Good morning, everyone, and welcome to the Marcus Corporation Second Quarter Earnings Conference Call. My name is Crystal, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference [Operator Instructions] As a reminder, this conference is being recorded. Joining us today are Greg Marcus, President and Chief Executive Officer; and Doug Neis, Executive Vice President, Chief Financial Officer and Treasurer of the Marcus Corporation. At this time, I'd like to turn the program over to Mr. Neis for his opening remarks. Please go ahead, sir.

Well, thank you, Crystal, and good morning, everybody. Welcome to our fiscal 2020 second quarter conference call. As usual, I do need to begin by stating we plan on making a number of forward-looking statements on our call today, all of which we intend to qualify for the Safe Harbors from liability established by the Private Securities Litigation Reform Act. Our forward-looking statements may generally be identified by our use of words such as we believe, anticipate, expect or words of similar import. Our forward-looking statements are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those expected, including, but not limited, to - the adverse effects of the COVID-19 pandemic on our theater, hotels and resorts businesses, results of operations, liquidity, cash flows, financial condition, access to credit markets and ability to service our existing and future indebtedness. And the duration of the COVID-19 pandemic and related government restrictions and social distancing requirements and the level of customer demand following the relaxation of such requirements. Our forward-looking statements are based upon our assumptions, which are based only upon currently available information, including assumptions about our ability to manage difficulties associated with or related to the COVID-19 pandemic. The assumption that our theater closures, hotel closures and restaurant closures are not expected to be permanent or to reoccur, the continued availability of our workforce following the temporary layoffs we've implemented as a result of the COVID-19 pandemic and the temporary and long-term effects of the COVID-19 pandemic on our businesses. Listeners are cautioned not to place undue reliance on our forward-looking statements. Additional factors, risks and uncertainties, which could impact our ability to achieve our expectations identified in our forward-looking statements are included under the heading Forward-Looking Statements in the press release, we…

Thanks Doug. As Doug noted earlier, I'm going to focus my remarks on where we are today, what we've done to date, and are continuing to do to manage through this crisis and what some of our plans are for the future. As you can imagine, there are a lot of unknowns yet about what the future months will look like. So our plans will continue to evolve as the situation unfolds. In this rapidly changing truly unprecedented environment, there is one thing that has not changed and will not change. Our priority, as it has been throughout our history, is the safety and well-being of our associates, customers and communities. This has guided everything we've done so far and will guide us in the weeks and months ahead as well. I continue to be thankful for our experienced and dedicated leadership team throughout our organization. We've had to make some very tough decisions in the short term. And they continue to work day and night, developing and executing strategies that we believe will get us through this crisis and put us in a strong position for continued growth over the long term. As we've now shifted to reopening properties, we're bringing people back and asking them to work under very different conditions. And not surprisingly, our people continue to step up and meet the challenges before us. Words alone don't do justice to how proud I am of all our associates, and I cannot emphasize at this point enough from our executive team to our people in the field. They talk about the importance of gratitude. I have huge gratitude for everyone because it's - we have less people. They're working harder. And as the words were just spoken, they're unprecedented. And so I'm thankful for everyone around me,…

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

Obviously, feels like you've gotten through the crux of the issues here is sort of get on the offense on the reopening process. A lot of, I think, positive data you shared with us in terms of the hotels and group pace for 2021, et cetera, theaters. It looks like the vast majority will be open here pretty soon. I realize maybe 2021, it's hard to balance in terms of where you are, I guess, relative to 2019. But I'm curious your view there? And then should - as we stretch out a little further to 2022, should we sort of think 2022 here is back to normal like 2019 or bigger? But your thoughts there would be appreciated. Then I have a follow-up or two? Thank you.

I mean I'll start, Mike. And look I mean, we haven't even opened our theaters yet to speak of. I mean that's with new products. So we certainly have a lot to learn yet about what the pace of the recovery will be on the theater side once we reopen. As we said in our prepared remarks, there is - look, there's a lot of product. And 2021 has a whole bunch of films that were originally scheduled for this year that, were moved in on top into a year that already had quite a few films that look very positive. So on that side, we're certainly very optimistic. But look, until we get open, until we start seeing how this - how the customers respond to try to now compare 2021 to 2019, that's tough, as you can imagine. And I imagine that will be tough for anybody to try to do it right now. Certainly, on paper, we're going to have the goods to be able to deliver to the customer. And so assuming that things continue to progress, we certainly think that as we get - as the year goes on, it will just progressively get better, but this will be a process. This won't be an overnight event.

