U.S. markets closed

Edited Transcript of MCS earnings conference call or presentation 20-Feb-20 4:00pm GMT

Q4 2019 Marcus Corp Earnings Call

Milwaukee Mar 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Marcus Corp earnings conference call or presentation Thursday, February 20, 2020 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Douglas A. Neis

The Marcus Corporation - Executive VP, CFO & Treasurer

* Gregory S. Marcus

The Marcus Corporation - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Eric Christian Wold

B. Riley FBR, Inc., Research Division - Senior Equity Analyst

* James Charles Goss

Barrington Research Associates, Inc., Research Division - MD

* Michael Joseph Hickey

The Benchmark Company, LLC, Research Division - Senior Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, everyone. And welcome to The Marcus Corporation Fourth Quarter Earnings Conference Call. My name is Josh, and I'll be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded.

Joining us today are Greg Marcus, President and Chief Executive Officer; and Doug Neis, Executive Vice President, Chief Financial Officer and Treasurer of the Marcus Corporation.

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

--------------------------------------------------------------------------------

Douglas A. Neis, The Marcus Corporation - Executive VP, CFO & Treasurer [2]

--------------------------------------------------------------------------------

Thank you very much. And welcome, everybody, to our fiscal 2019 fourth quarter and year-end conference call. Bear with me as, once again, I need to begin by stating that we plan on making a number of forward-looking statements on our call today.

Forward-looking statements could include, but not be limited to statements about our future revenues and earnings expectations; our future RevPAR, occupancy rates and room rate expectations for our hotels and resorts division; expectations about the quality, quantity and audience appeal of film products expected to be made available to us in the future; expectations about the future trends in the business group and leisure travel industry and in our markets; expectations and plans regarding growth in the number and type of our properties and facilities; expectations regarding various non-operating line items on our earnings statement; and our expectations regarding future capital expenditures.

Of course, our actual results could differ materially from those projected or suggested by our forward-looking statements. Factors, risks and uncertainties, which could impact our ability to achieve our expectations are included in the Risk Factors section of our 10-K and 10-Q filings, which can be obtained from the SEC or the company. We'll also post our Regulation G disclosures when applicable on our website at www.marcuscorp.com.

So with that, let's -- behind us, let's talk about our fiscal 2019 fourth quarter and our completed fiscal year.

Once again, we had multiple nonrecurring items in both this year's and last year's reported results that complicate comparisons to the prior year. So we attempt to get those numbers on a more apples-to-apples basis in our press release, and I'll explain each of them as this call proceeds.

But when all is said and done, our operating results were down versus last year for both the quarter and the year for a variety of reasons that we'll discuss on our call today.

As our press release notes, however, thanks to the Movie Tavern acquisition and a solid quarter and year for our hotels, fiscal 2019 fourth quarter and fiscal year revenues were a record for both divisions as well as the company as a whole. We also reported record adjusted EBITDA during both the fourth quarter and fiscal year as well.

As is our usual practice, before we get to Greg's comments on the quarter and year, I'm going to take you through some of the detail behind the numbers, both on a consolidated basis and for each division.

So not much to say about the line items below operating income. Investment income increased compared to last year during both the quarter and the year, due primarily to increases in the value of marketable securities held by the company.

Meanwhile, interest expense decreased during the quarter and the year, due primarily to reduced borrowing levels. These changes in the other line items were relatively minimal.

Income taxes, on the other hand, did have some nonrecurring activity last year that definitely impacted our comparisons to net earnings. Last year, during the fourth quarter, we benefited from a $1.2 million one-time reduction in deferred tax liabilities, related to a change in tax accounting method made last year. And for the full fiscal year, that total benefit was over $1.9 million during fiscal 2018. As a result, we had an unusually low fourth quarter and full year effective income tax rate last year.

Our fiscal 2019 effective income tax rate was 22.7% compared to 19.7% last year. However, if you exclude that $1.9 million nonrecurring benefit last year, our effective income tax rate last year was 22.7%, the same as this year. Shifting gears away from the earnings statement for a moment. Our total capital cash -- our total cash capital expenditures during fiscal 2019 came in right in the middle of the range we shared with you last quarter, totaling approximately $64 million, compared to approximately $59 million last year.

Now, that 2019 number does not include the approximately $30 million cash component of our Movie Tavern acquisition. Approximately $32 million or half of our spend during fiscal 2019 was incurred in our theater division, related primarily to the new theater that we opened and our continuing DreamLounger seating projects and premium large-format conversions that we referenced in our press release. The other half, the other $32 million of capital expenditures in our total Hotels & Resorts division during fiscal '19, were primarily related to the 2 major renovation projects at the Saint Kate and the Hilton Madison, plus various normal maintenance projects.

As we look towards capital expenditures for fiscal 2020, we're currently estimating that our capital expenditures may be in the $65 million to $85 million range. We're currently estimating approximately $45 million to $60 million for our fiscal 2020 capital spend in our theater division, with another $20 million to $25 million earmarked for our Hotels & Resorts division.

As is always the case at this point in the year, the actual fiscal 2020 capital expenditures certainly could vary from this preliminary estimate. And Greg will briefly discuss our spending plans in his prepared remarks.

I'll now provide some financial comments on our operations for the fourth quarter and the fiscal year, and I'll start with our theaters.

Our reported admission revenues increased 18% and our concession revenues increased 37.9% during the fourth quarter compared to last year. But when you exclude from the numbers the acquired Movie Tavern theaters and the new Movie Tavern theater that we opened during the fourth quarter, you'll find that our comparable admission and concession revenues decreased 5.1% and 4.6%, respectively.

For the full fiscal 2019 full year, once again excluding the Movie Tavern theaters, our comparable admission and concession revenues decreased 5.5% and 2.4%, respectively, due in large part to the industry's challenging first quarter.

