Good morning, everyone, and welcome to Marcus Corporation's Third Quarter Earnings Conference Call. My name is Lydia, and I will be your operator today. [Operator Instructions] As a reminder, this conference is being recorded. Joining us today are Greg Marcus, Chairman, President and Chief Executive Officer; and Chad Paris, Chief Financial Officer and Treasurer of Marcus Corporation. At this time, I'd like to turn the program over to Mr. Paris for his opening remarks. Please go ahead, sir.

Good morning, and welcome to our fiscal 2025 third quarter conference call. I need to begin by stating that we plan to make a number of forward-looking statements on our call today, which may be identified by our use of words such as believe, anticipate, expect or other similar words. Our forward-looking statements are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those expected or projected in our forward-looking statements. These statements 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. 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 third quarter results, and in the Risk Factors section of our fiscal 2024 annual report on Form 10-K, which you can access on the SEC's website. Additionally, we refer you to the disclosures and reconciliations we provided in today's earnings press release regarding the use of adjusted EBITDA, a non-GAAP financial measure in evaluating our performance and its limitations, a copy of which is available on the Investor Relations page of our website at investors.markuscorp.com. All right. With that behind us, let's begin. I'll start this morning by spending a few minutes sharing the results from our third quarter and then discuss our balance sheet, liquidity and capital allocation. 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 a quarter with solid results overall despite somewhat mixed results…

Thanks, Chad. Good morning, everyone. When we were together last quarter, we shared that our summer was off to a solid start in both of our businesses. In theaters, a more diverse film slate was bringing out audiences for a series of solid performances. In hotels, we were gaining momentum as we entered the third quarter, and we're well positioned with several newly remodeled properties in our portfolio. As the rest of the third quarter played out, we saw some divergence between the results of our 2 divisions. In theaters, we saw a late summer movie season that included several films that performed well and met our own expectations, but it lacked a runaway hit blockbuster film that we've had the last couple of years, and the film mix was challenging for our markets. In hotels, our team executed exceptionally well, capitalizing on both group and leisure demand and delivered a quarter that outperformed our competitors in the nation, overcoming a very difficult comparison to our record third quarter results last year. As I will discuss today, while the overall result was a mixed quarter compared to our own expectations, there were many positives that we think will benefit us in the long term. I'll start with our theater division. In a quarter where there has been much industry discussion about a national box office that was down nearly 12%. I'd like to step back for a moment with some perspective and start with a few things that we thought were positive. First of all, we have good product supply with 32 wide releases in the third quarter this year compared to 29 last year. The film slate was less concentrated, and many of the smaller and midsized pictures actually performed better on average than they performed last year. When…

[Operator Instructions] Our first question today comes from Eric Wold with Texas Capital.

A couple of questions. You mentioned -- on the hotel side, you mentioned that you had rate growth in 4 of the 7 hotels in the quarter. I guess for the other 3, is that something that was more of a short-term issue? Is that something that's kind of been more than 1 quarter where you haven't had rate growth at those 3 hotels something that's we think more of a competitive issue in those markets. I don't want to lean on that too much, but I just want to get a bit more of a -- something that's been short term or something that's been more than a quarter. And is that something you think that's more of a competitive issue or something that may require an investment as you look in the next couple of years.

Thanks, Eric. Yes, I mean, at the 3 hotels where we didn't see ADR growth, I would say there are more market dynamics. Two of them have been persistent market dynamics that are more generated by supply in the market. And in the third, it really was just a little bit of softening very recently in demand. But I don't know, 2 of the 3, I don't see significant CapEx investments. We have 1 of those 3 that we're going to be doing some small refreshes too, but nothing anywhere near what we've done at the 3 major properties over the last few years. I would describe it as a more normal course refresh that is embedded in our $50 million to $55 million of CapEx that we expect for next year.

Got it. And on that $50 million to $55 million, is that considered including refreshes, is that considered, I guess, more of a maintenance CapEx number kind of going forward? Anything that would be kind of unusual in that number?

It's not 100% maintenance. There is some ROI that we're doing in that, and we've done some of that this year in the theater business, and there'll be some of that again as we look forward in both of the businesses. There's always some of those types of activities, but it is primarily maintenance and ROI capital.

Got it. And then just last question. I know you touched on this a little bit with the capital return comments. With the increased share repurchases this year and the new buyback authorization, should M&A -- I know obviously, you had some increased free cash flow with the reduced CapEx next year and presumably going forward, but should M&A opportunities come up on either the hotel or the exhibition side. Can you talk a little bit about your comfort taking on leverage to the balance sheet? And kind of what's kind of your comfort level on leverage ratio, and then also, should the equity get back to a more, whatever, in your mind, be a more appropriate valuation, would you use equity for M&A in the future? Or is that, in your view, the more appropriate way to go about that?