Yes, I mean the only thing I would build on that, yes. I mean, I have no idea what's going to happen in the short-term. I have no idea, even in sort of the medium term. What - will look like 2019 or better? But what I do know and what we've talked about here is that - and we're in this for the long haul is that people want to be to get - I mean you just look at the news. They're crazy. You can't keep them apart, unfortunately. As we talked about in our prepared remarks, it's just nuts. Which as I said, which is short-term, not really a good thing, but long-term, it says human creatures are social animals and they want to be together, and they want to do things, and there will be pent-up demand. And I think that bodes well for the - for really all of our businesses. But in the short-term, who knows.

Fair enough thanks Greg. Just the last question, just sort of curious maybe what the demo looks like for the moviegoers coming back to your theaters? And sort of if I guess, the durability there, you think of that demand. I imagine you sort of come back, you're dying to get out of the house, you want to do something theaters - or obviously, escape as it makes a lot of sense. But curious if you feel there's in that demand? Then wondering about when pricing will come back on the tickets that sort of comes back with the tent poles that are planned here pretty shortly. And also wondering how your concession sales are gaining and how you expect they will trend, that's it from me guys? Thanks best of luck.

Yes, I can take that. The demos, I don't know the specific demos. I can speak anecdotally. I mean I've seen, surprisingly, all ages going into our theaters, the ones we've been testing. Again, I think the durability of people going will depend on so many things. The environment, what's going on with the virus? What is - how the product is - at the end of the day, we're - and people who - when good product goes out. And I said we've been heartened to see what's happening in other - in international markets. The numbers are starting to pick up. They described it yesterday, I saw as Europe had green shoots. And I know I think South Korea has had some success. So seeing - people will go to see the product that is good. They have to feel comfortable. The one that we've seen really, really, very, very positive, we've been running our customer service scores through our loyalty program, and we're seeing very positive commentary really, really, very surprising. I was surprised how strong this has been and how comfortable people feel and how - what they think about the experience. And so, we've - so again, I think it's all those things coming together that will - promote that durability. And on the concessions per cap side, it's been very strong.

Yes, I would just - maybe the only thing I would add to the comment is that, obviously, showing library product, just like if we're showing new products, the demos are tied into what you're showing as well. But I would echo what Greg indicated. It's not as if there's no demo that hasn't been represented. I mean we're seeing seniors. We're seeing adults. We're seeing families. And so, it's not as if we've looked at it and said, boy, the theater looks different today than what it was before. So that's encouraging.

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

A couple questions, kind of a few follow-ups from the prior ones. I guess one, I'll start with concessions. Any major changes to what - the food and beverage product you have available to pay trends when the theaters open based on kind of cleaning restrictions or handling restrictions, Movie Tavern and the other locations? Or is that going to be pretty much status quo when you reopen?

In terms of the offerings, the offerings are not changing so much as the procedures are changing and how we do it. And I would speak to our - this idea of the low to no contact and something where we've been really ahead of the industry, and I'm really proud of our team. Kim Lueck and her IT team really got us in a place that we - it's an angle we plan for this but this idea of being able to order on the app. I mean that's - that idea, you can - you preorder your food. We can prompt you to preorder your food before you come to the theater. And then - and your food is ready to pick up there. You don't have to wait in the line. You don't have to deal with a vendor, concession attendant. You're able to just show up and pick up your food. That, I think is something that will be - and they talk about this, the environment now accelerating things. That really was just an accelerating trend, not one that became because of it, as I said, because we are so focused on food and beverage. And we had such challenges in the labor markets, getting people. We were trying to figure out, okay how do we take labor out of the equation? Well, if you use technology to your advantage, you can do that and that led us to over the last year, I talked about it on the last call. We were ahead of the industry and getting testing on the application as part of our app. And as I said, we probably - we have shrunk the menu a little bit, but not tons. And the - Movie Tavern, we're changing. We're not necessarily going and taking orders at the seats, and we're not - we were changing that procedure a little bit as well right now for these times. People have to go out and pick up their food and bring it in. That is more - so it's been procedure, less menu. Well, a little bit of menu, but not much.

