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

Good afternoon, and welcome back to JPMorgan's TMC Conference. I am thrilled to have Cinemark here with us today. And from Cinemark, we have its CFO, Sean Gamble. Sean, thank you so much for joining us this afternoon.

Thanks for having me, Alexia. I appreciate it.

I would think the best place -- also I want to remind attendees, if they want to ask questions, please use your digital book. Just click on the question, a little icon there, and I will be looking for questions throughout the session and jumping in with what comes in queue.

But Sean, to just kind of kick it off, maybe you can talk about the current state of reopening for your theaters? And when do you anticipate attendance really ramping?

Well, we are highly encouraged by the positive momentum that we see continuing to build each and every week. We currently have about 98% of our domestic certain -- circuit open and operating. Government restrictions continue to ease almost daily. 90% of our domestic circuit is now operating at 50% or more capacity. And 1/3 of our theaters no longer have any restrictions, capacity restrictions at all. We're expecting a significant ramp-up during the second half of the year, with a slate of strong commercial films that's more indicative of a pre-pandemic lineup and we're in the process of literally hiring thousands of field employees right now to meet the expected demand that's coming. So we're really excited based on the current progress and kind of what lies ahead for the second half and we're also excited for this coming weekend with the Quiet Place II and Cruella.

Yes. When you look at this weekend with a Quiet Place II and Cruella, frankly 2 movies that I'm looking forward to seeing in the theaters. But do you see it, I mean, it's the beginning of kind of the return because I think this is for the first week where we're having a couple of big potential blockbuster come back. Is it just the beginning? Is that why people referenced the back half of the year, just much more robust laid back then?

Yes. I mean, we think both of those films hold a lot of promise. But I think the reason why I say it is we're still a little bit in a kind of ebb and flow mode. We had -- a couple of weeks ago, we had Mortal Kombat and Demon Slayer. Then there was a series of smaller openings and now Cruella and a Quiet Place II. And then there's some additional openings, then you get to Fast 9 at the end of June. And then in July, you start getting into more of a sustained level of larger commercial films supplemented by other interesting programming. So I think the point of being on the second half is that's really when it's a more consistent flow of content through the rest of the year. Whereas now we're still in a period of -- you kind of have a bigger weekend and then a few smaller weekends and then a bigger weekend, and it's just not as stable and consistent.

That makes sense. Can you elaborate on your recent announcement of deals with all the major studios with theatrical releases? I mean, how should we think about them in terms of windows and splits? Are the windows exclusive? Whatever you can share?

Sure. Well, each different -- excuse me, each deal is a little different. I'd say the overarching themes of all of them are flexibility and variability with regard to the deal structures that were designed to be tailored to the needs of each studio and to Cinemark. I'm not able to get into the specific deal terms other than to say that they're varied with a range of different window scenarios and all have commensurate economic considerations associated with those. With regard to window exclusivity, the majority of the titles impacted by the deals will have some form of exclusive window.

Okay. So just so I'm clear, and not to nitpick on any specific deal, but really in a general thought process here, if the takeaway should be that, in general, Cinemark agreed to a shorter window than a traditional window, there was some sort of commensurate economic advantage in doing so.

That's correct. Our aim has been to, obviously, to achieve to the extent the window is changing to receive some form of consideration for that. And clearly, the larger or more significant the change, the more significant consideration we've been going after. And that takes shape in a range of different formats. But directionally, you're correct. That is the correct assumption.

And do you think, Disney, we heard from Bob Chapek last night and he talked about his slate, busy slate that's coming out and obviously referenced 2 films, I think, in August that are coming out exclusive to the theaters. And I am -- but he also emphasized they're in a period of tremendous flexibility right now as things are still in flux, which I think is a fair point. And they're still trying to balance all the different constituents and needs with the evolving recovery of the pandemic. But I guess my question is, post all this, do you see Disney or, frankly, any other major studio ultimately going back to an exclusive theatrical window at some point?

