The Marcus - Q4 2022

Transcript

Operator (participant)

Good morning, everyone, and welcome to the Marcus Corporation fourth quarter earnings conference call. My name is Emily and I'll 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. If at any time during the call you require assistance, please press star and then zero, and an operator will be happy to assist you. As a reminder, this conference is being recorded. Joining us today are Greg Marcus, President and Chief Executive Officer, and Chad Paris, Chief Financial Officer and Treasurer of the Marcus Corporation. At this time, I'd like to turn the program over to Mr. Paris for his opening remarks. Please go ahead, sir.

Chad Paris (CFO and Treasurer)

Good morning and welcome to our fiscal 2022 fourth quarter conference call. I need to begin by stating that we plan to make a number of forward-looking statements on our call today, all of which we intend to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act. Our forward-looking statements may generally be identified by our use of words such as we believe, anticipate, expect, or words of similar import. Our forward-looking statements are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those expected. Listeners are cautioned not to place an undue reliance on our forward-looking statements.

The risks and uncertainties which could impact our ability to achieve our expectations identified in our Forward-Looking Statements are included under the heading Forward-Looking Statements in the press release we issued this morning announcing our fiscal 2022 fourth quarter results and in the Risk Factors section of our fiscal 2021 annual report on Form 10-K, which you can access on the SEC's website. We will also post all Regulation G disclosures, when applicable, on our website at marcuscorp.com. The Forward-Looking Statements made during this conference call are only made as of the date of this conference call, and we disclaim any obligation to publicly update such Forward-Looking Statements to reflect subsequent events or circumstances. In addition, we routinely post news releases and other information regarding developments at our company that impact our investors, customers, vendors, and other stakeholders.

You should look at our website, marcuscorp.com, as an important source of information regarding our company. We also refer you to the disclosures we provided in today's earnings press release regarding the use of adjusted EBITDA, a non-GAAP measure used in evaluating our performance and its limitations. A reconciliation of adjusted EBITDA to the nearest GAAP measure is provided in today's release. With that behind us, let's begin. This morning, I'll start by spending a few minutes sharing the results from our fourth quarter with you and discuss our balance sheet and liquidity. I'll then turn the call over to Greg, who will focus his prepared remarks on where our businesses are today and what we are seeing ahead. We'll then open up the call for questions.

This morning, we reported our quarterly results that cap a year of recovery and progress in our journey back from the effects of the pandemic, with both of our businesses outperforming their competition for the fourth quarter and for the year. In our hotel division, continued strong demand in both leisure and group travel led to fourth quarter total revenue above pre-pandemic levels, a trend that began in the second quarter. In theaters, our customers continued to come out of the home for the big screen theatrical viewing experience to see a slate of films that included some great quality blockbusters, was lighter on quantity than compared to the fourth quarter last year. Consolidated revenues were $163 million in the fourth quarter, a decrease of six...

of 3.6% compared to the prior year quarter, as the growth in our hotels and resorts division could not overcome the revenue headwinds in our theaters division. Consolidated adjusted EBITDA for the fourth quarter decreased from $29 million last year to over $16 million this year. For the full year fiscal 2022, consolidated revenues were $677 million, a nearly 48% increase from the prior year. adjusted EBITDA was $85 million, an over 142% increase from the prior year. These results are ill-illustrative of what we have been saying for a while, that while we are clearly on the way back, that road back will not necessarily be a straight line. We provided a breakdown of our fourth quarter numbers by segment in our press release.

As we will discuss today, our hotels business posted another strong quarter of revenue and earnings growth that contributed to a record year for the division. I do need to highlight a few items below operating income. Our fourth quarter interest expense decreased by approximately $900,000. The decrease came primarily from lower short-term debt and reduced borrowings. This was driven by our improved operating results. For the year, our interest expense decreased by $3.4 million compared with fiscal 2021. We reported total gains on asset sales of $7.1 million in the fourth quarter, including a $6.3 million gain from the sale of the Skirvin Hilton, which we completed in December. For the full year fiscal 2022, we had $7.4 million in gains on asset sales.

Finally, in the quarter, our income tax expense was negatively impacted by $6.7 million or $0.21 per share from a net increase in our valuation allowance on certain deferred tax assets. This adjustment relates to estimates for state income tax net operating loss carryforwards, the recovery of which is uncertain. For the full year, income tax expense was negatively impacted by $7.4 million or $0.23 per share from the net impact of valuation allowance adjustments on these deferred tax assets. All of these items are excluded from our adjusted EBITDA operating results. Turning to our segment results, our hotels and resorts division revenues were $65 million for the fourth quarter of fiscal 2022 as we continued to see strong demand for leisure travel and improved conditions for group events even as we entered a seasonally slower period for our Midwest hotels.