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

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

And then…

Eric, just I want to add on, if you look at our footprint of theaters, that's certainly to our advantage in this situation because of the markets that we're in. And so, they are pretty much 50% else everywhere. We're only in really, literally in two markets that we're still keeping an eye on. And it's only - we've got one theater in the state of New York, and we've got 3 theaters in Pennsylvania. And we're keeping a close eye on those markets. But that's 4 theaters in total. And so we're very - we're fortunate from that perspective.

Okay. And then final question, I guess, more of a longer-term, broader question. I guess you obviously mentioned again at the beginning that you own the majority of the real estate beneath your theaters, north of 60% of your screens. It's obviously been a big boost in recent years with your remodel strategy and that you haven't really had a deal with landlords in terms of what you want to do with the theaters. It's going to help you on the restart, in terms of having a lower breakeven point with less rent expense than others. But I guess assuming once we get into more normal situation, some of the only that real estate has not been reflected in your valuation versus your peers. As you get back to normal levels, how aggressive would you be willing to be to unlock some of that value for shareholders?

Boy. Eric, I mean, I'll start. And Greg jump in if you want. But I mean, so as we've talked about - we've talked about this multiple times before this all happened. In our core real estate and particularly on the theater side, it's proving to be exactly what we said it was, a strategic advantage for us. It was a strategic advantage for us in growing the company over the last 6 years. And now it's a strategic advantage for us in suffering - and going through all the craziest time we've ever seen in the industry. So it's for us to now change that perspective on our theater real estate, specifically, that might be a tough decision. Having said that, and we alluded to it briefly in the comments, we've got a lot of real estate. And so I mean it doesn't mean that there couldn't be some selective monetization. We also have a lot of surplus real estate. Former locations, excess surplus land and outlets and real estate that we own. And so there is - that's always possibility for us to unlock and monetize real estate, and we've done it selectively and periodically in the past and we certainly could do it in the future.

Yes. I mean I would build on this just a little bit, and that is to say, to sort of say, yes, it really - it has been such an advantage for us over the years. It maybe it would be incumbent upon us to be better at working to really work to really press and educate the investment community on the value of that real estate and really try to stress that point. And I would say that - I'd rather do that than give up our strategic advantages that we've seen because you can always ultimately go and monetize something. It's a onetime event, but I prefer to get better at telling the story.

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

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

Well, Jim, I mean, we - there's really two categories. There's kind of these nonrecurring expenses. And we'll have some more of that in the third quarter because we'll be reopening some more - a few more hotels and we'll be reopening our theaters. And so there are some of these nonrecurring costs that fall into the - Greg listed some of the categories or I had mentioned a few of the candidates that they fall into. Some of it even can be even capital. And so there's things that we have to do to get the theaters, get the hotels ready. We'll call those out again in the third quarter to the degree. And you saw in order of magnitude of what it was this quarter, it was about $3 million. On an ongoing basis, that's a little harder. And I think until we really get our theaters open, for example, it's going to be harder to tell on that. I mean there's a whole bunch of smaller supplies, right? And those aren't - you're not going to notice those that much. And they get mixed into that - kind of that soup with all of our other costs, where we're also trying to be very cautious about our cost structure. And so we're trying to operate our theaters in our hotels and we're trying to think outside the box and trying to operate with less staff. And so I don't know if you'll notice some of the things that are specific to the operating protocols in our operating costs going forward because it all gets thrown into the soup and gets mixed together. And there is no one single cost that is so large that we have to say, okay, well, you better prepared for the fact that we're going to have x amount a year related to this or that. So until we get the theaters open, I mean we - there could be a time when we ultimately say, look, our new operating structure and cost structure is going to look like this, but until we get the theaters open, it's hard to quantify anything.

And I think that that's - you got to be looking at - it's a more of a medium-term thing in terms of whatever the - we will have ongoing labor because the increased labor costs as we open - as we - even in this environment, dealing with sanitization and customer orientation. So we will see some increased labor cost. But I think that's - I think for the most part, that is a medium-term kind of thing because once we get past having to operate in the pandemic environment, and we will see a return to a normalized environment, whenever that might be, might you see a little more cost in terms of labor, in terms of things you might say, yes, this is a good thing that we were doing that anyway. But I think it will be offset by what I was talking about earlier, the technology changes that we're going to have put in place that's going to reduce people working at the box office and reduce people working at the concession stand. As people use technology to access our theaters and our concessions and so, in our food and beverage product. So, in the end, probably not much change. In the medium term, we could see some increased costs.

Okay. And Doug, just a housekeeping question - the timing of the inclusion of those very nice tax benefits you outlined. Will that be in the third quarter reports then?

