europe had green shoots.

And I know I think South Korea has had some success. So seeing - people will go to see the product that is good. They have to feel comfortable.

The one that we've seen really, really, very, very positive, we've been running our customer service scores through our loyalty program, and we're seeing very positive commentary really, really, very surprising. I was surprised how strong this has been and how comfortable people feel and how - what they think about the experience.

And so, we've - so again, I think it's all those things coming together that will - promote that durability. And on the concessions per cap side, it's been very strong..

Yes, I would just - maybe the only thing I would add to the comment is that, obviously, showing library product, just like if we're showing new products, the demos are tied into what you're showing as well. But I would echo what Greg indicated. It's not as if there's no demo that hasn't been represented. I mean we're seeing seniors. We're seeing adults.

We're seeing families. And so, it's not as if we've looked at it and said, boy, the theater looks different today than what it was before. So that's encouraging..

Thank you. Our next question comes from Eric Wold from B. Riley. Your line is open..

A couple questions, kind of a few follow-ups from the prior ones. I guess one, I'll start with concessions.

Any major changes to what - the food and beverage product you have available to pay trends when the theaters open based on kind of cleaning restrictions or handling restrictions, Movie Tavern and the other locations? Or is that going to be pretty much status quo when you reopen?.

In terms of the offerings, the offerings are not changing so much as the procedures are changing and how we do it. And I would speak to our - this idea of the low to no contact and something where we've been really ahead of the industry, and I'm really proud of our team.

Kim Lueck and her IT team really got us in a place that we - it's an angle we plan for this but this idea of being able to order on the app. I mean that's - that idea, you can - you preorder your food. We can prompt you to preorder your food before you come to the theater. And then - and your food is ready to pick up there.

You don't have to wait in the line. You don't have to deal with a vendor, concession attendant. You're able to just show up and pick up your food. That, I think is something that will be - and they talk about this, the environment now accelerating things.

That really was just an accelerating trend, not one that became because of it, as I said, because we are so focused on food and beverage. And we had such challenges in the labor markets, getting people.

We were trying to figure out, okay how do we take labor out of the equation? Well, if you use technology to your advantage, you can do that and that led us to over the last year, I talked about it on the last call. We were ahead of the industry and getting testing on the application as part of our app.

And as I said, we probably - we have shrunk the menu a little bit, but not tons. And the - Movie Tavern, we're changing. We're not necessarily going and taking orders at the seats, and we're not - we were changing that procedure a little bit as well right now for these times. People have to go out and pick up their food and bring it in.

That is more - so it's been procedure, less menu. Well, a little bit of menu, but not much..

And then you mentioned the capacity limitations you're doing at the theaters, the 50% on the checkerboard seating.

Is that the norm across the circuit when they reopen ahead of Labor Day? Are there any markets where it's measurably less than 50% and what is your view as you get to the end of the year where you could be in terms of capacity limitations?.

I think that is the vast, vast majority of the circuit is 50%. There maybe one or two that was a little bit less. And something that may come that might be less. But the way vast majority is 50%. And we feel comfortable having seen what happened with recliners that we can do pretty well in that environment..

And then….

Eric, just I want to add on, if you look at our footprint of theaters, that's certainly to our advantage in this situation because of the markets that we're in. And so, they are pretty much 50% else everywhere. We're only in really, literally in two markets that we're still keeping an eye on.

And it's only - we've got one theater in the state of New York, and we've got 3 theaters in Pennsylvania. And we're keeping a close eye on those markets. But that's 4 theaters in total. And so we're very - we're fortunate from that perspective..

Okay. And then final question, I guess, more of a longer-term, broader question. I guess you obviously mentioned again at the beginning that you own the majority of the real estate beneath your theaters, north of 60% of your screens.

It's obviously been a big boost in recent years with your remodel strategy and that you haven't really had a deal with landlords in terms of what you want to do with the theaters. It's going to help you on the restart, in terms of having a lower breakeven point with less rent expense than others.

But I guess assuming once we get into more normal situation, some of the only that real estate has not been reflected in your valuation versus your peers.

As you get back to normal levels, how aggressive would you be willing to be to unlock some of that value for shareholders?.

Boy. Eric, I mean, I'll start. And Greg jump in if you want. But I mean, so as we've talked about - we've talked about this multiple times before this all happened. In our core real estate and particularly on the theater side, it's proving to be exactly what we said it was, a strategic advantage for us.

It was a strategic advantage for us in growing the company over the last 6 years. And now it's a strategic advantage for us in suffering - and going through all the craziest time we've ever seen in the industry. So it's for us to now change that perspective on our theater real estate, specifically, that might be a tough decision.

Having said that, and we alluded to it briefly in the comments, we've got a lot of real estate. And so I mean it doesn't mean that there couldn't be some selective monetization. We also have a lot of surplus real estate. Former locations, excess surplus land and outlets and real estate that we own.