The division delivered $5.6 million of adjusted EBITDA for the fourth quarter and a division record $38.9 million for full-year fiscal 2022. Total revenue before cost reimbursements increased over $11 million or 24.4% over the fourth quarter of 2021. RevPAR for our eight owned hotels grew 22.2% during the fourth quarter compared to the prior year. Compared to 2019, fourth quarter total revenue before cost reimbursements for the division grew 3.2%, and fourth quarter RevPAR for our owned hotels decreased 2.8%. Breaking out the fourth quarter numbers for the eight comparable hotels more specifically, our overall RevPAR decrease during fiscal 2022 fourth quarter compared to fiscal 2019 was due to a 15.3% increase in our average daily rate, or ADR, offset by an overall occupancy rate decrease of approximately 11 percentage points. Our average fiscal 2022 fourth quarter occupancy rate for our owned hotels was 58%.

According to data received from Smith Travel Research for the fiscal 2022 and fiscal 2019 periods and compiled by us in order to evaluate our results, comparable competitive hotels in our markets experienced a decrease in RevPAR of 5% for the fiscal fourth quarter compared to the fourth quarter of fiscal 2019. This compares favorably to the previously mentioned 2.8% decline for our hotels. Once again, our hotels outperformed the competition by approximately 2.2 percentage points. For the full year fiscal 2022, comparable competitive hotels in our markets experienced a decrease in RevPAR of 7.8% compared to fiscal 2019, indicating that our RevPAR decrease of 3.5% during this period outperformed by approximately 4.3 percentage points for the year.

Finally, as group business continued to return, our banquet and catering operations continued to drive growth in food and beverage revenues, which were up 34% in the fourth quarter of fiscal 2022 compared to the prior year. Shifting to theaters, our fourth quarter fiscal 2022 admission revenues decreased 19.6% compared to the fourth quarter of 2021, with an attendance decrease of 24% driven by a reduced number of wide-release films debuting during the quarter, with 22 wide releases in the fourth quarter of fiscal 2022 compared to 26 in the prior year quarter. There were also several films early in the quarter that performed below expectations, as well as films that premiered in the middle to end of December and got off to a slower start than expected, but whose performance has been strong since the first of the year, benefiting the first quarter of fiscal 2023.

Of course, as the press release noted, last year, Spider-Man: No Way Home set box office records in December. When compared to 2019, our fourth quarter fiscal 2022 admission revenues were down 34.3%. According to data received from Comscore and compiled by us to evaluate our fiscal 2022 fourth quarter results, United States box office receipts decreased 35.7% during our fiscal 2022 fourth quarter compared to U.S. box office receipts during fiscal 2019. As a result, we believe we once again outperformed the industry average, this time by 1.4 percentage points. Our average admission price increased by 10% during the fourth quarter of fiscal 2022 compared to last year.

The increase in average admission price in the quarter was significantly impacted by an increase in our 3D ticket sales, which accounted for half of the increase and were 12% of tickets sold in the fourth quarter of 2022 compared to less than 1% of tickets sold in the prior year quarter. In addition, strategic pricing actions taken earlier in the year in response to inflation and pricing actions implemented during the holidays contributed to the balance of the increase in our admission per caps. For the full year fiscal 2022, average admission price increased 3.1% compared to the prior year. Compared to 2019's fourth quarter, average admission price grew significantly by 23.8%, which was also due to the increase in 3D ticket sales and pricing. Average admission price for the full year fiscal 2022 grew 14.2% compared to fiscal 2019.

Our average concession food and beverage revenues per person at our comparable theaters increased by 11.1% during the fourth quarter of fiscal 2022 compared to last year, driven by inflationary price increases implemented during the year, a higher food and beverage hit rate, which we define as the ratio of food and beverage transactions to box office transactions, and due to higher check averages across our circuit. We introduced new food and beverage menu in early November, which we believe has positively impacted check averages. When compared to the fourth quarter of fiscal 2019, our per capita average concession food and beverage revenues increased by 33.4%, which we believe is the result of several factors, including our industry-leading mix of nontraditional food and beverage options, the emphasis we are placing on ordering through our mobile app, as well as pricing changes.

For the full year of fiscal 2022, per capita average food and beverage revenues increased by 3.3% compared to the prior year, and 27.5% compared to fiscal 2019. Shifting to cash flow in the balance sheet, our cash flow from operations was $33.8 million in the fourth quarter of fiscal 2022. For the full year, cash flow from operations was $93.2 million, which includes approximately $28 million of nonrecurring income tax refunds and government grants received during fiscal 2022. Total cash capital expenditures during the fourth quarter of fiscal 2022 were $9.4 million, and for the full year fiscal 2022, total capital expenditures were $36.8 million compared to $17 million in fiscal 2021.

