Cinemark Holdings, Inc. (CNK) Earnings Call Transcript & Summary

Great. Thank you, everyone, for joining today's fireside chat with Cinemark's CEO, Mark Zoradi; and COO and CFO, Sean Gamble. Mark has served as Cinemark's CEO since August of 2015. He spent 30 years at the Walt Disney Company, most recently serving as President of Walt Disney Studios Motion Picture Group. Sean has served as Cinemark's COO and CFO since January of 2018; and CFO since August 2014. Prior to joining Cinemark, Sean work for Comcast as CFO of Universal Pictures within MDC Universal from 2009 to 2014. And he joined Comcast after 15 years at GE, where he held several senior leadership positions. Today, we're going to have a discussion on Cinemark's growth strategy. The future of movie-going, including PVOD and subscription programs. The current state of exhibition, including the effect of theater closures and stay-at-home measures on the industry and many more things. My name is Mike Ng. I cover movie theaters at Goldman Sachs, and I have the privilege of moderating this discussion with Mark and Sean. We have 40 minutes for this session, inclusive of audience Q&A. So if you'd like to ask a question, you can submit a question through the webcast. First, Mark and Sean, thank you very much for making yourselves available.

Although we would normally start a conversation like this talking about the long-term prospects of the business, given theater closures and other challenges in the industry this year, could you just describe for us where we are in the reopening of the global theatrical circuit and for Cinemark specifically? And what are some of the things that Cinemark is doing to manage through the current reopening process?

Okay. Michael, I think I'll grab the first one. Sean and I will go back and forth in this -- in a very fluid way. We're pretty good at that. We're good [ tag team ] back and forth. First, let me just say, it's really great to be with you, even though it's virtual. I mean this is my fifth year for this particular Goldman conference. And this not being in New York City, it's -- this is going to be good, but it's always wonderful to be in that room, and you always have such great attendees, and it's a very good conference. So thanks for hosting us today. We appreciate it. Look, it has been -- I'm going to try and be just as direct as I can over the next 40 minutes. It has been extremely challenging for the exhibition industry, clearly, at Cinemark over the last 5 months. We closed our cinemas on March 18, and we just started to reopen them about 45 days ago. We started with a test and learn philosophy, where we opened 5 theaters in and around Dallas. And then we went to 15 in multiple states, and then we went to 60 across the country. And in doing so, we learned a lot about how to reopen these theaters in the most efficient way possible. And again with library product and now more recently, we've gotten into the [ forefront ] product. We're still in a situation, however, where only 70% of our footprint is open. And our most important state and union, California, is very limited open right now. So we're a little bit behind the gate [ all ] there. However, there has been some good signs as it relates to California. We've been able to open up Orange County. We've been able to open up a couple of theaters outside of Sacramento. We've been able to open up Reading and Napa. And we just got notification earlier this week that we can open up Marin County, which is just north of San Francisco. So there's good signs in California, even though the heart of the state, which is San Francisco DMA and Los Angeles DMA, are still closed. We held on with all of our general managers through this process. And so in doing so, it made our process of opening up a little bit smoother. We have a tremendous emphasis on our health and safety protocol because we knew how important that was for us to get this right and to communicate it to the moviegoer. Those one of the things that we could control, other things we couldn't control, of course, is the status of the virus, and to a lesser extent, the movies that are available. But we knew that if we could create a safe environment and communicate that to people, that they would be more willing to come back, and we're starting to see that. We've got success in it. I mean literally, as we have cued our moviegoers, 97% have told us that they are satisfied and feel safe coming back to our theaters after having already been there. So I feel like we've really accomplished that. And now clearly, the biggest issue is to get California open, to get New York open and to get a consistent product flow through the fourth quarter. So I'll take a breath there and let you continue or Sean, if you want to add anything to that.

Please, go ahead, Mike.

So Tenet opened up in the United States on September 3 after an international opening on August 26, in select international markets, including the U.K. Could you give us a postmortem on Tenet's performance over the opening weekend and to date? And how that, along with what you've learned from Cinemark's test and learn theaters to date. How that all informs your reopening strategy and your views on just the recovery of U.S. movie-going?