And so there is - that's always possibility for us to unlock and monetize real estate, and we've done it selectively and periodically in the past and we certainly could do it in the future..

Yes. I mean I would build on this just a little bit, and that is to say, to sort of say, yes, it really - it has been such an advantage for us over the years.

It maybe it would be incumbent upon us to be better at working to really work to really press and educate the investment community on the value of that real estate and really try to stress that point.

And I would say that - I'd rather do that than give up our strategic advantages that we've seen because you can always ultimately go and monetize something. It's a onetime event, but I prefer to get better at telling the story..

And our next question comes from Jim Goss from Barrington Research..

Okay.

I'm wondering first, if you could - if you have any estimate of the continuing cost of sort of the new normal in terms of cleaning protocols and any offsets you might have to that increased cost allocation?.

Well, Jim, I mean, we - there's really two categories. There's kind of these nonrecurring expenses. And we'll have some more of that in the third quarter because we'll be reopening some more - a few more hotels and we'll be reopening our theaters.

And so there are some of these nonrecurring costs that fall into the - Greg listed some of the categories or I had mentioned a few of the candidates that they fall into. Some of it even can be even capital. And so there's things that we have to do to get the theaters, get the hotels ready. We'll call those out again in the third quarter to the degree.

And you saw in order of magnitude of what it was this quarter, it was about $3 million. On an ongoing basis, that's a little harder. And I think until we really get our theaters open, for example, it's going to be harder to tell on that.

I mean there's a whole bunch of smaller supplies, right? And those aren't - you're not going to notice those that much. And they get mixed into that - kind of that soup with all of our other costs, where we're also trying to be very cautious about our cost structure.

And so we're trying to operate our theaters in our hotels and we're trying to think outside the box and trying to operate with less staff. And so I don't know if you'll notice some of the things that are specific to the operating protocols in our operating costs going forward because it all gets thrown into the soup and gets mixed together.

And there is no one single cost that is so large that we have to say, okay, well, you better prepared for the fact that we're going to have x amount a year related to this or that.

So until we get the theaters open, I mean we - there could be a time when we ultimately say, look, our new operating structure and cost structure is going to look like this, but until we get the theaters open, it's hard to quantify anything..

And I think that that's - you got to be looking at - it's a more of a medium-term thing in terms of whatever the - we will have ongoing labor because the increased labor costs as we open - as we - even in this environment, dealing with sanitization and customer orientation. So we will see some increased labor cost.

But I think that's - I think for the most part, that is a medium-term kind of thing because once we get past having to operate in the pandemic environment, and we will see a return to a normalized environment, whenever that might be, might you see a little more cost in terms of labor, in terms of things you might say, yes, this is a good thing that we were doing that anyway.

But I think it will be offset by what I was talking about earlier, the technology changes that we're going to have put in place that's going to reduce people working at the box office and reduce people working at the concession stand. As people use technology to access our theaters and our concessions and so, in our food and beverage product.

So, in the end, probably not much change. In the medium term, we could see some increased costs..

Okay. And Doug, just a housekeeping question - the timing of the inclusion of those very nice tax benefits you outlined.

Will that be in the third quarter reports then?.

So there's two different issues. There's the P&L impact, which is already reflected in, I mean there's a large part reflected in the numbers we reported today.

And it will continue in the third and fourth quarters and it will come through in the third and fourth quarters because of that higher effective income tax rate that I referenced in my prepared remarks. Normally, as you know, you might see a, I don't know 24%, 25% effective tax rate under normal conditions.

And because we'll still be able to take some of our losses in the third and fourth quarter back to prior years, we're right now estimating that that effective rate might be 29% to 30% in the third and fourth quarters. So that's one way that you'll see it. The other way is a balance sheet.

And so, if you look at our balance sheet, you'll see that there's a large refundable income tax number there. And those claims - part of that is claims that we're filing right now. And we will receive in - we would expect to receive in 2020 as we filed our 2019 return and the claim - refund claims that go along with that.

And part of that refundable will stay on our balance sheet through the end of the year and because it's additional refundable taxes that we're accumulating in 2020 that we'll get back next year..

And then with both the hotels and the theaters, I assume mask protocols will be in place at both types of venues.

How are you thinking in terms of enforcing that and - is that a challenge or is that something you're seeing not to be so much? And maybe also in the theater area, the rewards program wondering how that fits into this whole process?.

On the mask protocols, we require everyone to wear mask. And frankly, you know what most of the country is getting it. I think that it's two months ago, it might have been harder. Yes, it probably would have been. But I think so much of the country - yes, there are people who, for medical reasons can't.

And if they can't for medical reasons, then they don't wear a mask. But if someone is saying they aren't going to wear a mask, then we ask them not to patronize our establishment. But we really don't ask them. We ask them to put on the mask. And we're seeing very, very, very high compliance because they understand that this is about staying in business.