During 2022, the majority of our capital expenditures have gone to renovation projects in the hotels business, with the balance going to maintenance projects in both businesses. As Greg will discuss further, as our business operating performance continues to normalize, so do our capital expenditure plans. We expect a ramp-up in our capital expenditures in fiscal 2023 as we begin several renovation projects in our hotel business and continue to invest in maintaining and enhancing the customer experience in theaters. For fiscal 2023, we expect total capital expenditures of $60 million-$75 million, with $45 million-$55 million in hotels and $15 million-$20 million in theaters.

We are particularly proud of the feat that during 2022, we reduced long-term debt by $83.6 million, ending the year with a debt-to-capitalization ratio of 28%. Our net leverage was 1.9x net debt to adjusted EBITDA. While we invested in our businesses and reduced debt, we also returned $3 million in capital to shareholders in fiscal 2022 by reinstating our quarterly dividend in the third quarter of the year. Yesterday, we announced that our board of directors approved our next quarterly dividend, declaring a $0.05 dividend to common shareholders of record on March 13th to be paid on March 20th. We remain committed to returning capital to shareholders while maintaining the strength of our balance sheet and liquidity. We ended the fourth quarter with nearly $22 million in cash and over $243 million in total liquidity.

As we have discussed before, we have always believed in maintaining a strong balance sheet with a manageable amount of debt, including owning the majority of our assets. We believe our strong balance sheet is a strategic advantage, providing flexibility and allowing us to invest in growth opportunities for the long term. With that, I will now turn the call over to Greg.

Greg Marcus (CEO and President)

Thanks, Chad. Good morning, everyone. Throughout 2022, we reported on the incremental progress made in our recovery journey. As we close out the year and step back to reflect on where we are today compared to where we were a year ago, we've come a long way. Last year at this time, uncertainty was high in both of our businesses, and while we expected significant year-over-year improvement, there were many things we knew we couldn't control. Our focus was on bringing our customers back, managing operations efficiently while facing cost and labor inflation, supply chain disruptions, an inconsistent film slate, and executing our strategies in each business. As I look at our performance during fiscal 2022, I'm pleased with our results and how we managed our businesses. We outperformed our competition in both of our businesses throughout the year.

Our diversified business strategy allowed us to still make progress overall when the pace of recovery in our two businesses was clearly different. Our hotels division returned to pre-pandemic revenue levels by mid-year. While our Theatres division made progress in the year overall, with summertime performance that began to approach 2019 levels, the recovery has been held back at times by the lack of film content. At the end of the year, we had restored the balance sheet to its pre-pandemic state, and we have returned our focus to reinvestments in our assets that will drive future outperformance. What a difference a year makes. The themes we saw throughout much of the year continued in the fourth quarter. In hotels, leisure demand remained strong, and we continued to see the return of more group business.

In theaters, our customers confirmed that they wanna see iconic movies like Black Panther: Wakanda Forever, and Avatar: The Way of Water on a premium large format screen with our best-in-class food and beverage. As expected, the quarter was negatively impacted by the number of wide-release films. As Chad recounted in his remarks, that path back is not necessarily a straight line, but it is headed back. The fourth quarter and fiscal year that we are reporting today complete a year of significant progress, and we're pleased to be sharing these results with you. I'll start with our hotel division. Chad shared some of the numbers with you, including comparisons to our pre-pandemic fiscal 2019 numbers. The fact that the data indicates that we once again outperformed our competitor sets this quarter.

While we certainly planned for a significant recovery during 2022, our hotels division record year exceeded all of our expectations. Our hotels team delivered nearly $39 million of adjusted EBITDA for the year, a record for any year, either pre or post-pandemic. This level of success speaks to both the high level of execution by our team and the quality of what I have previously described as our special hotel assets. Leisure travel remained strong in the quarter, as it has all year. Group business continued the strength we began to see during the summer. Last quarter, I shared that we were encouraged by the increased amount of activity in sales leads we were experiencing. I'm pleased to report this activity has continued to convert to bookings and close the gap on group pace.

As of this week, our group room revenue bookings for the remainder of fiscal 2023, or group pace in the year for the year, is now for the first time running in line with where we would historically be at this same time in pre-pandemic years, even though booking lead times are shorter than pre-pandemic years. For 2024, group pace remains below pre-pandemic levels, but is significantly ahead of where we were at this time last year. Our experience appears to be indicative of a broader industry trend. According to industry data service Knowland, reported US group meeting volume in December 2022 exceeded pre-pandemic levels for the second month in a row, up 3.1% from December 2019.

While meeting room volume continues to increase, so has the average attendees per meeting, increasing from 99 in December 2021 to 111 in December 2022, and compared to 82 in December 2019. We continue to see strong average daily rates and improving occupancy. Chad shared our quarterly numbers, when we look at the full year, our average daily rate increased 9%, occupancy increased nearly 14 points, and RevPAR increased an impressive 40% compared to 2021. As we look to 2023, our hotel division strategies remain focused on three pillars: operational excellence and financial discipline, portfolio management, and lastly, growth.

