The Marcus Corporation (MCS) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Meghan Durkin from the media team at Credit Suisse. Next up, we have Marcus Corporation. We have Chad Paris, the CFO; and Greg Marcus, the CEO, will be joining us a little late, but he will be there in a few minutes.

So I'm going to start with Chad. So this is our third virtual conference, and we've been talking about closures, reopenings. This year, we have some good news to talk about. We have had a few really nice [indiscernible] at the box office. And I wanted to talk about Top Gun and Jurassic World. How are those movies doing in your circuit?

Meghan, thank you for having us. So the 2 films, obviously, everybody is very excited about, are doing really well in our circuit. So Top Gun, we really saw a broader demographic come back, and that's probably the biggest takeaway for us is it appealed to a very wide audience. And we saw the 55 and older, both male and female audience come back. The drops from week to week have been abnormally low, and it's showing a lot of legs in its third week here. And we're -- obviously, it's a great picture, and we're seeing people come back a second and a third time in some cases. So it's been a great film. And now we have this more steady cadence of releases as we get into the summer and 2 weeks later, it was followed by Jurassic World Dominion, which had really nice weekend for us, our $5 Tuesday is today. And so we're expecting another big audience today. And with kids out of school, we're seeing a lot of families go to see that movie and strong attendance. The industry as a whole is reporting in the dailies, but certainly is holding up in our circuit. So 2 great films, I mean they're really off to start that in one case, well above expectations and in another case, slightly above expectations.

And Marcus has been outperforming in the industry. Is that still going on in 2Q this far into 2Q, and what do you think is driving that?

Yes. I mean so relative to industry, I'm not going to get into how we're performing here in Q2, but you're right. Historically, our per caps, both attendance and food and beverage have been a little bit more than our natural share of the market. I think the way that the company has been able to do that is pre-COVID. We have been in a pretty long run of making serious investments into our circuit. We were one of the early movers on recliner seating and expanding the number of premium large format screens that we have at all of our locations. We're in the high 70s percentage on a number of our locations that have both of those amenities. And so as audiences return, we saw a clear preference for a premium experience, customers gravitating towards PLFs where the per ticket price was higher and we were commanding a an up charge for PLF screens and customers have really shown a preference to see movies not only on the big screen but on the biggest of screens in our older screens and our super screens and a few IMAXs as well. So those investments have paid off, and we've been very successful at holding on to an increased share of wallet on food and beverage. And when people come back, they're buying food and beverage and concessions. So that's continued. We've not seen any sort of indication of weakness or softening in that yet. Now some of the growth rates that we've done over the last year are going to be hard to repeat, but we certainly believe that we can hang on to the per caps that we've grown in right now.

So on an absolute level, you're saying and just you won't see the growth that you did because you're going to be comping those higher levels?

Yes, you're going to comp the higher levels, and particularly on food and beverage as the attendance grows and grows meaningfully, that last 20% to 30% in return in attendance, the math gets a little bit harder, right? The theaters get way busier. The lines will get a little bit longer. And so you may have folks who pass the food and beverage. Now we've implemented some interesting and, we think, pretty exciting tools to try to mitigate that impact with technology having people order food and beverage from their seats on an app on their phone and have it delivered into their seats so they don't have to deal with the line, all in an effort really to continue to hold on to those gains that we've made. But just by virtue of the math, is that attendance gets higher, that continue to achieve the growth in per caps will be harder.

And Light Years coming this weekend, how do the presales look to you? Does it imply that the families are going to be back in real numbers?

Yes. I mean so maybe a little bit just on the evolution of the return of the family. I mean, we did start to really see families come back -- going back to Sing 2 over the holidays. We started to see those audiences return. It picked up quite a bit in April, and we had some really nice family films that we're very successful with The Bad Guys and with Sonic 2, and we saw families return in big numbers here in April. And now as you point out, Light Years coming back here this weekend. And then Minions yet to follow here in a couple of weeks. So a lot of family films that were in the spring and coming into the summer season -- on Light Years, we're really excited about the film and we think it's going to do well. The advanced -- on your question on advanced ticket sales, the interesting thing with Light Years was Disney did not open up advanced ticket sales until 8 days prior to the first opening of the movie. So unlike some of the other films where it's been 3-plus weeks, we only have a few days' worth of sell data, but certainly tracking as we would expect, and we're looking for a pretty big open. Generally, the family audiences haven't been as -- demonstrated a higher propensity to buy tickets in advance or well in advance like you might with some of the super-hero films. So those tend to be shorter lead times on the purchases. So we'll have a better sense of it once the movie opens here on Thursday.