According to data received from Comscore and compiled by us to evaluate our fiscal 2019 fourth quarter and fiscal year results, United States box office receipts, excluding a handful of new builds for the top 10 circuits, decreased 5.5% during our fiscal 2019 fourth quarter and decreased 6% for the comparable 52-week fiscal year. As a result, we believe our admission revenues for comparable theaters during the fourth quarter of fiscal 2019 outperformed the industry average by 0.4 percentage points, with our fiscal 2019 full year results ending up 0.5 percentage points ahead of the industry.

Now we do not include the performance of our Movie Tavern theaters in the comparison to the industry because we did not own Movie Tavern during all -- during fiscal 2018. Based upon data available to us, however, from the previous owner, we believe that our Movie Tavern theaters outperformed the industry by approximately 7 percentage points during the 11 months that we owned them during fiscal 2019. Greg will address the outperformance of both our legacy theaters and our Movie Tavern theaters during his prepared remarks.

Attendance at our comparable theaters was down 9.9% and 8.6%, respectively, during the fourth quarter and fiscal 2019 full year compared to the same periods last year due to a weaker film slate. The decreases in attendance were partially offset by increased per capita revenues.

Our average admission price at our comparable theaters increased 5.4% during the fourth quarter and 3.4% during 2019 compared to the prior periods. We're also pleased to report the increases in our average concession and food and beverage revenues per person at our comparable theaters of 5.9% for the fourth quarter and 6.9% for all of fiscal 2019.

Our investments in nontraditional food and beverage outlets continue to contribute to higher per capita spending. And if you want to add Movie Tavern to the numbers, I'll tell you that our average concession in food and beverage revenues per person increased by nearly 28% this year.

Our theater division operating income and operating margin declined during the fourth quarter and fiscal 2019 compared to the same periods last year due to the negative leverage that occurs when attendance declines. Through the significant investments we and others in this business have made in our theaters over the last 5 years, we have higher fixed costs, such as rent, depreciation and amortization, and a certain percentage of our labor expenses, due in part to our increased number of new food and beverage outlets in our theaters.

As a result, it's more difficult to remove costs when attendance declines like it did in the fourth quarter and full year fiscal 2019, and operating margins are more likely to decline when that happens. In addition, as we discussed all year, our operating margin also declined as expected due to the inclusion of the Movie Tavern operating results.

Our Movie Tavern theaters have a lower operating margin than our legacy theaters, due to the fact that all 22 acquired theaters are leased rather than owned, and because a larger portion of Movie Tavern revenues are derived from the sale of in-theater food and beverage, as food and beverage labor costs are generally higher for those items compared to traditional concession items. Of course you've heard us say many times before, we take dollars to the bank, not percentages.

And lastly, our press release and attached table reconciling net earnings to adjusted net earnings, highlighted for you several nonrecurring items that impacted our fourth quarter and fiscal 2019 theater results.

During our fiscal 2019 fourth quarter, we recorded a $1.9 million impairment charge related to 1 specific theater location. And we incurred approximately $400,000 of preopening expenses related to the new Movie Tavern theater that we opened during the quarter. Those items, plus nearly $2.1 million of nonrecurring acquisition and preopening expenses related to the Movie Tavern acquisition reported in earlier quarters, resulted in total nonrecurring items in our theater division during fiscal 2019 of nearly $4.4 million or $0.10 per share. During our fourth quarter last year, we also had some nonrecurring acquisition and preopening expenses totaling approximately $1.7 million.

Shifting to our Hotels & Resorts division, our reported results for fiscal 2019 were obviously impacted by the fact that we closed the Intercontinental Milwaukee after the first week in January, in order to begin a major renovation that transformed this hotel into Saint Kate the Arts Hotel. We reopened the new hotel in June. And as expected, we also incurred initial start-up losses at this hotel during the third and fourth quarters as we compared a newly opened independent hotel to the results of a stabilized, branded hotel the year before.

As previously reported, we also were undergoing a major renovation in our Hilton Madison hotel during the first half of fiscal 2019. So that further negatively impacted our reported results for the full year of fiscal 2019 from this division.

As you saw in the press release, we're reporting slightly increased hotel revenues and a decreased operating loss during fiscal 2019 fourth quarter. And we're reporting increased revenues and decreased operating income during fiscal 2019, compared to this last year's same periods.

Now when you exclude the closed former Intercontinental, now the Saint Kate Hotel, and cost reimbursements which have nothing to do with our owned hotels whatsoever, from our results, you'll find that comparable hotel revenues actually increased 2.6% during both the fourth quarter and fiscal 2019. Our operating income was obviously impacted in both years by the Saint Kate conversion. This year's numbers were impacted by the aforementioned closing of the old hotel and the subsequent preopening expenses and initial startup losses of the new hotel.

Last year's report -- results in the fourth quarter were negatively impacted by approximately $500,000 of preopening expenses and approximately $3.7 million of accelerated depreciation. So if you just look at our hotel results excluding this hotel altogether, we find that our fiscal 2019 full year operating income for our remaining hotels actually increased by approximately $1.2 million or 7.6% during fiscal 2019 compared to fiscal 2018. And these numbers are despite some negative impact at our Hilton Madison as well, through the aforementioned renovation in the first half of the year.

As the table in the press release highlights, nonrecurring preopening expenses and initial start-up losses at the Saint Kate negatively impacted our reported results by approximately $1.3 million or $0.03 per share during our fourth quarter and $6.8 million or approximately $0.16 per share during fiscal 2019.

Now to be clear when I use these terms, when I refer to preopening expenses, I'm primarily talking about direct expenditures incurred in conjunction with the 6-month closing and subsequent reopening of the hotel. When I refer to initial startup losses, I'm addressing the, kind of, the delta that has occurred as expected, between the operating performance of the brand-new independent hotel compared to a stabilized branded hotel last year, and Greg will expand on this in his comments.