Operational excellence and financial discipline initiatives include a renewed commitment to customer service and guest experience, expanded associate training programs, sales and marketing focused on increasing market share to capitalize on leisure and group demand, and enhancing technology to optimize labor management. We did a great job controlling our costs during the pandemic and managing through a labor shortage. We have to hang on to the efficiencies we gained when we had to operate with less labor. We've talked in the past about our ongoing portfolio management process, which includes evaluating each asset's competitive market, strategic positioning, financial performance over time, current valuation, and expected future returns as each asset approaches its next capital investment cycle. Our investment decisions are focused on value maximization as the determining factor for whether we hold, reinvest, or divest a hotel.

During the fourth quarter, we executed on our portfolio management strategy with the sale of the Skirvin Hilton in Oklahoma City. The Skirvin is a great hotel that was a great investment for the company and our shareholders, delivering an internal rate of return over 30% during our investment period that dates back to 2007, when we reopened the historic hotel following an extensive renovation. Ultimately, in this case, we were able to maximize value through the sale, with a valuation of nearly 20x LTM EBITDA when including $14 million of avoided capital expenditures. After retiring property-specific debt and lease obligations, we will redeploy the capital into investments in the hotels business. We thank our former associates at the Skirvin for their many years of loyal service to The Marcus Corporation.

Portfolio management strategies will also include continued reinvestment in our existing properties to maintain and enhance their value. During fiscal 2021 and 2022, we made investments in renovation projects at the Grand Geneva Resort & Spa, where the final phase of our room renovations are currently underway and planned for completion in time for the summer season. We will also begin making significant investments in renovation projects at The Pfister Hotel and our other hotels during fiscal 2023 and 2024 to enhance the guest experience. We expect these investments to continue to drive our outperformance in the years to come. These investments will be significant over the next two years, with up to $55 million of capital expenditures expected for the hotels business in 2023.

Finally, as part of our growth strategy, we are actively seeking opportunities to invest in new hotels and increase the number of rooms under management. That may come in several different forms, including acquiring new management contracts or hotel management businesses, seeking opportunities where we may act as an investment fund sponsor, acquiring additional hotels for redevelopment or as a joint venture partner, and acquiring additional hotel properties. We are excited about the opportunities for future growth in the hotels business, and I'd like to congratulate Michael Evans and our Hotels & Resorts team for delivering a great year. Shifting to our Theatres division. Chad went over the numbers with you, including our continued increases in per person revenues and our outperformance compared to the industry.

I'd like to start by highlighting a few things that we believed at the beginning of the year that were proven out during the year. First, consumers want an affordable, out-of-the-home entertainment experience, and more specifically, they still wanna go to the movies. The big screen experience can't be replicated in your living room, and with a number of films, we saw that even when movies began their second window on premium video on demand, customers still came in significant numbers to see the movie in the theater. When our customers came back, they went to see many genres beyond superhero movies, including family films, action and adventure, horror, and even romantic comedy. When they came back, they preferred a premium large format screen and continued to spend more on concessions, food, and beverage.

Finally, there were many examples this year that demonstrated that an exclusive theatrical exhibition window sets up strong subsequent windows, including premium video on demand and streaming platforms, and it maximizes the performance and monetization of film content over its life cycle. The magic and gravitas of exclusive theatrical exhibition delivers an experience that elevates the perceived quality for a movie, building long-lasting demand for its brand that other channels of distribution do not. Several of the year's biggest hits performed better on streaming following their theatrical run. It is becoming clear that the sequential release model with an an exclusive theatrical window continues to be a winning strategy that maximizes the value of the creator's intellectual property, and we're encouraged to see many in the industry come to the same conclusion. With these in mind, the fourth quarter in the year can be summarized simply.

The customer still wanted our product. They just want more of it. We finished fiscal 2022 playing 85 wide-release films. This compared to 79 wide-release films last year but still was below the approximately 115 wide-release-120 wide-release films delivered annually prior to the pandemic. The headwind of a movie production backlog that impacted the availability of films in 2022 is expected to continue to dissipate as we go through 2023. We do expect there to still be some uneven spots in the film calendar, we are encouraged by the additional releases that have been added to the film slate for 2023. In the recent months, this year we are projecting 95 wide-release-105 wide-release films. We are also encouraged by the increased level of promotion and marketing that is returning for exclusive theatrical releases.

Watching the NFL playoffs and the Super Bowl, it was great to see so many films promoted with a commercial that ended with exclusively in theaters. The first quarter in our theaters division is off to a notably stronger start than last year. Avatar: The Way of Water has continued its blockbuster run with Puss in Boots: The Last Wish, M3GAN, A Man Called Otto, 80 for Brady, and Ant-Man and the Wasp: Quantumania all playing well. We are excited to begin a run of more steady weekly theatrical releases that will take us well into the summer. Overall, we believe the 2023 movie slate is strong and will continue to bring audiences back to the theaters. We also continue to work with additional content providers, including streaming platforms, to take advantage of the unique theatrical experience to showcase some of their best content.