Makes sense. So higher gas prices, have you seen any you just referred to sort of the premium pricing holding up and that you expect to see per cap sort of hold up. But have you seen any -- any evidence that the inflation is causing anyone to sort of trade down or do any -- I guess your answer before sort of implies that you're not seeing it. But any risk that the consumer is going to start to trade down from the premium options that they've been taking so much since pandemic sort of happens?

Yes. I mean, I think within our different product offerings, that's always a possibility in the face of tougher economic times. But I'd quickly point out that theaters and exhibition generally as an industry in times of recession has actually done better because the consumer often will trade down from other more expensive forms of out-of-the-home entertainment. So instead of going to a sporting event or to a live concert, relative to ticket prices and the price for a night out to go to those things compared to going to a movie, we are providing a pretty value-oriented experience to begin with. So I think we actually could continue to do better if we actually hit into a recession. We're not seeing any indication yet of consumer demand softening. And I would say it's also true incidentally in our hotels business, which is the other 1/3 of the company outside of the theaters, leisure travel and leisure demand continues to be strong. Now we're in the peak of our season in that business. And so normally summers in our upper Midwest locations would be strong. But right now, we're not seeing any softening.

Well welcome, Greg. How are you?

I think [ I'll walk on ] on music.

So we were just talking about the pricing and whether or not the business could be recession-proof since pricing has been driving the industry since you're back, is there a risk that becomes more risk this time around? But have you considered raising prices? I know you're looking at subscription plans, is that right? So why now? And what exactly are you testing? And what have you learned? I don't know who wants to...

As your question on the subscription side? Yes. We are -- we're trying something very different than the subscription side. We're testing 2 different things. One, which is less of a test because it exists which is one way or other a competitive model where you basically get 1 movie per month for a set price of around $10 and if you don't use it, it rolls over. We're testing that model and that mode tested and it works. The one thing that model doesn't address. I mean the good thing about that model is that it gives you a sort of a regular cash flow stream, which is not -- and it's nice to have that regular tie with the customer. The thing that, that model doesn't address and that we want to try to figure out is how we get customers to come see the smaller films. There's -- we're seeing in that because we're testing both in that model, we're seeing about 5% of those movies -- those customers see the smaller midsize films. The other model were tested, we call MovieFlex+. And basically, we do is we charge $15 per month as opposed to like $25 where you can eat anything movie you want to see, probably, which tends to be relatively self-selective, generally not very profitable for these theaters. And because it's a big nut, every month, $20, that's a lot to pay if you have a family, a couple of people could be $50 a month. So we try to for how to come in at a lower price point with an all-you-can-eat model. So $15, it's an all-you-can-eat model. But it's all-you-can-eat of the small and midsize films. And -- but we call it MovieFlex because if you want to see Top Gun, pay $5, incremental. And so if you -- and so for us, that allows us in a way to have to really offer a -- let's say, it becomes a lower price point for the smaller and midsized films, but we're not we are not presenting that as a lower price point or not because if you come in -- if you're not a number of MovieFlex, MovieFlex+, you come to the theater, and you want to see a smaller film, you're going to pay the full price. But if you're in MovieFlex and you're not -- there is no -- there doesn't appear to be a price you're paying because you're paying to be a part of the subscription service. And we think that's a winner for us and then for the studios because the studios don't have to then advertise a lower price. We're able to help drive traffic to the smaller films with less of a marketing spend, right? Because one of the benefits of subscription service, it seems to be that what -- that's maybe the challenge now for some of these big streamers who are losing to really spend a lot of time marketing individual films because they're marketing their subscription service. So for us, if we can market the subscription service and people will then look and see what the smaller homes are, that allows us to drive traffic to those smaller films. If it works. And what we're seeing is that against a control group, they are 150% more likely, 1.5x more likely than more in the past to go see those smaller films. And yet they are also then taking the opportunity to bigger films and paying more and then getting it up to what would be above our average ticket rate for a premium film. And so it's an interesting way to try and do it. We don't know if there's enough depth in the market. There's enough people that want to do it. We're -- we've only been in it for about 100 days. So we're far from experts. But it speaks to us as a company, I think we are always looking for the next thing what's new, what's different? How can we improve the business. And -- it's -- and I can tell you that it probably won't look exactly like we're starting right now, all the new things we've started really years, whether it be food and beverage, or our approach to theater design, we were always at the front end of all that stuff. And it always changed as we went along once we got smarter at it. So we'll see what happens.