The biggest contributor to our same-store increase in revenues were increased food and beverage revenues during our fourth quarter and full year fiscal 2019.

Our total revenue per available room or RevPAR for our 7 comparable owned hotels, excluding the Saint Kate, increased 1.3% during the fourth quarter and 1% during the fiscal 2019 compared to last year's same periods. But even those numbers are a little deceptive because, as I mentioned, we also had 1 hotel, the Hilton Madison, significantly impacted during the first half of the year due to that major renovation. When you strip that hotel out, our true comparable hotels for the full year actually reported an increase in RevPAR of 2.4% for fiscal 2019 compared to fiscal 2018.

As we've noted in the past, our [RevPAR] performance did vary by market and type of property. Now according to data received from Smith Travel Research and compiled by us in order to compare our fiscal quarter results, comparable upper upscale hotels throughout the United States experienced an increase in RevPAR of 1.4% during the fiscal 2019 fourth quarter and 1% for fiscal 2019. Meanwhile, competitive hotels in our collective markets experienced a decrease in RevPAR of 0.6% during our fourth quarter, and an increase in RevPAR of 2.7% during fiscal 2019, again, compared to the prior periods. As a result, we outperformed our competitive sets during the fourth quarter, and excluding the Hilton Madison, we outperformed the nation, while performing in line with our competitors during the full year of fiscal 2019.

And finally, breaking out the numbers for all 7 of our comparable hotels more specifically, our fiscal 2019 fourth quarter RevPAR increase was due to a 1.7% increase in our average daily rate or ADR, partially offset by a slight decrease of 0.3 percentage points in our overall occupancy rate. For the full fiscal 2019, our overall RevPAR increase was due entirely to a 1.6% increase in our ADR, partially offset by an overall occupancy rate decrease of 0.4 percentage points.

Finally, looking forward a little bit here, I do want to remind you that fiscal 2020 will be a 53-week year for us, ending on December 31, 2020. And that extra week in December is no ordinary week, but rather includes this traditionally strong moviegoing week between Christmas and New Year's Day. And since the first week of our new fiscal year began on December 27, 2019, that means we'll have essentially 2 of these traditional strong moviegoing weeks during our upcoming fiscal year. Now the last time we had an additional week of operations was during our 31-week transition period that ended on December 31, 2015. That additional 31st week of operations that year benefited both of our operating divisions, but particularly our theater division, due to a new Star Wars film that played, and contributed approximately $17.4 million in additional revenues and $6.2 million in additional operating income to our final 5-week period and our transition period results. After interest expense and income taxes, we estimate that the extra week of operations that year contributed approximately $3.6 million to our transition period net earnings or approximately $0.13 per diluted share. While there can be no assurance that we'll realize similar benefits in fiscal 2020, it is important to note that our theater operations in 2015 did not include our 2 most recent acquisitions, and we had a higher effective income tax rate that year.

With that, I'll now turn the call over to Greg.

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Doug. I'll begin my remarks today with our theater division. The word you're going to hear most often from me today is balanced.

We've been in the movie theater business for nearly 85 years. As you know, this business can be a real roller coaster. We joke internally that it seems like some days we are geniuses and other days, well, not so much. And for as long as we've been in this business, there has been concern for its future. And yet we're still here, entertaining millions.

So when you operate in a business like this, we believe it is imperative that you take a balanced approach. Sure, we care about each and every quarter, but as you know, we have a long-term perspective on everything we do. A balanced approach recognizes the grass doesn't grow to the sky, but it also acknowledges that the sky is not falling either.

So as I make my comments about our theater division's fourth quarter and fiscal year, you're going to hear what I hope you will agree with -- will be a balanced perspective.

So let's start with our fourth quarter and fiscal 2019. As anyone who follows this industry knows, it was a challenge. We all know that our industry was playing catch up all year long after starting the year with a -- with very difficult comparisons during the first quarter. We had high hopes for the fourth quarter, as we knew we had several blockbusters lined up in late November and into December. And sure enough, the Frozen, Jumanji and Star Wars films ended up being 3 of our top 4 films for the quarter.

What we didn't count on was October and early November film comparisons to last year being as difficult as they were. Last year, our top 4 films of the quarter all were released during that same early time period, and this year's film product just didn't match up.

So let's look at the ledger from a balance perspective. On the 1 hand, attendance was down this year nearly 9%, which in a high fixed cost business, creates operating challenges that showed up in our numbers. In addition, the film slate was particularly top-heavy this year, with our top 5 and top 15 films accounting for approximately 26% and 48%, respectively, of our total admission revenues during fiscal 2019, compared to 23% and 42% for our top 5 and top 15 films last year.

A direct result of that dynamic was an increase in our film costs, as we generally pay more as a percentage of box office for the largest blockbuster films. Another potential negative is that we won't have an Avengers or Star Wars movie in 2020, which understandably has created some concern about how the 2020 film slate will perform compared to this past year. And of course, all of this is occurring at the same time that the so-called streaming wars begin to ramp up in earnest.

So I get it. If you're just going to look at those 4 items in isolation, I could understand why sentiment seems to be negative at the moment. But let's look at the other side of the ledger and balance things out. Let's start with 2019 box office.

It was the second largest box office in history. In fact the only problem was, the largest box office in history was the year before, when we're comparing it to. When you dig into the numbers, you find that the single biggest difference between 2019 and 2018 was the holdover films from the prior year.

In 2018, the 2017 holiday holdovers, that's 2 years ago, this is going to get a little confusing because the names are almost the same. Star Wars 8, we just showed Star Wars 9. In 2017, holiday holdovers, Star Wars 8 and the first Jumanji with The Rock, the greatest show -- and The Greatest Showman contributed significantly to January and February 2018 results.