We believe exclusive theatrical runs can deliver an important incremental revenue source for content providers. We continue to work together to find a model that is mutually beneficial. Amazon Studios' upcoming Air, featuring Ben Affleck and Matt Damon, is an example of the potential for films coming from new content providers with an exclusive theatrical window, marketing, and promotion that help get the industry back to pre-pandemic levels of wide releases and over time, potentially beyond. As we look to 2023, our strategic growth initiatives are focused on bringing new content to our screens and creating fresh entertainment options to complement the moviegoing experience. This includes growing alternative content, including live performances, concerts, sports, and faith-based content. In the last year, we saw significant customer demand for alternative content events, including concerts from BTS, Billie Eilish, Coldplay, and others.

In addition, in January, we launched Marcus Passport, a program that allows customers to purchase a passport ticket with access to every movie that is playing as part of a Marcus Theatres film series. The program launched with a Best Picture Passport featuring the 10 Academy Awards Best Picture nominees and a kids passport featuring 12 family films. We are also looking ahead to returning to strategic growth in our theater division when the time is right. Growth opportunities that we may explore in the future include management contracts or taking over existing theater leases and acquisitions. We believe our strong balance sheet positions us well to execute on this strategy as attractive growth opportunities arise. As Chad discussed in his remarks yesterday, we announced another quarterly dividend. The Marcus Corporation has a long history of returning capital to shareholders, and we remain committed to paying a dividend.

As we continue to progress in our recovery and as we move past the more significant capital investments in our hotels business planned for this year, we will continue to reevaluate the level of dividend and potential share repurchases to return incremental capital to our shareholders. As you know, we view the world through a long-term lens. Our rate of improvement will vary from quarter to quarter as it did this quarter, but I'm confident that we will continue to make consistent long-term progress. We manage the business day to day but at the same time look at the overall performance of our investments with a goal of long-term sustained growth and industry outperformance. Finally, I would like to once again express my appreciation for our dedicated associates at The Marcus Corporation.

Their outstanding work and commitment to serving our customers is responsible for our success. We appreciate all that they do every day. They are our most important asset. On behalf of our board of directors and our entire executive team, thank you to all of our associates. With that, at this time, Chad and I'd be happy to open up the call for any questions you may have.

Operator (participant)

Thank you. If you would like to ask a question, please do so now by pressing star followed by 1 on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then 2. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. We will just take a brief pause to compile our Q&A roster. Our first question today comes from Eric Wold with B. Riley. Eric, please go ahead.

Eric Wold (Managing Director and Senior Equity Analyst)

Thanks. Good morning, Greg and Chad. Appreciate the taking two of my questions. I guess a couple here. I guess one, when you think about the hotel division, you talked about portfolio management, obviously the sale of Skirvin, and potential others and kind of what you're doing, you know, looking for additional opportunities. Maybe talk about those opportunities, kind of what you're seeing in the pipeline for potential expansion within that segment. You know, are there attractive, you know, underperforming, mismanaged properties out there right now that are reasonable prices? I mean, are sellers' expectations reasonable? Then do you kinda have a cap on what you might be willing to put into a single property, or is that there really isn't a ceiling at this point?

Greg Marcus (CEO and President)

Well, I would say right now, there is the market is not moving very much. There's, I think as everybody knows, you know, the debt markets have certainly had their challenges. I saw a stat the other day that CMBS debt, not that we're gonna take on CMBS debt I have any plans for. You never know, but the that market is pretty much frozen right now. I think that there's, there is currently a mismatch between. I think there's a lot of sellers who are counting on interest rates going down in the second half of the year. I'm not here to opine on where interest rates will be, but I'm just saying that drives probably a mismatch between buyers and sellers.

Nothing right this second is there's not a huge volume of transactions, but that, you know, that eventually turns around and there will be opportunities. We don't have them, right? We have a pipeline, we're working on it. We always are looking at things. We constantly are evaluating what is out there, and we will continue to do that. As for size, you know, I don't have a limit. I don't think we're about to go do something crazy and gigantic, but I mean, if the deal were amazing and we saw we could bring in partners, you know, we might do. You know, I wouldn't rule anything out.

Chad Paris (CFO and Treasurer)

Yeah. Eric, the only thing I'd add to that is on valuation, we're gonna. We have a process, and we're going to be very disciplined about how we think about acquiring, you know, hotels and doing diligence on those properties and where we think we can acquire relative to our cost of capital. I think right now there is a bit of a disconnect between buyers and sellers. You know, we're patient, and we'll continue to find the right opportunities, but we're gonna be disciplined about it. On your question on reinvestment and the magnitude of reinvestment, I think you were getting at our existing properties. Look, we think about that in terms of our return on the incremental capital as well as the, you know, plus the value of the asset today.