It's interesting because everyone's clamoring for more midsized content. And if this works, it could open the door for more movies to be released. I mean it's an interesting test. So it will be fun to watch. Chad, why don't you walk us through the film cost line. And what are the biggest factors to think about as a slate ramps up? And wouldn't this loyalty plan or the subscription plan sort of impact that because isn't there in some way the average ticket price is playing into that formula?

Yes. So I mean for as you know or maybe folks are new to the space, that film costs rate is based on a scale that is a function of how well the movie does. And so the more attendance and box office that's driven the higher the percentage of the total box as is paid in film cost. It's a scale that actually, I think, has worked fairly well throughout the course of the pandemic because as studios were shifting content and some of the films went day and day, we didn't have as big of a box office, but we were also paying quite a bit lower percentage. Now as we get back to a more steady ongoing attendance for moviegoing and that box office has grown, those percentages, particularly on the Tent-pole films, the bigger movies like Top Gun and Jurassic World are going to fall at the higher end of that range. So -- it is a function of the mix of films and how an individual film does. And you can, as an example, look at the quarter and look at the types of films that are there and look at how our weighting of blockbuster films as compared to midsize and smaller films and assume that, that percentage is going to be up. Of course, we're also happy to have the EBITDA dollars as a result of the success of the film. So that's, I think, really the change that you would expect to see. As it would relate to MovieFlex and what Greg just walked through, we have a little bit different model that we're working with on the studios. I won't get into all of the details. But I would say the size of the program today, it's really not needle moving impactfull to that overall film cost percentage.

I think that the important point here, though, just to build on that a little bit, again, I'm not getting into the details of it, is to remember that, look, when someone's flexing up, we're paying the full price, but they're also paying for a full price, essentially, what should be a full price ticket, assuming what we think are going to be the usage patterns. On the smaller films, our pitch, the studios is remember, you're not going to have any VPFs because those are going away. And you're not going to really have much in the way of advertising. We'd like you to do some marketing, but frankly, we don't see it as robust. We're sort of contributing to the marketing program by running the subscription program and marketing and subscription. So that alters the terms of how we negotiate those deals so that we don't get something that to you. I know exactly where you were going with that, and we don't want to -- the point is not to get upside down. That's the problem with the $25 all-you-can-eat model. They get completely upside down with that. And we said, "Look, we want a win-win with the study goes. This seems to work for us if we look for the films. By the way, you're sitting here telling us you're not going to even give us these films so much anymore. We want to give you a reason to giving to us, but that should be found money for you.

Yes. It's doing -- it's having the opposite effect on some average ticket prices in the industry as it did early on in the -- when they were launched and people were going 7 to 8x because they're not coming as much now. But anyway, Greg, how are things going at the hotels? I think Chad was just talking about that you're seeing some good travel and leisure, a lot of people coming to the hotels and traveling through. Anything to talk about with group visitation and return of big events?

Yes. Look, it's good I'll tell you it's been really amazing to see is how much the business has come back just with the leisure business, the strength of leisure has been really, really interesting. And so what I find heartening is to the extent that even if the consumer gets a little worn out, we still haven't even gotten to the point we've sort of put the -- the business travel back in. And so that's going to be a only additive. And so yes, we are seeing now the business start to come back and -- and we're seeing conferences having in person. We're seeing the live events happen and people being really unbelievably excited to be together. It's the exact parallel, I think it's called Top Gun effect, right? On the whole people with a in the last few weeks. And they're all saying, "Wow, it's so different. It's still going to be back in the theater. Well, I mean I can't say sometimes and then it's only anecdotal, how many times I've been hearing like, "Wow, I haven't been back and so long. It's so good to be back from an older cohort. Well, it's no different when you go to an event with the people in the room in a hotel, whether it's -- especially in our kind of folks, we have a big meeting space. And there's a big group get together, and everybody's like hugging each other and their lads. I forgot how good it was to be together. And so we see that same sort of what's called a Top Gun effect, all people hugging each other very excited [indiscernible].

I heard from [indiscernible] people that I know that their weddings were oversubscribed. The more people said, yes, then they expected than the norm is because people are so excited. So it's funny to hear. But I want to talk about labor because it's been a huge topic. And you've just talked about the uneven film slate as being a pressure on your labor costs. Can you talk about that and why it's such an issue? And what needs to happen to alleviate this sort of pressure?