Yes. On the first part of your question on M&A, I think if we have something that's actionable, we will move on it. We have been allocating a lot of capital to share repurchases lately. And at the current leverage at 1.7x we're very comfortable, and we actually have a target leverage that's a bit above that, closer to 2.25% to 2.5%. So we have some capacity to do that. And if we found the right type of M&A opportunity, we have some flexibility and can flex up a bit and then bring ourselves back down to somewhere in that target level, but very comfortable with where we're operating right now, and there's actually some room to do a bit more and continue to invest.

As for whether we -- taking on more leverage and doing things, we have that balance sheet capacity, as Chad pointed out. Would we use equity? Yes, I mean, look, we have a history, if you look and you know this, Eric, if you go back, when we think there's -- when we think that we -- the opportunity to return capital to shareholders through stock repurchases make sense, we do that. When we have -- when we believe the stock is at a price where we think it's appropriate to use it as capital, we do that as well. And so it will just depend on market conditions. We are not a company that just says, well, we programmatically buy stock, no matter what the price is or we're going to sell stock to grow just to raise equity. We will do it based on where we think the price is and whether it makes sense.

And just to be clear, at the current levels, obviously, we're in the market and we were repurchasing shares during the quarter. And so that's kind of the level that we're at right now, you wouldn't see us issue equity at the current share price to go do M&A.

Our next question comes from Patrick Sholl with Barrington Research.

Just curious on concessions. Just with the current macro environment, have you seen any change in how consumers are like -- just consumer uptake or I guess, hesitancy with regard to price increases and the ability to offset the inflationary pressures there?

Pat. No, we haven't really seen a lot to speak of over the summer in changes in consumer buying patterns. The hit rate and the basket sizes have been pretty consistent. We've moved through inflationary-type price increases. Nothing overly aggressive as we've seen in our per caps. And there's actually been more propensity for our customers to buy merchandise associated with concession purchases. That's been a nice part of the uplift. But nothing that we've seen that would tell you there's a change going on in the willingness to buy concessions.

Okay. And then maybe just a question on the M&A market. Just kind of with the, I guess, softening macro environment in hotels and maybe some stability in the film slate. I'm just kind of curious how you're seeing like the various macro factors kind of affecting the M&A market in those 2 segments?

It feels like there's some more trends. I mean, look, if you look at it from a macro level and you back up, the market is still very, very sluggish in terms of transaction volume. But it's -- if I -- how to feel right this minute, it's starting to feel like there's some more stuff happening. I don't think we're seeing so much selling pressure from anyone feeling the pressure to sell from performance standpoint yet. I think you get people who just own things too long, and that's their issue. The thing I think we bumped into and by the way, if interest rates -- as they come down, that will help because, again, I think one of the bigger challenges that we bump into is if you wrote a pro forma to buy an asset and you had an exit cap that's significantly below where cap rates are now, you're going to -- and you don't have to sell, you're going to hold on as long as you can. And so since the economy has held up, we're not seeing forced -- people feeling pressure and forced sales. You're seeing people where now they're starting to say, well, okay, I'm going to make the reinvestment in the next cycle, because we've got -- because PIPs are coming up on people, am I going to -- am I going to want to reload that, and that's probably where we're seeing some opportunity. It's more along that. We're not feeling that as you might be alluding to some economic pressure as the economy slows down.

Our next question comes from Andrew Crum with B. Riley Securities.

So I think you talked about expectations for admission per cap growth over the next few quarters. Does that incorporate or contemplate any further changes to your pricing strategy? And if so, what are those? And any early learnings from the pricing increases you took at the beginning of 3Q?

Andrew, yes, the -- it does not contemplate a lot of significant changes prospectively beyond what we did in the third quarter, it's more the annualization benefit and tailwind that we'll get from, frankly, flipping from a headwind on some of the discount programs that we've been comping for the last year to now moving to some strategic pricing moves that have increased pricing and that becomes a tailwind. During the third quarter, we had blockbuster pricing on a number of films that our pricing approach and that evolved a bit throughout the quarter in terms of the length of period that we had blockbuster pricing on and Everyday Matinee evolved a bit during the quarter. But I think we've hit a level that makes sense. Pricing, as we talked about last quarter, continues to be an area where the industry has done various experimenting. And so we'll continue to watch what others are doing. But in what we did in the third quarter, it is having the effect that we expected it would.

Got it. Okay. And then you guys discussed the composition of the fleet in 3Q having a negative impact on your theater admissions. As you look at 4Q, how are you viewing mix? Is it a positive for your circuit negative or too tough to tell?

Yes, I'll start first and let Greg add on his thoughts. I mean I think it's a little bit tough to tell. It's easy to forget that we had a Moana film in the fourth quarter last year, and we don't have something quite like that. We do have a couple of family films here coming up in the quarter. And we have an Avatar, which we didn't have last year. So there are several puts and takes. It's frankly tough to tell on mix.