You know, it's not so much a limitation in terms of the quantum of investment as it is, can we hit our hurdle rates for the reinvestment as compared to what we can get to in valuation to sell the asset. I think the Skirvin is an example where we concluded that the right answer was to divest the asset rather than put more capital into it.

Eric Wold (Managing Director and Senior Equity Analyst)

Got it. by the way, I do wanna go back.

Chad Paris (CFO and Treasurer)

And then on, on the other-

Greg Marcus (CEO and President)

Question on size. Eric, just one thing on size. Look, at the end of the day, remember, Paramount for us has always been managing our balance sheet appropriately. you know, that's why I said if it was in partnership with something, because you know that's gonna be a limiter just by itself. The one promise I can make is we are not about to stretch our balance sheet to do a giant acquisition.

Eric Wold (Managing Director and Senior Equity Analyst)

No, that's helpful. On the theater side, maybe just give an update kind of where you are with the staffing environment. You know, with the current flow of films and kind of expected flow this year, are you at optimal staffing levels for where you'd wanna be? If attendance does return to pre-pandemic levels in the coming years, you know, as you look forward to that point, whatever it may be, would you anticipate having the same number of employees as you had back then, let's say in 2019? Or would that number be lower, but with the, you know, wage inflation higher, kind of making the overall cost comparable?

Chad Paris (CFO and Treasurer)

Yeah. Great question. Let me point out a couple of things. This quarter, our labor cost was now starting to get back to the staffing levels that we wanna have. Whereas if you compare it to where we were in 2021 and we shared with you that we could not hire enough folks in the fourth quarter of 2021 to meet the volume that we had going through the theatres, so we had a short-term benefit in our P&L because of that. You know, we got through it, but we want our NPS scores and we want our customer experience to, you know, be at a higher level than we were a year ago.

I'm happy to share that, you know, we're making great progress in that area and getting back to the staffing levels that we think make sense. The labor market has loosened a bit over the course of the second half of 2022, and we still have some pockets where maybe we aren't filling some positions, but generally, we feel like we can get pretty close to meeting the demand. You know, I think your other question is the, you know, the cost of labor and the P&L, is that gonna be greater than it was in 2019 given the wage inflation that we've seen? You know, what we're trying to solve for here is taking labor out of the model. That is.

Greg Marcus (CEO and President)

Going to get executed through an increased use in technology and really running our facilities with fewer people than we would have before. I'd say that the same thing is true in our hotels business. We know and we are managing to operate these properties with a different staffing model than we did before the pandemic. You know, will it ultimately be neutral to margins? We're still, you know, trying to work through that. It's a challenge, but we believe that we've done well on changing the staffing model, we still have some opportunity in front of us.

Eric Wold (Managing Director and Senior Equity Analyst)

Perfect. Helpful. I'll leave guarantee the rest offline. Thanks, guys.

Operator (participant)

Our next question comes from Jim Goss with Barrington Research. Please go ahead, Jim.

Jim Goss (Managing Director and Senior Research Analyst)

Thank you. Greg, I'd like to go over a little more on the sort of the new normal in film releases. As you mentioned, it has been choppy in coming back. I'm wondering if you'd think there'd be tended to be fewer mid-sized films that sometimes go direct to streaming, but may be offset by some streaming network films that might get theatrical releases, as has started to occur. You know, the overall size in comparison to the slate. Then maybe you can talk about a couple of the streamers and how they might view the world.

Greg Marcus (CEO and President)

Well, you get me on my soapbox, Jim. Wind me up early.

Jim Goss (Managing Director and Senior Research Analyst)

Yeah.

Greg Marcus (CEO and President)

Um, you know-

Jim Goss (Managing Director and Senior Research Analyst)

I give you-

Greg Marcus (CEO and President)

You know that.

Jim Goss (Managing Director and Senior Research Analyst)

I give you a chance.

Greg Marcus (CEO and President)

Thank you. You know, look, I believe that, I know, that for us to have a healthy film ecosystem, we're gonna need mid-size films and smaller films to be a part of that mix more than in the last, you know, few years, for sure. I don't know where it gets back to or where it was, I can tell you know, we're seeing some real positive signs in what they're releasing and the performance of those smaller films. Because like, you know, A Man Called Otto, $100 million. What a great gross that is for a mid-size film, It was fun. It was a good film. I was reading a list of the movies so far this year that have been out. I've seen them all, They aren't huge.

M3GAN, not a huge movie, but a, but fun and good, under two hours. You know, I saw, well, I saw Plane and Missing in the last month. Really, you know, really nice, fun, you know, short, mid-size films that did well and performed nicely for us. You know, they are, I keep saying, you know, you can't just feed us dinner. We need lunch and we need breakfast too to have a, you know, a rounded nutritional diet. Because those films help to build what. You know, we talk about momentum and theatrical being a habitual thing, and that we have to rehabitualize the moviegoer. What happens is, you know, you go to that movie, it's really not too complicated. You go to the movie, and you start watching the previews for the next movie.