Okay. Let me just start with that. And I appreciate this question because it actually gives me an opportunity to do a shout out to Warner Bros. and also to Chris Nolan. I mean they have been unbelievably great partners in this. And we have worked hand in glove with them on the reopening campaign and then the movie marketing campaign as well, and we intend to play this movie for a long time. They're not just in the theaters that we're currently in, which will play for a long time, but also in California and New York and some of the other states open up. The movie has been well received. We think it was a really important movie to get out there. Warner Bros. has supported it like no other. They've done a lot of smart moves as it relates to their marketing campaign, where they open the movie up successfully, and then they saved a lot of marketing money for [ NCs ] as well. And they opened up on a weekend that was a very unique weekend. For most of the people listening in, you know that Labor Day weekend is not traditionally a strong moviegoing weekend. In fact, it's one of the weaker ones of the entire year. And yet with the [ advent of ] COVID and everything that's transpired there, they decided to take that weekend, knowing that this was going to be the long haul. This was going to be a marathon, not a sprint. So I think that Warner Bros. can count on us as well as other exhibitors to really play this movie for the long haul. And it's like well in our theaters. People have been happy to be back. And so overall, I just -- I plot orders. And I -- and what we've seen is obviously a strength coming back first of the male demographic. And then secondly, when we look at this and we go, where does Chris Nolan pictures typically play the strongest? Well, they typically play the strongest on East Coast and West Coast. Well, those 2 are still yet to go, so we just got a lot of views left in this movie, and we're going to continue to support them.

And I would add, for the test and learn observations and findings. I mean clearly, a big part of that phase was working through all our new health and safety protocols. It was theoretical prior to opening, but then we were able to really work through and perfect those over the course of the test and learn phase. While our theaters were shut down and spent a lot of time working on developing incremental efficiencies so that we can operate more leaning. And then as we were open, we really [ hone ] that to get to a place where we've been able to predominantly cover our incremental variable costs of being open. That was just another big aspect of where in during that phase. And I would say something else, it has reinforced, not so much the test and learn, but this full experience has just been our whole capital allocation strategy. We favor a strong balance sheet prior to the bulk prices. And I think one of the main reasons that we're in such a good position to steer away through that is because of that balance sheet and because of many of the actions we've taken to preserve [ liquidity ]. So I wouldn't think it was necessarily a learning, but certainly a validation, if you go through all this kind of the philosophy we've had in the past.

Great. And appreciating that. I'm sure a lot of your time is spent on the day-to-day management, given how dynamic the situation is. Could you just talk a little bit about some of the things you've learned from these challenges to date? And how that may affect your future strategic priorities?

Sean, why don't you just jump on. You started -- we started on the balance sheet, which is -- finish up that question.

Yes. Some of the challenges today and how it affects our strategic priority. I mean I think the way we kind of look at things is there's a lot of strategies that we were working on prior to the crisis, that we still believe are good long-term strategies. We just put them on hold for the time being. Our main focal point right now and in the near term, will continue to be liquidity. We'll be refortifying our balance sheet, that's going be our focal point during the course of the crisis and as we emerge from crisis. So I think those are some of the challenges. Our priorities will be on that. And as we have better line of sight to stability of attendance and positive cash flow generation, we'll start to layer back in some of those other areas. We're obviously heavily focused on communicating all the health and safety measures we've taken to get consumers comfortable with coming back to our theaters. I mean those measures are substantial and people come and see what we're doing. I think it kind of -- it confirms, and I would say, it gives them comfort that they may not otherwise recognize, it gives them the confidence in coming back and we've seen that time and again, we've got guest satisfaction results from our surveys is that we're in the upper 90s in terms of what they've seen and how comfortable they see with the set of response rate we've got. So that kind of our main near term priority. I think over time, like I said, we'll work to kind of pave back in some of the areas we've been focused on in [ impact ] [indiscernible].

Sorry, Mike, I knew you're on.