The carryover. In 2019, so that was a year ago. In 2019, Aquaman was really the only holiday holdover from the prior year. According to data from NATO, the National Association of Theater Owners, this was more than a $300 million difference in box office revenues this year. That's the vast majority of the difference between the 2 years. And just since we're talking about history. And if you want to think about how good we are at predicting as an industry, we sat around at the end of 2017 and said, well, 2018 doesn't have as big as slate as 2019, and we were sort of saying, well, we can't wait to get to 2019. And yet, as it turned out, 2018 was actually the better year, and here we sit again, and we're saying we can't wait to get to 2021 and yet, who knows.

But let's talk about that film slate. Looking ahead to the film slates for 2020 and '21, we see a strong mix, of both established franchises along with a lot of original films as well. On paper, it also looks like we will have likely -- we will likely show more, not less wide release films in our theaters in 2020. And it appears we will have a wider range of options and genres as well.

We believe that is exactly what moviegoers are looking for. And if the film slate turns out to be more balanced in the year and less top heavy, then that may have a favorable impact on our film costs. Again, time will tell. We're off to a good start in fiscal 2020, thanks to stronger holiday holdovers and several films mentioned in our press release, but we know we will have some difficult comparisons ahead. I can't predict how all these films will perform. But neither can anyone else. We're looking forward to seeing how the slate unfolds.

And don't underestimate that aforementioned 53rd week and the benefit it will have on next year's fourth quarter results. I know it's easy to ignore that extra week since it only comes once every 5 to 6 years, but the impact is real. And every year, we report in between -- we report in between has 1 less -- every year we report in between, has 1 less day than everyone else.

Doug, thanks for reminding us of it. And I think the same balanced approach should be appropriate as we consider the impact of streaming on the movie theater business. NATO also recently published some very interesting numbers on this topic as well. It may have come as a surprise to some, but films grossing under $100 million accounted for essentially the same revenue at the box office in 2019 as they did in 2018.

As the theory goes, these are the exact type of movies that streaming is said to be harming. And this study has shown that people who tend to stream movies also tend to be more frequent movie theatergoers as well. My point is that there is a lot to learn yet regarding the impact of streaming on all forms of entertainment, not just movie theaters. And keep in mind, in the end, we're in the business of out-of-home entertainment. I know it's a cliché, but my grandfather would always remind us that there's a kitchen in every house, but people still go out to eat. It's our job to offer an experience and a value proposition that keeps moviegoing at the top of our customers' list of things to do when they get out of the house. When viewed in that light, we offer the cheapest form of out-of-home entertainment. And I would argue, that is our competitive advantage.

So let me get off my soapbox for a moment and get more specific to Marcus theaters. While our overall results Doug shared with you weren't what we want them to be, and you've been hearing about all the challenges, let's balance things out once more with some of the wins we experienced during the fourth quarter and fiscal year.

Let's start off with our continued outperformance. We've now outperformed the industry for 6 years in a row and 19 of the last 24 quarters. That is no easy accomplishment, and by definition is getting harder every year, as we near the later innings of our recent capital investment cycle. Yet, with the help of a favorable film mix and the continued efforts of our tremendous leader team, we once again outperformed in our fourth quarter and fiscal year. And that's not counting Movie Tavern, which also outperformed during the 11 months we owned them during 2019. Movie Tavern is another example of needing to take a balanced perspective. These theaters performed better in 2019 than they did in 2018 under previous ownership, but the weaker film slate was a challenge.

And as you well know, the labor market continues to be our other challenge. And given the Movie Tavern business model, the labor challenges are accentuated at these theaters. We've been very focused on developing tools to help our managers manage their labor costs efficiently, while at the same time introducing technology, like the order your food from your app or kiosk innovation that we introduced at our new Movie Tavern by Marcus theater in Brookfield, Wisconsin and are testing in select theaters in our circuit. Overall, the integration of the Movie Tavern theaters into our circuit continues. We still have a lot of work to do to get these theaters where we want them from an attendance, margin and service level perspective. But our capital improvements, combined with our innovative pricing, marketing and loyalty programs are having a noticeable impact on attendance at these theaters, another 2019 win.

Finally, I'd be remiss if I didn't recognize the success our team has had executing strategies that resulted in another year of meaningful increases in our average ticket price and average concession food and beverage revenues per person. And as you know, while a portion of the ticket price increase was due to a change to tax on top, we've been accomplishing the majority of our per capita increases, not by raising prices, but rather by making investments in amenities our customers should benefit from and are willing to pay for, such as premium large-format screens and expanded food and beverage outlets. A true win-win.

Looking ahead, Doug shared with you that we may spend as much as $45 million to $60 million in this division during fiscal 2020. And we would do that in a number of ways. We're under construction with a new theater in Tacoma, Washington, that is expected to open during our fourth quarter. In addition, although I mentioned that we are nearing the end of our amenity investment cycle, we still have opportunities to add DreamLounger recliner seats and our signature food and beverage outlets to several additional theaters during fiscal 2020. We also have identified several potential opportunities to convert existing screens to superscreen DLX auditoriums during fiscal 2020. And of course, we'll always spend the necessary maintenance money to keep our theaters looking great for our valued customers.

So now I'll end my comments in the theater division where I began. As we move ahead, we'll continue to evaluate our business opportunities and challenges with a balanced perspective. Our team will continue to manage the short-term environment while still focusing on our long-term strategies that have served us so well for the past nearly 85 years. There will be ups and downs, but I'm confident that Rolando Rodriguez and his team are up to the challenge.