You say, "Oh, I'd like to see that." Hopefully, you enjoy the movie you saw, and you say, "Well, this was fun. Hey, let's come back and see this next movie." When we have the... Since you can't have nothing but blockbusters, giant films. You need those smaller films to help with that rehabitualization and that healthy ecosystem. It's not just good for us. It's really good for the entire industry, you know, because as we talked about, this idea of sequential release. The movies that show up and have a play in a theater, when you go on that endless pit of streaming that it just has, it's bottomless, and that's a great thing. There's so much content, and yet how do you distinguish yourself?

People look and the person says, "Oh, I heard of that because it was in the movie theater." That's why that performance is as good or better on streaming. This is really found money for the, for any, for the people who have a streaming business or who ultimately sell into the streaming, you know. That, you know, again, in the sequential release model, you don't have to own your own streamer to ultimately sell your product after theatrical into the other channels. It's beneficial for them. Frankly, you know, I just... You know, I get...

I have to admit, I get a little frustrated when I hear people say, "Well, you know, the movies are for the theaters are for big movies, and the medium and the small stuff, you can watch that at home." Oh yeah, you can. Even at that, the experience is different. You know, it is. Yeah, you may have a 100-inch screen at home, but we have a 45-foot screen, you know, 30-45 at our smallest screens, feet of screen. Our sound is great. Even better, different than that, your phone is off, your kids are not walking into the room, the dog doesn't have to go outside. You've got all, you know. You are fully engaged in the content in the way you are not at home. It's a better and different experience. You know what?

You'll watch it again at home when you liked it. I really have to say this, you know, I don't like when we compare ourselves to TV because we are an out-of-home experience, and we talk about theatrical being the least expensive out-of-home experience. If you wanna get out, get off that desk on your couch, go see A Man Called Otto. Go see Plane, you know, or go see Creed...

Jim Goss (Managing Director and Senior Research Analyst)

While we might all agree philosophically with everything you're saying, it does seem like, you know, the new normal is not gonna be the old normal, and that there will be variances. I'm just wondering, you know, how high is up? You know, what those differences might be, because we've had several years, it doesn't seem like we're getting back to where we were exactly. Maybe, maybe we don't need to, at least we're improving from this level. I'm just always looking at those differences. In fact, if you mentioned Amazon with the Air film, and they've got their feature films, they have MGM, they have Amazon Prime. You know, they have a sort of an interesting mix that might, you know, prod them to do certain things.

Warner Bros. and Paramount are undergoing different challenges too. I don't know, are there any more specific thoughts you might have on the approaches from those companies?

Greg Marcus (CEO and President)

Well, I don't wanna be argumentative necessarily, Jim, but I'm not ready to throw the towel in yet on what the future is gonna look like. You know, it, as 'cause you pointed out, all of a sudden, Amazon's gonna release Air theatrically. You know, I don't know I can't speak for the streamers. Look, as you just pointed out, we have a good cash flowing business right now. I don't know what all of a sudden the tone is changing in a way I haven't heard in a while.

You gotta remember that for the last number of years, frankly, Wall Street was saying, "Be like that one company that gets $1,200 a subscriber," which they don't anymore, on their stock value, "and don't worry about anything else. Don't worry about maximizing the value of your content. Don't worry about your profitability. Forget any other revenue stream. Just get that one subscribing revenue stream." That tone has changed, but that takes time to work through the system. Now, I'm not here saying that it's gonna go back to where it was.

I'm gonna manage to whatever comes our way, I'm also not gonna throw in the towel because there are a lot of content providers who make content who haven't been playing theatrically, They are starting to see the benefits of that sequential release and not just for the larger movies. I don't know what it is. I wish I could tell you, As I said, I don't, I just don't wanna say that I know that it's not gonna be there. I don't know that it's gonna be there. I will say if the trend is your friend, it feels better than it did before.

Chad Paris (CFO and Treasurer)

Yeah, I think, Jim, that's the, that's the key compared to where we stood back in November and where we were thinking the number of wide releases was gonna be for 2023. At the, at the top end of that, at that range in November, we were thinking this was more like a 95 as, you know, the top end. Now there's been a number of positive developments and content coming our way that have dropped into the schedule during 2023, some of which are coming from streamers and appear to have, you know, legitimate marketing promotion associated with them. There, there does seem to be a change in tone and the nature of the discussion.

Some of them seem to be getting it and realizing that there's a lot of opportunity with box office and theatrical that will be incremental to their total returns on content. I think we're very encouraged by that. Where it ultimately stabilizes, you know, we'll see over the next couple of years here. We're still working through some supply chain issues that have been disruptive, and I think there will still be some impact of that that doesn't get you to a stabilized number in 2023. You know, we'll see where 2024 and 2025 end up, but this is not the stabilized number.