It's funny. The idea - the masks are - and I talked about this before, nobody likes them. I don't know anybody no [gee], I want to wear a mask. But I know everybody likes the economy functioning. And the only thing the economy functions is if we're able to keep the virus at bay.

And it seems that the mask - I've seen numbers just looking around Wisconsin, where Madison - we had a problem. They put in a mask policy and the problem has started to abate, City Milwaukee, same thing here. And so, you see that the science shows that it's working, and it's - and that's good for business.

And I think a lot of people are coming around to that. And it's temporary. It will eventually - it will go away. And it's not about the person people who are just distance on my mind soapbox for a minute, it's about people always say, it's my choice. Well yes, but really their actions impact others. And that's when they have a different approach.

It's just like I'm not allowed to drive on the street in front of my house 100 miles an hour because they worry I might hurt someone else, including myself. That's the reason behind it. And as more people understand that, they go, oh, okay, I get it. So that's been fine, I would say.

And your second question, Jim, I forgot what was it?.

I was just saying the rewards program is typically?.

Oh yes, the rewards..

An advantage because it gives your data and that sort of thing, I'm just wondering how it fits into this process?.

Yes same thing. Look, it's been great to have it. It's been great to be able to - for all these years we never knew who was coming to our theaters. We just never knew. They paid cash and they went into the movie theatre and they were anonymous.

And now - half our transactions coming out of our loyalty program, it's still very - we're still seeing significant percentages even in this environment in the small tests that we're running. It's great to know who they are. We've been able to stay in contact with them throughout this whole experience.

And they continue to be customers, and so it's very beneficial to us..

And lastly, I just wanted to compliment you Greg, and - the way you outlined your position on the windows issue. I think it is clear that first run domestic box office is a significant share of the studios revenue base. And I agree the confirmation that's indicated by putting off rather than going to PVOD and the major films.

Those are really good points? Appreciate it..

Thanks, Jim yes if I could just - I'd build on it just a hair. And that is simply, again, as I said, the goal is to grow the pie. By the way, there's good news in this, isn't it? At least we're having a discussion about the future of how we're going to divvy up the pie. That's good. That means that there's going to be a theatrical business.

We should all take heart. If it's that - I'd much rather have that debate, then when are we going to open. But that pie has to grow larger. And we have to be careful that we don't shrink the pie because shrinking the pie, by the way - and well-intentioned people have made mistakes. And when you shrink the pie, it doesn't just hurt us.

It hurt the distributors, too. They don't make it up in the PVOD side. And as we talked about it, and you just alluded to, it's hard to know necessarily the normalized environment. How big that will be.

And I guess I'd just end with - there's an old saying, and I remind anybody who's thinking about as they alter the model and don't leave a good party in pursuit of a better one. And by the way, also, let's not forget one other point. Nobody talks about this, and I want to talk about it for a minute.

This is about - and this whole discussion they've had about PVOD. This is all about figuring out how to make those mid-market movies more financially viable for the studio. So that they can get more out of theatrical and more out of the secondary markets. I know that's what their goal is because that's been the challenge.

But one of the things - and we applaud them, and we want to be a part of that discussion. But one of the things that they never - and so they always talk about oh, the cost of releasing a movie is so high, like we talk about, but that's never going to change. That actually is going to change.

And so one piece of that equation is - actually, I argue both pieces of P&A, prints and advertising. The cost of P is coming down. I hope it's not 0. But when the VPFs go way, the virtual print fees, I would like a little bit of money for maintenance.

It would be nice to have a little something because these projectors and all the components do - they are a lot faster than the older projectors. But virtually, that's going to go down to a very small number.

And then the advertising - I would argue that with streaming, one of the things that you're seeing is that the way they market movies in the streaming world, they don't market the individual movies very much. They market the streaming service.

And so, I even think the cost of advertising could be going down as the streamers use - their economies of scale across they're marketing, their one name of their streamer across a lot of films. That's one of the benefits of it.

And I hope they see the benefit of it then giving those - some of those films a halo and a highlight and a platform where they get that national attention on the movie theater screens.

I think that - as that market becomes more competitive, the ability to use our theaters to say, see it here and then playing exclusively on, you name the streamer, that could be a benefit for some of them. I think they'll see that. And so, I think the cost of distribution is coming down. That will be helpful to the mid-market films.

And if they can figure out a way then also, they'll find other ways to monetize, and we can be a part of it where the pie is growing for everybody. That's a win-win-win..

Thank you [Operator Instructions] At this time, it appears that there are no other questions. I'd like to turn the call back to Mr. Neis for any additional or closing comments..

Well listen, I just like to wrap up by saying thank you for joining us once again today. We do look forward to talking to you once again in approximately three months when we release our fiscal 2020 third quarter results. And until then, thank you, and have a great day. Be safe. Be healthy..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day..