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. .

The Way Of Water. Our average concession food and beverage revenues per person at our comparable theaters increased by 0.8% during the first quarter of fiscal 2024 compared to last year's first quarter.

The increase was primarily due to inflationary pricing changes implemented during 2023 and was partially offset by a decrease in the number of concession items purchased per customer, which we believe is the result of fewer blockbuster films in the quarter, which tend to result in larger average purchase sizes as customers make a bigger event out of going to see the bigger films.

Our top 10 films in the quarter represented approximately 62% of the box office in the first quarter of fiscal 2024 compared to 71% for the top 10 films in the first quarter last year. The less concentrated film slate resulted in an approximately 3 percentage point decrease in overall film cost as a percentage of admission revenues.

On the lower revenues, theater division adjusted EBITDA during the first quarter of fiscal 2024 was $6.2 million compared to $13.8 million in the prior year quarter. Given the soft film slate, we closely managed operating hours and labor throughout the quarter. Shifting to cash flow and the balance sheet.

Our cash flow from operations was a use of cash of $15.1 million in the first quarter of fiscal 2024 compared to cash used by operations of $7.7 million in the prior year quarter, with the increase in cash used primarily due to the lower EBITDA.

As a reminder, our cash flow from operations in the first quarter is historically impacted by seasonal changes in working capital resulting from the slowdown in our businesses following the peak holiday season and by the timing of various year-end accounts payable and compensation payments.

Total capital expenditures during the first quarter of fiscal 2024 were $15.4 million compared to $8.9 million in the first quarter of fiscal '23.

A large portion of our capital expenditures during the first quarter were invested in renovation projects in the hotel business at The Pfister Hotel and Grand Geneva Resort & Spa, with the balance going to maintenance projects in both businesses.

Our capital investments and renovation projects have progressed as planned, and we continue to expect capital expenditures for fiscal 2024 of $60 million to $75 million, recognizing that the timing of several of our planned expenditures are still just estimates at this time.

We are still finalizing the scope and timing of various projects and the actual timing of these projects will impact our final capital expenditures number for the year. We will update our capital expenditure estimates as the year progresses.

In addition to our capital expenditures, during the first quarter, we also invested approximately $4 million in a joint venture that acquired the Loews Minneapolis Hotel, a 251-room full-service luxury hotel that Greg will discuss further.

This investment and our ability to execute on this deal is a great example of the flexibility and strategic advantage that our strong balance sheet and liquidity provide, making us an attractive asset buyer to sellers in allowing us to move quickly when attractive investment opportunities become available.

Our balance sheet remains strong, and we ended the first quarter with $17 million in cash and over $237 million in total liquidity with the debt to capitalization ratio of 27% and net leverage of 1.7x net debt to adjusted EBITDA. With that, I will now turn the call over to Greg. .

Impossible, Jurassic World, Karate Kid, The Fantastic Four, Snow White, Wicked 2 and Avatar 3, just to name a few. We've always taken a long-term view of managing our businesses.

And as we look at the product supply ramping back up to and potentially exceeding 2023 levels in 2025, we remain very positive and optimistic about the long-term future for the industry and our theater business. Finally, I'd like to once again express my appreciation for our dedicated associates of The Marcus Corporation.

Their outstanding work and commitment to serving our customers is responsible for our success, and we appreciate all that they do every day. They are our most important asset. So on behalf of our Board of Directors and our entire executive team, thank you to all of our associates.

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

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

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?.

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. .

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?.

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. .

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?.

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. .

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

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?.

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. .

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?.

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. .

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. .

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. .

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. .

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. .

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

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?.

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. .

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?.

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. .

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?.

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. .

And by the way, on the hotel side... .

Okay. I mean... .

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. .

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%?.

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. .

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

Exactly. Net neutral on [ total profitability ]. .

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?.

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. .

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. .

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. .

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