With that, let's move on to our other division, Hotels & Resorts. You see the segment numbers, and Doug gave you some additional detail. Obviously, our reported results in both years were impacted by the Saint Kate. And Doug went over the various nonrecurring items with you. We felt it was very important to provide investors with the information necessary to understand, not only how this particular hotel impacted our results, but also a clean look at what our core operating performance was for the rest of our Hotels & Resorts business, both for the quarter and the year.

What we did with this hotel, closing it down for half the year, then reopening it as an unbranded arts-themed hotel, is extremely rare. And when you only have 8 hotels in your own portfolio, something like this understandably has a very noticeable impact on your reported results. As a result, I think the most meaningful numbers Doug shared with you were the fiscal 2019 results of this division when you exclude Saint Kate from both years.

As a reminder, excluding that hotel, our fiscal 2019 hotel operating income would have increased by $1.2 million or 7.6% during fiscal 2019 compared to fiscal 2018. As our press release indicates, that year-over-year improvement in our comparable hotels and management company, are due to increased revenues and the continued focus on cost controls and operating efficiency. The increase in revenues was directly related to another increase in group business at several of our hotels during the fiscal 2019 fourth quarter and full year compared to the prior year periods, contributing to our increased RevPAR performance for our comparable company-owned hotels. This increase in group business also contributed to an increase in our banquet and catering revenues as well.

Looking to future periods, our group room revenue bookings for future periods in fiscal 2020, commonly referred to in the hotels and resorts industry as group pace, is running ahead of our group room revenue bookings for future periods last year at this time.

Banquet and catering revenue pace for fiscal 2020 is also currently ahead of where we were last year at this same time. Not surprisingly, the fact that Milwaukee will host the Democratic National Convention in 2020 is certainly contributing to our increased group pace for next year. And hosting a convention with this level of international prominence is already leading to increased lead activity for future years at our Convention and Visitors' Bureau. When you consider that Northwestern Mutual's annual convention is moving to August to accommodate the DNC and the Ryder Cup will be held about an hour north of Milwaukee in September, the 2020 fiscal year looks like it may be an event-driven year, at least here in Milwaukee.

Nationally, the pace of RevPAR growth has been declining over the past several years, and many published reports by those who closely follow the hotel industry suggest that the United States lodging industry will experience very limited overall RevPAR growth -- limited -- try that again. The United States lodging industry will experience very limited overall growth in RevPAR in calendar 2020, with some markets possibly experiencing small declines. Whether the relatively positive trends in the lodging industry over the last several years will continue, depends in large part on the economic environment as hotel revenues have historically tracked very closely with traditional macroeconomic statistics such as the gross domestic product.

Also, I'd be remiss if I didn't double back to the Saint Kate for a minute. In fiscal 2020, it is our job to begin delivering on the investment we made in this new hotel. As an independent hotel, we don't have a brand to rely on to create name recognition. So that creates unique challenges we are working to overcome. We are spending an extra effort marketing the Saint Kate in order to increase awareness of this very special new hotel in Milwaukee. And as the press release notes, we are particularly pleased to recently be named 1 of the country's best new hotels by USA TODAY, 10 Best Readers' Choice Travel Awards. Additionally, the reviews we are getting from both the media and our customers, is nothing short of outstanding. With over 200 rooms, group business will play an important role in the hotel's future success. As you know, there is a lead time for booking group business. And while our sales team is pleased with the traction they are gaining as they sell this hotel to future groups, we still have a lot of work ahead of us to get this hotel where we want it to be. Our entire team is focused on making that happen. And of course, improving operational efficiencies is also at the top of our list at this hotel as well.

Speaking of our team. During our fiscal 2020 first quarter, Michael Evans joined us as the new President of Marcus Hotels and Resorts. Michael is a proven lodging industry executive with more than 20 years of experience in the hospitality industry, with companies such as Marriott International and MGM Resorts International. We believe that Michael's proven development, operating and leadership experience with -- and strong roots in the hospitality industry make him extremely qualified to build on our Hotels & Resorts division's long history of success, supported by a strong and experienced senior leadership team.

And while we believe Michael's background and development should help our growth efforts in the years ahead, he and his team will also be charged with taking care of the assets we already have. With that in mind, our fiscal 2020 capital budget includes dollars later in the year for major renovations that we will begin at 2 of our largest hotels, The Pfister and The Grand Geneva. These projects will carry over into 2021 and they're vital to maintaining these 2 hotels as the premier properties in each of their markets.

With that, we've shared a lot of information with you, and we want to get to your questions. So let me end by noting that once again, our board expressed confidence in our future yesterday by raising our quarterly dividend rate by another 6.3%, our sixth dividend increase in the last 5 years. With an extremely strong balance sheet, we believe we are well-positioned to not only weather any storms that may lie ahead, but to also invest in the future. With that, at this time Doug and I will be happy to open the call up for any questions you may have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go first to Eric Wold with B. Riley.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [2]

--------------------------------------------------------------------------------

A couple of questions, I guess one, kind of, for each of the 2 divisions. I guess, Doug, as you think about the 2020 CapEx guidance for the theaters of $45 million to $60 million, how much of that would you kind of say is "maintenance" versus ROI generating activities? And then, you obviously -- at what point would you say you're in the cycle? I don't see Movie Taverns now in the mix but it shifts a little bit. So maybe kind of think about the legacy theaters, the legacy market theaters in Wehrenberg versus Movie Tavern, kind of, where are you in that cycle in terms of where do you expect that CapEx spend to decline meaningfully in the theater side?