Yes. That certainly was a theme that we had in the first quarter, and we talked a little bit about it. But really, it's this -- we're trying to maintain our customer experience. So when people are coming back to the theaters, they're having the experience that we want them to have. And there's minimum staffing levels that we need to have. There's also a minimum number of hours that from the associate standpoint that they want to get to be employed by us and to stay with us. And so they need to get so much staffing and shifts. And so when you have I think like Q1, where some of the films moved around in the year because of production delays or because back in early Q1, some Omicron push outs. And so you've staffed up assuming that the content would be there and now a gifted and you don't want to let those people go because you can see coming in April, there's some more sizable movies, and you're going to want to have the staffing. You're also making investments in training and bringing those people on board as well. So as we got into Q2, and you just look at the calendar of releases, we now have had really since early April -- very late March, but early April a more consistent slate of movies coming out, and it lets us manage the staffing just frankly more efficiently. And certainly, there's operating leverage in the business, attendance falls through meaningfully, and we don't have a lot to staff up. But managing the overall hours that we're operating and staffing is something that's a whole lot easier to do when we have a consistent release schedule.

And I'm going to go Greg, because I think the exhibitors we talk to, whether it's today or at CinemaCon, they're all talking about more content. And I hear from distributors that it's really difficult to date these midsized movies. And I think your subscription plan is aiming to help with that. It sounds like that but the [indiscernible] that I hear is that the Tent-pole tent just suck all of the era. So how do we get past that and get the studios to date more film and give them enough screens. Does anything make sense to you that there's not enough screens for everyone?

Not really. I mean let's -- because you're lets look at -- that are 2 things that we know, okay? One of the things that we keep seeing over and over again, if you put movies in the theaters and you market them, people show up in record numbers, right? We know Spider Man. Let's go back, we can only get repeating it because it was repeating third biggest will be of all time. But Top Gun, biggest, Memorial Day weekend opening ever, right? Yes, it was, what, maybe the 11th best Memorial Day that had -- is compared to history, which that means there's a lot of room for people to still come to the movies if we give them something to watch, they will show up. So I'm not so sure that it's that hard to date those as they're sucking all the air out of the room. Look, nobody is going to be a Top Gun. That's for sure. I don't move is going to be a Jurassic Park. But I got to believe the people who made everything ever all at once, found a way to release their film and are really happy look I think it just crossed $60, or will probably get -- probably the $70 million. I heard it cost some $16 million to make. I mean that's a winner. Now not everyone is -- my point being is if we give them the product I think it's very clear. People are coming out to the movies, and they're coming out of all ages.

And what are you doing with alternative products and how big of a role can that play?

We are continuing to look at different kinds of alternative content, whether we've done this [indiscernible]. Our company is specifically trying to be innovators, which I think we've always been. The sports bar, we imagined that we took one of our auditoriums out incurred to a sports bar not just sports bar as sports bar -- a sports viewing experience is because sports bar doesn't even to do it justice. A 40-foot screen with that monitors all around it. So you could look at that as alternative content, concerts. We're playing reparatory film. Whatever gap might be in your model is what everyone's writing the model. Where are we going to be in [ '19 ]? Well, I'm looking and saying, well, whatever that gap is, let's build that gap with other content or other things to do in the real estate. And I don't know what the exact number is at 5%, 10%, 15%, but we will -- one of the thing was the Jurassic. The life finds a way that well. Because theaters will find a way to fill that space with content that people are going to come see. Is it going to be 50%? No, it's not going to be 50%. It won't be 25%. But I don't know that we need to fill a gap that large. They talk for years about it being 5% to 10% and maybe that's actually going to come to real. But people -- humans want to be together. That's the good thing. And that's what we offer. We offer a place for people to get together and experience something. Somebody told me today that the view Top Gun not even in a premium large format at the end of the movie, like 3 people out in the front of the auditorium and start clapping and then the whole auditorium started clapping. That's pretty quiet when you're sitting in front of your 60-inch television claim yourself.

Chad, can you help investors with margins as recovering? What should it look like versus 2019? And what are the biggest swing factors you should consider?

I mean going back to 2019, the single biggest thing that we've got to get back to is the attendance and the volume, right? There's a lot of incremental margin that happens from the incremental customer. And so if we're at 25% off of 2019 box office, we've got to grow the revenue to get the margins close back to where they were. That's pretty meaningful. The other puts and takes in that really revolve around what's happened in inflation in our costs. And the biggest line item being labor. And so we've seen like everyone has meaningful double-digit wage increases, going back to 2019 levels since then. It's now in the base in the business. And so we've worked hard to focus on changing the amount of labor that we need in the theater locations and in our hotels, taking some of that labor out through technology and replacing servers with order on app and those types of things. It's helpful. It's an offset. The other way we're going to get back there is through revenue management and doing more fine tuning with pricing. And we want to be very thoughtful as we go and do that. We've done some tilt pricing, so higher pricing for certain showtimes, certain days of the week. We certainly adjusted some food and beverage pricing to address the inflation we've seen in the cost of food in our -- in those operations. But it's a coin of both cost management and revenue management that will let us get back there. But we have to get back to 2019 volumes to get to the same margins.