So let's talk about some of the changes on the studio side that we've been seeing during this year. We've seen multiple film studios explore other alternative forms of film distribution, Trolls on demand, Mulan on Disney+. Do you think this is a broader shift away from theatrical releases? Is this simply a response to the current environment where theaters are not fully open yet? What are your thoughts there?

Mike, I think I'll skip and start with this one. Disney chose to move Mulan. Obviously, that was a movie that was originally scheduled for March, then it was scheduled for July, then it went undated. So they made it very clear both publicly and privately, that this was a one-off, however, they were going to learn a lot from it. So I think Disney is in that learning mode right now. That's exactly what they said they were going to do. And we'll see what the results are. They've not yet -- they've not share their results with the public yet, but we'll see. And we are -- we realize that the world is significantly changing. And even pre-COVID, we were in active discussions with multiple studios about how long is the right amount of time for an exclusive theatrical window. And there's a lot of components to that. It's not just the number of days but it's, what are the rental terms? What are the per cap terms? There's a multitude of items need to be discussed there. So we're in discussions with multiple studios on that work. We're open to different and evolving patterns as they go forward. We just want to make sure that they are viable for us as an exhibitor and also good for the overall industry and for the content provider. And we've got a little bit of time to figure this out. We don't have to figure it out this week or next. And so we're taking that time and having good solid active discussions with people about everything from PVOD to release windows to terms associated with that. And Michael, as we -- as I've said multiple times in the past, it really -- I don't think it's a good business practice for us to talk about the details of those things in a public forum. But I just want everybody listening in to note that we fully get -- we understand what the world's trunking from Universal. I came from Disney. Now we're on the exhibition 5. We've got a pretty good understanding of the issues and good relationships with our counterparts, the studios, to come up with a solution that can work in the long haul. And I would say this, from the studio perspective, big movies typically will earn as much as 50% and sometimes more than 50% of the total revenue for worldwide theatrical. So it's important to the theater -- to the studios to not lose that revenue. I mean that's significant. And then on top of that, the theatrical business is really the engine that lights the whole chain of the ancillary business. So whether it's consumer products that follow, whether it's theme parks that follow, whether it's PVOD or VOD or ESG, it gets established theatrically. And so it's in the studios' and the content provider's interest, they have a good, strong, theatrical business. And then move forward down the chain on other revenue streams.

Great. I was going to ask you a question about the AMC-Universal deal. But given your comments, I'll skip that one and move straight to the box office. Could you talk a little bit about your box office expectations for the rest of this year and into 2021? Are there any films that you're particularly excited about that you think could outperform expectations and meaningfully help bring consumers back to the movies? Or is there still a big question mark around what theatrical side even looks like?

There's a little bit of both there, Michael. I want to say this because I think it's important. We're all in the same page, we've been talking to our team about this. We've set up internally so that our team has the expectation that the fourth quarter is going to be a gradual build back to the system. We've been close to over 5 months. There was a lot of very high-profile movies that got moved out of '20 into '21. Therefore, '21 is a really good release schedule. But what does that mean for the fourth quarter of '20? It means that's a little bit thinner than what a typical fourth quarter would be. That doesn't mean it's a disaster, it just means it's a little bit thinner because things got moved out. And we understand that when Top Gun moved to July and A Quiet Place 2 got moved to 2021. But we're [indiscernible] to take advantage of a great holiday release date and put one of their -- probably their -- one of their highest-profile commercial movies, Wonder Woman 1984, under that Christmas Day. So we think that's going to be a smash hit for the holiday playtime. And I think it's going to correspond well hopefully with the virus starting to subside and maybe there'll be -- obviously, by that time, I think that we'll have our theaters open in New York and L.A. But even prior to that, you've got Doom, you've got West Side Story. You've got Soul from Disney. You've got the Bond picture, No Time To Die. You've got Death of the Nile; Lord and Miller, Connected. So there's plenty of movies in the fourth quarter, but I also don't want anybody to think that we don't understand that it's thinner than what a normal fourth quarter would be. So this is a start-up fourth quarter, I would then categorize '21 as a transition year where you've got a lot of movies move in. And by the way, you have a few movies that got delayed to '22 because of production, right? When we were closed, so was filming. So you've got some moved in '22. So I call it kind of the '21 is the transition year, and '22 is really a year where the release schedule becomes more normalized and our business gets back to a more fully predictable status.