--------------------------------------------------------------------------------

Douglas A. Neis, The Marcus Corporation - Executive VP, CFO & Treasurer [3]

--------------------------------------------------------------------------------

Sure. Well, look, I would say of that -- we gave a range for theaters of $45 million to $60 million. And I will tell you to get to that high end, it'll take a bunch of projects to accelerate and move pretty quickly. So I don't know that we'll get to that high end, that's why we provide the range. I'd say probably half and half in terms of the mix. We've got several legacy locations that we're taking a look at in terms of ones that we still haven't put -- done DreamLoungers or some other amenities related to that. We're working on a Movie Tavern location right now as we speak. There's a -- there's another 1 or 2 that we're taking a look at. And then as Greg mentioned, we do have a new build in that mix as well. So keep in mind that, that there are some dollars in there for a building in Tacoma, Washington that we're -- and it includes landlord contributions as well, but we have obviously, a component that we have to contribute to. So I would say it's probably -- if we end up on the low end of that range, it will probably be about 50-50 between what I'd call ROI and maintenance, maybe skewed, maybe 60-40. If we end up on the high end of the range, it will be because there's more ROI projects to do. Because the maintenance CapEx is pretty consistent in this division that can -- and ranging in that $10 million to $20 million range, depending on how many projects we have to do.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [4]

--------------------------------------------------------------------------------

Okay. And then how much of that is earmarked for Tacoma and new build?

--------------------------------------------------------------------------------

Douglas A. Neis, The Marcus Corporation - Executive VP, CFO & Treasurer [5]

--------------------------------------------------------------------------------

It's -- we're not going to give you the exact number, but it's in the millions, but it's single millions.

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [6]

--------------------------------------------------------------------------------

It's a lease.

--------------------------------------------------------------------------------

Douglas A. Neis, The Marcus Corporation - Executive VP, CFO & Treasurer [7]

--------------------------------------------------------------------------------

It's a lease. And so there's a significant landlord contribution, but we still have to put some of the FFA in and some additional dollars as well. So it's in that range.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [8]

--------------------------------------------------------------------------------

Okay. And then secondly, on the hotel side. Obviously, Milwaukee market is getting a nice boost this year from a number of things you laid out. I guess, which hopefully a rising tide lifts all boats there. I guess other than that, what are you seeing in, kind of, competitive environment in your key markets? Are competitors being rational as people kind of constantly say we're getting towards the end of the cycle there. And then lastly, on Saint Kate, now that you're kind of 6 months past opening, what are your thoughts on kind of where your occupancy and ADR levels are versus what you would have thought, given acknowledging this is a new brand you [can either] built from scratch?

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [9]

--------------------------------------------------------------------------------

The -- what are we seeing in other -- look, by the way, I want to say, Milwaukee, remember, as we pointed out in the call, I do believe it's not just a 1-year thing. I mean we should look at, it's a good year. There's no doubt about it. But we will be increasing the size of our convention center here, the state passed a moral obligation -- gave us the moral obligation. So that's in the works. We -- and again, we know that -- we've studied other markets that have had things like DNCs and seen the long-term halo effect that something like that has for a market like ours, and we're already seeing increased activity at our Convention & Visitors' Bureau, and that's long-term business. So I just want to point out that we're -- we have a significant investment. We see a long-term -- we see a long-term benefit. Look, we are seeing, like everybody else, lots of buildings in the different markets. We tend to be central city. So they are getting absorbed. But it's not as robust as it was 5 or 6 years ago, when we were seeing high single-digit RevPAR increases -- as not -- as the market -- as the industry is seeing, it's later -- it seems to be later in the cycle. Now, are we at the point where we're going to start to see a reacceleration of the cycle? Again, this is -- it really will just all depend on the economy. And if the economy is strong, then the hotels should all be okay. But we are seeing building in certain markets. But like, Chicago had a very rough year last year, and this year is supposed to be a good year for their convention market, which should be good for the hotels, but they've got a lot of product. So again, it just is market-dependent as well. And Eric, if you could very more specifically ask me your Saint Kate question?

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [10]

--------------------------------------------------------------------------------

Yes. Just now that we're kind of 6 months past the opening of that, kind of where kind of has been kind of demand occupancy, ADR been relative to what you thought, acknowledging you are building a new brand from scratch?

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [11]

--------------------------------------------------------------------------------

Yes, I think -- well, what we're seeing is, we're getting the rate we wanted. For the most part, we are -- we -- our occupancy is not where we want it to be yet. The most promising thing we're seeing is that our food and beverage, although it's not really where we make our money. We make money on the heads in the beds. But our food and beverage is far and away ahead of our expectations. Now again, that's not really going to drive the bottom line so much. But what it's showing is, we have a lot of -- being with our presence in Milwaukee, we get great press and great coverage. And when you do something like this in this market, so locally, everybody knows about it, and it's almost the talk of the town. It's really very exciting. You walk in there, and there is a buzz in the place because -- and we sit in the theater district and with the all the theaters going, the place is hopping. And so we're very happy to see that. The challenge, again is, when people outside Milwaukee, when they look to say where they want to stay, it's -- they don't know what it is yet. And it's just getting things like being on that 10 best list and getting in Condé Nast, that takes up to a year to start to populate those so that when somebody Googles "best hotel in Milwaukee," we show up, and the algorithms in the sites, the Expedias, the Travel, the Trip Advisors of the world, we need to have a certain number of reviews. And so doing that, this is now really a marketing challenge for us and getting the word out there. And look, at this time of year and frankly, the fourth quarter sort of towards -- are not our strongest time. So just in this market, it's -- we're much better in the summer. So we opened mid-summer. And so we just haven't gotten that traction that we need yet. But it's much easier when people write a lot of nice things about you.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question comes from Jim Goss with Barrington Research.

--------------------------------------------------------------------------------

James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [13]

--------------------------------------------------------------------------------

I might as well go on with Saint Kate, since you're there right now. Would you say development of Saint Kate was a, sort of a response to the challenge of the weakest of 3 properties in that market? Or was it an attempt to create a new franchise that you could recreate and franchise that template in other markets?