It's so hard. It is really hard to tell. We've never know. I'm glad we got Zootopia, glad we got Wicked, that will play, that should play good in our markets. SpongeBob, I'm a fan. So -- but we'll have to see how it goes.

[Operator Instructions] We'll move to our next question from Mike Hickey with Benchmark.

I guess first, Greg, obviously, I heard your prepared comments on '26 for both your segments, sounded pretty bullish actually encouraging. Just would love to get sort of your off-script thoughts Greg on the growth opportunity you see from theaters and hotels and any catalysts or major drivers. Obviously, you list a lot of films that sounds encouraging. Maybe something that's very relevant to your demo. And on the hotel side, I don't know if the mark, it seems like a really interesting project that you guys are doing, if that could be a catalyst or any other initiatives that you think can move the needle for you guys across your 2 segments in 26. I've got a couple of follow-ups.

Sure. Look, on the theater side, you know me, Mike, I'm not -- I tend to hate to try to predict how things are going to go. It's -- I always go down to let's just count the number of films, and that will give us a range. And then I don't know what -- and then in some years, it's going to be better or some years in some periods, it will be not as good. I mean I keep reminding myself, oh, yes, Memorial Day this year was the biggest Memorial Day on the history of the movie business and then summer slowed down. So you just don't know. But I thought it was a really interesting data point. Look and say, well, look at the number of franchise films next year pretty much like this year, I think maybe one less. But if you look back at the historical grossing of what the franchise zones that are coming around this time certainly more robust than we had in '25. So I'm not going to ignore that stat. Now go to bed, feeling good about that, but again, always hard to predict. On the hotel side, look, we've made a lot of investments that should continue to bear fruit for us, which is great. There's that old saying that old smells and new sales. And so that's very good for us, and we should see that. I don't want to overplay the Mark thing. The Mark was done opportunistically, frankly. We have -- we've been very disciplined about the amount of investment we want to put into the here into the Milwaukee Hilton. And in -- we were -- we had made the decision that we weren't going to renovate the entire property. We were going to actually close 176 keys. And we looked at it -- but we weren't going to close immediately, and we had demand for the rooms. And so while there's demand for the rooms, we're not going to actually make much of an investment in it. We're just going to separated out from the Hilton system basically that will run as an independent. And it's a wait -- if it's there, what's -- well, let's get some cash flow off of it while it's there, while we figure out where it's going. And if the city and the community decides they want to go in a certain direction because it will involve all of them that any further investment in hotel, frankly, is going to require a subsidy. And if that's going to happen, then we're [indiscernible]. If not, that will become a different use. But while it's waiting let's warehouse it and get some cash flow from it.

Mike, I just want to add 1 comment on the '26 slate in terms of film mix. The one thing that does stand out is when you look at family content next year and you look at the franchises, we have Mario Brothers, we have a Toy Story, we have Minions movie, we have Moana, we have a Jumanji. I think the family mix comparatively to '25 is very helpful for our circuit.

Then I guess given that you guys seem optimistic on growth, how should we think about the bottom line here, EBITDA growth potential operating leverage and free cash flow conversion? I know that's come up a lot, when you think about, I guess, catalyst to your valuation. I think free cash flow in '26 would probably stand out as the largest.

Yes. No doubt. I mean just by virtue of the CapEx coming down, our free cash flow is going to grow significantly next year. And then I think as the -- the highest leverage is in the theater business. And so if you assume the hotel business continue steady as you go as it has with a stable economy, if you believe the '26 slate will grow, our operating leverage in theaters has historically contributed around 50% to the bottom line in top line growth. So we continue to focus on managing our cost structure and getting better at managing these buildings when you're in the troughs of the content supply, that's really critical to holding that type of contribution margin because the peaks and valleys have been pronounced the last couple of years. But yes, the EBITDA should flow through with what the top -- if the top line grows, as you would expect for the slate.

Last question. Obviously, recent news that Mark is retiring, sad to hear that 55 years, you never hear that sort of tenure with the company, so congrats to him. Just curious on the transition plan, and if this could also be a potential catalyst for maybe a change in strategy and how you manage your theater asset?

Well, we are looking -- we're in the middle of a search for the new leader. We're looking at internal and an external candidates. We have both. And the -- with the new leader, look, the idea is that we hopefully will see new ideas and new approaches. And yes, look, we're celebrating our 90th anniversary. I don't think that we're going to see like -- we're going to wake up with a wholesale change as to how we approach the business. But I like the idea of new ideas and bringing out new approaches. And we will -- and we're always trying to do new things to figure out what will work. And most of it doesn't. But every one in a while, you find one and we'll run with it. I can't say It's like the surprise movie. I never know what it's going to hit, but there always is one.

Thanks, Mike.

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

We'd like to thank everybody for joining us today, and we look forward to talking to you once again in late February when we release our fourth quarter results until then, thank you, and have a good day.

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