Jim Goss (Managing Director and Senior Research Analyst)

Okay, one last one. The loyalty program. Haven't talked about that much lately. What is the size, the role, and the usage right now? You mentioned Marcus Passport, perhaps that ties into it somehow.

Greg Marcus (CEO and President)

What are we, over $4 million now?

Chad Paris (CFO and Treasurer)

Over $5 million.

Greg Marcus (CEO and President)

Oops, over $5 million in our loyalty program. It's, our usage is, you know, I think we're around 50% of our transactions are loyalty transactions. I'm speaking from memory, Jim, and frankly, Chad's looking around the office to make sure that I'm not making a mistake. Look at it, we're pleased with the program. It's a good program. We have room to improve it. There's absolutely no doubt, we have room. You know, I've said and I've pushed our team that that's our ability to build a relationship with our customer, and our customers, you know, that's the real interesting thing about the movie business. You know, our customers are very passionate.

I've noted that they'll actually tattoo our product onto themselves, which sounds crazy, but you know, there are people walking around with Superman tattoos and Yoda tattoos. So when they're actually gonna permanently put our product onto themselves, we think that's a really good thing and that's an opportunity for us that we really need to get better at capitalizing on. It is our way of reaching out to the customer and building our business. We're pleased with what, so far with what we've got. Chad, you wanna give them some information?

Chad Paris (CFO and Treasurer)

Yeah. Yeah. Just to put some numbers to it, Jim, we are at 5.1 million members enrolled in the program today. Our percentage of transactions of loyalty members is growing. 45% of all of our box office transactions are loyalty members. 40% of our total transactions, including food and beverage, were from loyalty members. As Greg said, we're continuing to do things to incentivize use of loyalty and create more incentive for customers to frequently come to the movies, which is really what that program is driving at.

Greg Marcus (CEO and President)

Then it's, well, it's about frequency, as I said, and building that relationship. It's twofold. A stronger relationship will ultimately drive frequency, which is the end game. As the Passport, that's a really cool program that our team came up with. I love what they did. It is, you know, it's a way of marketing a smaller set of movies as a, you know, almost like a subscription. I don't wanna call it a subscription necessarily, but, you know, when you buy the Oscar Passport, for us, you're paying $40 to see all the Oscar movies if you want to. Now, you may not be seeing all the Oscar movies, what your price per movie is will depend on what your own personal usage.

We're, instead of trying to market every individual movie, we're marketing all the best pictures in one thing. I foresee a day when you can go on our website, and you're gonna be able to pick from your Marcus Passport. Do you wanna go see a bunch of kids movies in our Kids Dream series? Do you wanna see the Best Picture series? Do you wanna see the comedy series? Do you wanna see the, you know, the, what's it called? The, a concert series. Whatever, whatever it might be, whatever our creativity hopefully has no bounds. And that you'll buy a... We'll be able to market that in a different way, and it'll be a bulk purchase. Again, it helps build frequency and the relationship with our customers.

Jim Goss (Managing Director and Senior Research Analyst)

All right, thanks. Oh, by the way, Greg, which logo did you choose for your tattoo?

Greg Marcus (CEO and President)

Some things are on a need-to-know basis, Jim.

Jim Goss (Managing Director and Senior Research Analyst)

Okay. Thank you.

Operator (participant)

As a reminder, for any further questions, please press star followed by one on your telephone keypad now. Our next question comes from Chris Potter of Northern Border Investments. Please go ahead, Chris.

Chris Potter (CEO and Principal)

Good morning. You guys have done a great job improving the balance sheet over the last couple of years, specifically, bringing the debt level down, and it's easy to envision a scenario where you might be able to settle the convertible with cash rather than shares. Which by the way, I think would be very good for the stock price. Can you guys talk about how you think about that issue?

Chad Paris (CFO and Treasurer)

Sure. And on the convertible, we've got a bit of runway here left on the maturity. It's out there till 2025. And given where the stock is trading today and the capped call transaction that we put in as a hedge on that instrument, candidly, it's not a urgent problem, and given where the debt markets are today, you know, it would, you know, so long as you keep the dilution within the bounds of our capped call, the coupon on that, on that debt isn't, you know... It would be more expensive, frankly, to replace it. We will look, you know, if there are opportunities to do something before maturity that make economic sense, we certainly would look at it, but, that isn't a priority.

Chris Potter (CEO and Principal)

Thank you.

Operator (participant)

As a final reminder, for any further questions, please press star followed by one on your telephone keypad now. At this time, it appears there are no further questions. I'd like to turn the call back to Mr. Paris for any additional or closing comments.

Chad Paris (CFO and Treasurer)

All right. Well, we would like to thank you once again for joining us today. We look forward to talking to you not that long from now in early May when we release our first quarter fiscal 2023 results. Until then, thank you and have a good day.

Operator (participant)

That concludes today's call. You may now disconnect your lines.