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [14]

--------------------------------------------------------------------------------

Well, I'd say, yes. I mean -- but I think there's even more than that, Jim. Yes, that was -- that was our -- obviously, our one -- that property needed -- it needed a new game plan. But also, it was -- even if it's just for that property, the idea of tapping into this idea of experiential travel. And what the traveler of today is looking for. Certain set of the travelers. They want to come to a market, learn something about where they are, experience something different. That is a big trend in our industry, so -- even if just for that property. Now if it should work, well, that would be great. Let's -- we would book to do it again, but let's get the first one working.

--------------------------------------------------------------------------------

James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [15]

--------------------------------------------------------------------------------

Okay. And how long is the evaluation period, do you think before you figure out? I know it's still early, as you've just been talking about it. There's a couple year period before you figure out whether there's a market for it elsewhere?

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [16]

--------------------------------------------------------------------------------

I think that you're exactly right. You're exactly right. It could take up to that long. I mean, if something happened and it really goes crazy this summer, which I've have all the hope in the world that, that could happen, well maybe it will be more accelerated. But I think it could be up to 2 years before we really figure out what we have.

--------------------------------------------------------------------------------

James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [17]

--------------------------------------------------------------------------------

Okay. And generally, in the theatrical space, it does seem we're moving to the end of the CapEx cycle as you've been discussing. Now -- and I've wondered what direction, in terms of capital allocation, the theater operators are going to take? One of the options is to buy additional chains. And you've already been in the leadership of doing that sort of thing. As you get -- do you think you have continuing opportunity to get another Wehrenberg or another Movie Tavern? And if you don't, at some stage are you likely to be prioritizing share buybacks or additional dividend gains? Where do you go in the capital allocation? Maybe this is a Doug question.

--------------------------------------------------------------------------------

Douglas A. Neis, The Marcus Corporation - Executive VP, CFO & Treasurer [18]

--------------------------------------------------------------------------------

Yes. I mean -- and you've seen, Jim, that's a really good question. And I'm not sure if we quite know the answer yet of what -- because there's a lot of different avenues this could go. You've seen the chart in our prepared materials and where we've been allocating our capital over the last 6 years, and it certainly has been very theater-focused and with a large chunk of it, probably a quarter, probably 25% of our capital going towards those 2 big acquisitions that you alluded to. Certainly, that -- we will be selective about that. We always have been, we're not just a growth for growth's sake company. We're a smart growth company. And so if there were further opportunities, that's still on our radar. You're right that the piece of that -- the allocation over these last 5, 6 years, that has gone towards those amenity adds primarily, but the DreamLoungers, the large-format screens and the food and beverage, that piece is coming down, as I just shared with you earlier, there still are some opportunities for us to spend some dollars in 2020, but there are just less of those projects. And so that piece is starting to come down. And as you know, I mean you saw it in our numbers this year, we generate so much cash in our businesses, that's a nice problem to have because our balance sheet is in incredible shape. So my best answer is, we have lots of options. If something -- and we love -- a word we love to use in this company is optionality. We love to have those different options. So we're opportunistic. And if we see an acquisition that we might like, great. If we don't, if we see some opportunities in the hotel business where we could start to allocate some capital and growth, great. Maybe there's -- we've alluded to in the past about potential opportunities to, kind of related type businesses. So we'll keep our eye open for things where we could potentially further invest in businesses that -- or in things that make sense because of hitting some of our core expertise. And then returns of capital, and you specifically mentioned buybacks, that certainly, share repurchases is a tool we've used in the past. We've also used dividends in the past. We just raised our quarterly dividend. We've used special dividends in the past. I can't commit to any 1 of those, but those are all options that are always on the table for us.

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [19]

--------------------------------------------------------------------------------

Yes, I mean I'd build on that just a little bit and just simply say, look, our strategy, frankly, is really not that complicated. It starts with, have a really strong balance sheet. And then what we're able to do is -- and then you have great people, and take advantage of the opportunities that present themselves, wherever they might be. And as I think Doug sort of laid it out in that orders, let's -- our goal is to invest capital and properly allocate capital. And at the same time, provide a return to our shareholders. And then if we don't see the right opportunity for that capital then we'll make a decision about the best way to return capital. But that's our game plan. And I said, I don't think it's very complicated, but not all easy to do either.

--------------------------------------------------------------------------------

James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [20]

--------------------------------------------------------------------------------

Okay. And maybe 1 final 1 for you, Greg. In a year with fewer apparent blockbusters, do you typically see some of the $100 million movies becoming more than that and sort of filling in that gap by outperforming expectations, something that might mitigate the decline in the overall box office that seems like a potential challenge this year?

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [21]

--------------------------------------------------------------------------------

Sure. Oh, absolutely, that can happen. At the end of the day, it will just depend on how good the movies are. And I will tell you, look, I've been hard -- I've seen so many good movies lately. So this -- there's been this concern about the quality of the -- would there be a degradation in the quality of the product. I mean, I've seen, I bet I've seen 10 to 15 movies in the last couple of months, all of which I thought were really good. I want to see Gentlemen last night. I really liked it. I saw the Harley Quinn movie last week, I thought it was great. Richard Jewell was great. Parasite was great. 1917, cinematic masterpiece. I mean, I just -- I mean I've seen so many good movies, which really heartens me in the long run for our business. I cannot tell you what's going to happen tomorrow. If I had that crystal ball, I guess I'd probably be on a very nice island somewhere while it's about 6 degrees here. But it's -- it is -- in the long run, to see the quality of the product hold up in the face of peak TV is -- gives me and our look at this business on a balanced long-term way makes we feel good about it, so.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Mike Hickey with Benchmark.

--------------------------------------------------------------------------------

Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [23]

--------------------------------------------------------------------------------

Congrats on your quarters, guys.