And Greg, how far -- when do you expect to get back to 2019 levels? Do you see it happen in either at the theaters, the wells or both? And when I mean the CinemaCon is interesting because we started here that '24 or '25 might be the returns to 2019 levels of box office. What are your thoughts?

I'm not going to really try and predict the theater side. I just don't know when we're going to get there. Because the world changes so fast. Discussions we're having now about what content might become available to us because the bloom seems to be off the streaming rows, so to speak, where maybe they're saying, gee, maybe I should try to figure how to maximize the revenue of that sort of changes the dynamic in a positive way for us because we offer the ability to drive more revenue for the IP. Yet I know there's production delays, and I know they're still working -- they're working through trying to figure out what their strategies are going to be. And so I can't tell you exactly when we're going to get back to those numbers. The hotel is a little easier to see with visibility in that we're getting pretty close now in the first quarter, we were 91% of '19 revenues. So we're starting to creep up on those numbers getting pretty close to those on the hotel side. So it's probably in the next few years. I just can't tell you exactly when the theaters will get there. It's the beauty of the theater business. Nobody ever knows.

And we have a minute here. If you can talk about the balance sheet and capital priorities, I think you just sold some real estate and said that there might be more what are these noncore assets that you have available to sell? Is it land? Is it -- it's parcels, right? What are they?

Yes. It's generally land. It's come from two things. One is -- one of the things that we view ourselves as and something I think it's important to talk about because we don't get credit for this, and it's really, really important when someone is looking at our company to realize that we are a movie theater business, we're a hotel business, but we're also a real estate business. And for someone that says, well, I'm just going to slap a theater multiple because it looks like a theater company. So I'm going to put a whatever mobile, 7 and 8 I don't know what picture you got be optimistic. But pick your multiple. That's not the way to look at our business. We have 3 businesses that operate with 3 different multiples. And frankly, the lowest multiple is the theater tenant, which is what all of our competitors are AMC's tenant, rebuilds is a tenant. For the most part in the market intent. Those are the lowest multiples. You get more multiple for your real estate -- we own the real estate. So you sort of have to split our company and say, on the theater side, they're a tenant and a landlord. And so we got to apply a landlord's multiple to an implied rental stream on that side, which is a much higher multiple than the tenant's multiple. And then on the hotel side, owning your hotel real estate, it's probably more the way to do it, really, owning the hotel real estate, that's got a multiple as well, which is much higher than a theater multiple. So slapping a theater multiple will probably not give you an accurate way. It's easy, but it's not accurate. And so being -- and I go into that because I want to talk about is, so when you're a real estate company, and we view ourselves also as a real estate company, you start accumulating surplus real estate over time because you buy real estate, think maybe I'm going to do something with, I'm buying good real estate and it's going to hold its value or middle even growing value. In a lot of cases, that's what happens. So one piece of what we're selling is real estate we've bought that has just -- that we ended up not using necessarily or that we -- there are some old obsolete theaters that have great real estate that we sold that we -- and for example, Madison, Wisconsin, which we're going to sell. We rebuilt new theater, a couple of miles out. And then the theater that's sort of in board is going to -- has gone as a piece of land that's an extremely valuable piece of land. So you have surplus land like that. But then also, there's this other little dynamic, which is -- it's interesting. It's not a huge amount of money, but when we went to recliners, theater real estate is -- you size your parking lots based on the number of seats you have. Usually 3 seats per spot is about the way it works to Well, when you -- when you put in recliners, you cut your seating counts in half. You don't need all that parking. The -- you probably need all the market to begin with, but you're dealing with the municipalities as you should have. And then now, it's not lose you can cut your land in half because our occupancy percentage gets better when we go to -- when we went to recliners. But it does leave us with surplus land. And again, because we're not just a tenant, we can sell the land. And so we have sold some of that land as well. And so it's -- it comes back to saying it's important to look at our company differently than the others because just slapping a theater multiple on it is not the way to do it.

Okay. Well, I have to end there. I appreciate you both being here. Thanks so much, always nice to talk to you guys.

Great. Thank you, Meghan.

Thanks, bye-bye.