I think that's to be determined. There certainly is some indication of trends converging toward a window, perhaps in more of a 45-day type window structure. But -- and with that, perhaps some outliers still here and there that diverge from that. But all that's still very much in motion. And hard to fully assess still in kind of the period of time we're living in where the pandemic still isn't fully eradicated. We certainly think that an exclusive theatrical window is in the best interest of both the studios and exhibitors, especially once the pandemic subsides and theatrical exhibition is firing again on all cylinders. Theatrical exhibition still provides the highest per cap of all distribution channels. And the majority of consumers who watch movies in theaters tend to consume them again, via other platforms, which provides multiple revenue opportunities on the same content for the studios. Furthermore, theatrical has proven time and again that it's an optimal way to differentiate and elevate content, leading to better results and opportunities across all other distribution platforms. And ultimately, that leads to greater overall revenue and profits for the studios. So these results have carried through all previous iterations of home entertainment evolution and I at least haven't seen any data so far to suggest they'd be any different going forward.

And I think we've seen some of -- some big Hollywood talent come out vocally very much for trying to get consumers to go back into the theaters. So that's probably a consideration as well. I would think in terms of making the directors and the talent happy in terms of what the distribution is ultimately going to be?

Absolutely. I mean, I think there's a big part of many filmmakers and talents work, where they're going into that to kind of see their -- the fruits of their labors on that big screen and in that environment. It's a different level of engagement with that content. And not to say that viewing content in the home or on streaming is a great experience as well. It's just different. It's a different way of doing it. So absolutely, I think the talent aspirations certainly play into that to a certain degree.

Another kind of hypothetical, but I'm curious to see if you have an opinion. When things all settle post-pandemic, do you think we will once again have kind of an industry standard for windowing and splits? Or will still be kind of variable depending on each deal with each studio?

Hard to say. I kind of mentioned there may be some trends that point towards some type of convergence around a 45-day window. That could become more mainstream with some outliers, we'll see. It's also going to be interesting to see what happens as we do emerge from the pandemic. And like I said, when theatrical is fully cranking again. And also, as these relatively new streaming platforms mature and start to focus more on consumer retention versus acquisition. I mean there's a dynamic of that that's played into this. We can't lose sight of the fact that the whole media landscape was on the verge of the so-called streaming wars right before the onset of the pandemic, and those dynamics have clearly been exacerbated as a result of everything that's happened. So some of the windowing and overall content release decisions that are being made by the studios in the near-term in the midst of having a heavy focus on subscriber acquisition and dealing with the pandemic, those decisions may not ultimately prove out to be the most economical ones for them over the long haul.

Now that makes a lot of sense. We have a question that came in from the audience here, which is, in your experiment with Netflix, they have expressed -- have they expressed any willingness to experiment with a larger window beyond 1 week? And once things reopen, is there a minimum window length consistently in your agreements with each studio?

Sure. Well, we're kind of in the early phases of testing and learning with Netflix. And I think one very -- the results of Army of The Dead, which I believe you're referring to, have been very encouraging. We're also very encouraged about the ongoing focus on larger film production that is within Netflix' aspirations. As far as longer windows, we'll have to see. I believe, we've actually done a couple of tests at a 2-week window. Earlier on before the pandemic, when we were in discussion on certain films, there were some discussions of longer windows. So I think that's still to play out. It's probably a bit premature to kind of hypothesize on that, but certainly could be the scenario. And sorry, the second part of that question, Alexia. Can you...?

I think it was, once things reopen, is there a minimum window length consistently in agreements with you? I think we sort of discussed that.

Got you. Yes. The studios are still going to decide what ultimately -- how ultimately they want to release their films. I think really, the question becomes what's the optimal scenario for them and there's dynamics that will lead that decision may be to be different in the near-term than in the long term. And there may be different kinds of content. I think if anything, one of the positives coming out of the windows evolution is there's more flexibility. It's not necessarily a one-size-fits-all. And they're very well could be certain content, particularly more commercial larger films that carry longer windows because that's what makes sense. And at the same time, there may be some smaller or alternative kind of content that has shorter windows, and there's a way to structure deals to get those released as well. So it just creates more opportunity for a broader swath of content in theaters.

Have you done any market research on how consumer behavior might shift with a shorter window? Will people still go to the theaters if they can catch something of demand, say a month or 6 weeks later?