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [24]

--------------------------------------------------------------------------------

Thanks, Mike.

--------------------------------------------------------------------------------

Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [25]

--------------------------------------------------------------------------------

I guess maybe just to follow-on Jim's question of that the slate is less obvious this year. Doesn't mean it's going to be down, but I think that's probably the direction most people think. Do you think, I guess, in this sort of environment where the slate is not as obvious, do you think that could be the catalyst to maybe facilitate a deal with some of the OTT providers that are obviously creating pretty compelling content? I know maybe we're close. Last year with the Irishman, maybe we weren't. But I guess, is this the right time maybe to show enough flex in terms of economics and windows to get a deal done for the industry? Both industries.

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [26]

--------------------------------------------------------------------------------

I mean, look, I think I'll say the same thing that everybody in our industry has been saying. We are open to a deal with an OTT, but we have to have a window. We have to have a window. That is -- that is what maintains -- that is one of the things, in addition to our significant investment in making this experience such a great experience, just generally. That window is 1 of the things that maintains the value of our product upstream. If they shorten the window, they degrade the value because the customer says, well, I can -- we are in a battle against the couch. I've said that a bunch of times. And the shorter the window, the harder -- the more attractive that couch becomes, and then it degrades the value of what we're trying to sell. And you can already see -- 1 of the reasons that $5 Tuesday is so successful, and we've talked about this before, is because it is -- and the reason the studios like it is because in a way, I don't know, it brings customers back to the theater who had sort of had decided they like the couch better. But at $5, they'd say, yes. No, the theater is better. I'll tell you an interesting statistic that I just saw in our numbers, and I looked at our attendance. And I looked at our attendance on Tuesdays compared to the rest of the week. And if you look at -- take 2018, where we had a big pop. If you look at 2017 and 2019 in our legacy theaters, so you have a steady base of theaters. Our Tuesday attendance was identical. And yet the attendance from '17 to '19 actually dropped on the rest of the days. And so look, that -- and yet we still outperform the industry, and it's all the good things that we've been talking about. But what you see is the resiliency of that customer and what they see as the value. And so they have to be very -- so we're very open to the idea, but -- and we think it would be great [people] to play their product, and we would welcome their product into our theaters. They make some great product, but -- and we have to understand what the underlying fundamentals of the foundation of our business and make sure that stays in place.

--------------------------------------------------------------------------------

Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [27]

--------------------------------------------------------------------------------

I think both you made a pretty big statement about the extra week, how powerful it could be for your business. Doug, you gave some math, obviously your circuit was smaller, but maybe the movies were better when you gave that last. But is that sort of little headwind, a little tailwind, is that sort of the right number we should be thinking about adding to our models for your -- the '20 year?

--------------------------------------------------------------------------------

Douglas A. Neis, The Marcus Corporation - Executive VP, CFO & Treasurer [28]

--------------------------------------------------------------------------------

Well, as everyone who listened to this remembers my forward-looking statement comment at the beginning of this whole thing. Yes. I mean I think that, that's why we provided that number, so at least provide some perspective, and I do appreciate that you're recognizing that in that particularly set of numbers, we had a Star Wars in that. And in this year's 53rd week, we won't have a Star Wars, but it's still a big week. And sometimes, I think we can show Greg's home movies and maybe do pretty well, too, during that week. And so look, we -- I think that, that's -- those are reasonable placeholders to at least say that in a similar week, we did that amount of business, keeping in mind that the dynamic and the reason why it's so profitable is because it's basically revenues and variable costs. All the fixed costs are already accounted for on a monthly basis in our numbers. And so there's no additional fixed costs that go against it. So the margin on these additional incremental revenues is fairly significant, and that's why you see such a significant impact. And we're not in the business of projecting specific numbers for what that week could be. We obviously have some thoughts. But we thought by at least providing what it was in 2015, that would at least give you a nice benchmark to put in place.

--------------------------------------------------------------------------------

Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [29]

--------------------------------------------------------------------------------

Okay. Last question for you guys. Obviously, M&A has been the great instrument where you've created some serious growth in value. I guess, when you look at sort of the private theater market, theater owners, do you get any sense of a greater willingness to want to sell when market conditions are tough or when market conditions are great? Or is there sort of not -- no real correlation? I'm just wondering how they behave in terms of maybe looking to sell in a difficult market versus a good market?

--------------------------------------------------------------------------------

Gregory S. Marcus, The Marcus Corporation - President, CEO & Director [30]

--------------------------------------------------------------------------------

I think that it really is -- it's not -- it's nothing -- I don't know if it's necessarily correlated. I mean the markets, we've had some bumpy quarters over the last number of years. But fortunately, the market has been pretty good. So it's hard to really say where everybody's heads are at right now. But you have to remember this is the -- especially when -- generally, the people we're talking to at this point. It's not always about economics. These people have been, maybe been in business for generations. It's a family business. They love the business. And so they may look at it a little differently than others. And they may -- and they also have longer-term perspectives, too. And so they may be more comfortable struggling through some of the challenge because they say, as we said, as I said, as I started at the outset of my comments, literally, my dad tells me, he can't remember not being worried about the business. He's been with it for 85 years. And yet, it always -- it seems to be something that we're able to deliver on and provide a great product and something compelling that the customer likes.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

At this time, it appears there are no other questions. I'd like to turn the call back over to Mr. Neis for any additional or closing comments.

--------------------------------------------------------------------------------

Douglas A. Neis, The Marcus Corporation - Executive VP, CFO & Treasurer [32]

--------------------------------------------------------------------------------

Thanks, once again, everybody, for joining us today. We really appreciate it. We look forward to talking to you again in a couple of months, in late April, when we release our fiscal 2020 first quarter results. Until then, thank you, and have a great day.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

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