So there's two different issues. There's the P&L impact, which is already reflected in, I mean there's a large part reflected in the numbers we reported today. And it will continue in the third and fourth quarters and it will come through in the third and fourth quarters because of that higher effective income tax rate that I referenced in my prepared remarks. Normally, as you know, you might see a, I don't know 24%, 25% effective tax rate under normal conditions. And because we'll still be able to take some of our losses in the third and fourth quarter back to prior years, we're right now estimating that that effective rate might be 29% to 30% in the third and fourth quarters. So that's one way that you'll see it. The other way is a balance sheet. And so, if you look at our balance sheet, you'll see that there's a large refundable income tax number there. And those claims - part of that is claims that we're filing right now. And we will receive in - we would expect to receive in 2020 as we filed our 2019 return and the claim - refund claims that go along with that. And part of that refundable will stay on our balance sheet through the end of the year and because it's additional refundable taxes that we're accumulating in 2020 that we'll get back next year.

And then with both the hotels and the theaters, I assume mask protocols will be in place at both types of venues. How are you thinking in terms of enforcing that and - is that a challenge or is that something you're seeing not to be so much? And maybe also in the theater area, the rewards program wondering how that fits into this whole process?

On the mask protocols, we require everyone to wear mask. And frankly, you know what most of the country is getting it. I think that it's two months ago, it might have been harder. Yes, it probably would have been. But I think so much of the country - yes, there are people who, for medical reasons can't. And if they can't for medical reasons, then they don't wear a mask. But if someone is saying they aren't going to wear a mask, then we ask them not to patronize our establishment. But we really don't ask them. We ask them to put on the mask. And we're seeing very, very, very high compliance because they understand that this is about staying in business. It's funny. The idea - the masks are - and I talked about this before, nobody likes them. I don't know anybody no [gee], I want to wear a mask. But I know everybody likes the economy functioning. And the only thing the economy functions is if we're able to keep the virus at bay. And it seems that the mask - I've seen numbers just looking around Wisconsin, where Madison - we had a problem. They put in a mask policy and the problem has started to abate, City Milwaukee, same thing here. And so, you see that the science shows that it's working, and it's - and that's good for business. And I think a lot of people are coming around to that. And it's temporary. It will eventually - it will go away. And it's not about the person people who are just distance on my mind soapbox for a minute, it's about people always say, it's my choice. Well yes, but really their actions impact others. And that's when they have a different approach. It's just like I'm not allowed to drive on the street in front of my house 100 miles an hour because they worry I might hurt someone else, including myself. That's the reason behind it. And as more people understand that, they go, oh, okay, I get it. So that's been fine, I would say. And your second question, Jim, I forgot what was it?

I was just saying the rewards program is typically?

Oh yes, the rewards.

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

Yes same thing. Look, it's been great to have it. It's been great to be able to - for all these years we never knew who was coming to our theaters. We just never knew. They paid cash and they went into the movie theatre and they were anonymous. And now - half our transactions coming out of our loyalty program, it's still very - we're still seeing significant percentages even in this environment in the small tests that we're running. It's great to know who they are. We've been able to stay in contact with them throughout this whole experience. And they continue to be customers, and so it's very beneficial to us.

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

Thanks, Jim yes if I could just - I'd build on it just a hair. And that is simply, again, as I said, the goal is to grow the pie. By the way, there's good news in this, isn't it? At least we're having a discussion about the future of how we're going to divvy up the pie. That's good. That means that there's going to be a theatrical business. We should all take heart. If it's that - I'd much rather have that debate, then when are we going to open. But that pie has to grow larger. And we have to be careful that we don't shrink the pie because shrinking the pie, by the way - and well-intentioned people have made mistakes. And when you shrink the pie, it doesn't just hurt us. It hurt the distributors, too. They don't make it up in the PVOD side. And as we talked about it, and you just alluded to, it's hard to know necessarily the normalized environment. How big that will be. And I guess I'd just end with - there's an old saying, and I remind anybody who's thinking about as they alter the model and don't leave a good party in pursuit of a better one. And by the way, also, let's not forget one other point. Nobody talks about this, and I want to talk about it for a minute. This is about - and this whole discussion they've had about PVOD. This is all about figuring out how to make those mid-market movies more financially viable for the studio. So that they can get more out of theatrical and more out of the secondary markets. I know that's what their goal is because that's been the challenge. But one of the things - and…

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

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

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