And just have a more existential question. Industry attendance in North America has been declining for quite some time, about 15 years, albeit, fairly modestly. Do you believe the pandemic has accelerated this attendance trend and perhaps even cause a lasting change? What's your outlook for domestic attendance? And are there any levers that you think the industry can pull to help reinvigorate or spur growth putting COVID aside?

I think the kind of experience you're on, is this accelerating anything? I think the [ straight answer ] is no. I think there's a lot of unknowns in the period of time of how long the ramp back up might be. Some of that's just going to be dependent on the state of the ongoing virus and new situations that nobody can really predict right now. Then there was an argument about the levers to kind of bring people back. I think I know it just from virtually starting to go out a little bit more like people after being trapped in their homes for so long. It's kind of said this, there's clearly an argument, it's this unnatural state of being for human beings to be kind of locked up like that. So I think if anything, we could see an over-indexing of people when there's a bit more freedom to go out and about, wants to -- will take full advantage of that. When they do that going to the movies is clearly one of the more affordable options they have at their disposal to do. So that could play as anything to ramping things back up quicker or maybe over-indexing. Some of the other levers are, I think, back to many of the levers that we're in process ahead of pandemic, packing in more value for new amenity needs and new kind of offerings into the theaters, which have been starved for a while several years ago. But with the advent of flyers and premium screens and subscription programs and better food and beverage, like all these things that have been kind of advancing in the theaters, I think that's been -- that's clearly been slowed now as they are all focused on liquidity at management. But as we work through this, I think those are going to be the levers that just continues to enhance that movie-going experience coupled with an urge for people to go back out that I believe we'll see a resurgence of attendance back again once the risks of the pandemic subside.

How do you see the composition of the box office changing? There has been a greater reliance on tentpole films even prior to the pandemic. And it seems like with more direct-to-consumer distribution alternatives, some smaller or mid-budget films may pursue that avenue rather than a theatrical release. So do you expect this trend towards the greater reliance on tentpoles to continue? And what are the implications, if any, of this trend on Cinemark in the broader exhibition space?

Michael, we've been seeing this trend for a while. But I don't think it's just the depth of the midrange moving forward through important hard house movie because we're going to continue to make screens available for those pictures. And who knows what the release pattern is going to be for really small movies into the future as well. So like I said, I think there's going to be some new release patterns, and we'll see whether or not that can encourage some of those to get a strong theatrical release and then move in. But as we look to '21, I see just a well on some of those strong blockbuster titles that you're talking about. I mean, just a few of them. You've got Top Gun there, Eternals, Ride the Dragon, Jungle Cruise, The Batman, Fast and Furious, Jurassic World. And then for '22, we already have some big movies like Avatar, Black Panther 2, Indiana Jones, Thor. So it's an exciting time. What we're looking forward to is just getting everybody up and operating. And that's really the only thing that's missing out there. I think Sean's point is well taken. I mean people actually want to get out of the house. And we've heard that hundreds and hundreds of times in the last several weeks. It's nice to be back. It's nice to be back. It's nice to be back. The component right now is just getting a lineup of movies schedule and getting New York and California fully open.

I would add and build on earlier comments Mark made just around our discussions with the studios, part of those discussions too. There's more and more content being created, or will be created when the production cycle gets back into it at various skills than ever. And part of the focus of that is how do we make sure we have more and more access to that and create structures that are going to make those films successful so that we continue to create a pipeline of access to those and have a viable way of exhibiting those things to be probable. I think that's kind of a key focal point here, to round up blockbuster as well.

Right. So Sean, earlier on, you talked about capital preservation being an immediate focus. As the pandemic abates, could you talk about how you think about the future of M&A? Whether that's in the U.S. or Lat Am, organic expansion in the United States, perhaps luxury renovations. Just, do you see some opportunities to deploy capital being one of the stronger exhibitors in the space right now from a capital perspective?