That's always been the big unknown, both for content creators and exhibitors. And it's, to some degree, hard to rely on research about what people say they might do. Considering the majority of Box Office is generated in the first 30 to 45 days of a film release. It's quite possible that the impact would be limited. Our pre-pandemic research suggested that would be the case under those types of conditions; however, there could be some risk and that's why we've negotiated terms to help protect us in our recent studio deals. Research has also shown us that our most frequent moviegoers are also the heaviest consumers of in-home and streaming content. And that they love the differentiated, immersive and heightened experience of viewing content on the big screen. A significant portion of our business involves providing consumers with an extraordinary entertainment experience when they want to get out of their house and do something, and they only have a limited range of options to choose from. And considering that people have lacked that ability to freely go about their business for the past year, we think there could very well be a renewed appreciation for out-of-the-home events like going to the movies. And in fact, we're already seeing glimpses of that scenario playing out today.

With the shorter window leading to potentially lower attendance, and I guess, it's to be determined if that's the case. How does that impact your high-margin concession revenue and any ways to kind of mitigate the impact?

So far, we haven't seen any impact on our food and beverage per caps, at least based on the current window reductions that have taken place during the pandemic. In fact, our concession per caps have been hitting all-time highs as consumers have started returning to our theaters. So we don't necessarily think windows have a material impact on food and beverage per caps. That said, we intend to continue focusing on building audiences and capturing increased market share and finding new revenue sources as ways to enhance our margins. Much of that comes back to providing our guests an extraordinary entertainment experience when they visit our theaters. For example, with almost 65% of our domestic circuit reclined, we have one of the highest recliner penetrations in the industry. We have the number one premium large-format experience in our XD auditoriums. And we have the industry-leading subscription program in Movie Club. We also have meaningfully enhanced our digital and social marketing capabilities as well as our e-commerce platforms to be able to proactively engage with consumers and entice them into coming to Cinemark. And now we're able to communicate to over 15 million consumers. We recently introduced Snacks In A Tap that allows our guests to preorder their concessions before arriving at theaters. So these are the types of revenue-generating efforts, along with a wide range of productivity initiatives that we have underway that we're working on to increase our margin expansion.

How realistic do you think the streamers -- it is for the streamers to come in and start releasing films in theaters in a more substantial volume? I guess, will there be others beside Netflix that will come in? And what do you expect in terms of your deals to showcase Netflix films? Is this a big opportunity?

Well, number one, we think in terms of how probable it is? We think it's highly probable. The lines are blurring between who's a studio and who's a streaming company. Much like they've been blurring over time with streaming companies, pay-TV platforms and linear TV channels. We've consistently said that we'd love to showcase content from Netflix and Amazon and Apple TV in our theaters. However, historically, we weren't able to reach agreements on the windows. That said, with the evolution that's taking place in windows. Now that's become possible and we talked about a moment ago, we started experimenting with different pieces of content from those providers like Army Of The Dead from Netflix recently. And we think the opportunity to theatrically release content from these streaming companies, these traditional streaming companies as they continue to get more and more into the production game, we think the opportunity is significant.

And I would say, windows have been at overhang on theater stocks for a long time as far as I can remember. And I guess with the issue potentially settled here, I guess, how do you think the perception of the industry will change?

I'm not sure. I'm not sure windows have necessarily impacted the perception of theatrical exhibition. But certainly, what has impacted it over time has just been the general condition and quality of theaters. That perception has clearly been improving meaningfully over the past several years with significant investments that have been made in better seats and expanded food offerings, simplified purchasing processes, subscription programs, better sight and sound technology, heightened cleaning routines. All of these investments have materially improved the proposition of going to the movies. I also think that the impact of being sheltered at home for so long has given people somewhat of a renewed appreciation for going out and enjoying communal experiences like going to the movies. Sometimes, it's not until you have something taken away that you truly realize what you've got. And our feeling, and we know this is -- comes from our consumers, there's just -- there's no comparison to the immersion and the depth of emotion and ability to be transported to other worlds that is produced by watching a movie in our theaters. We're hearing that over and over as our guests are returning back to us as the pandemic subsides.

Yes. I was thinking in terms of overhang more as a stock perspective, I should have been more clear in terms of -- but you're right, I think, from a [ studio ] perspective, they probably have no idea.

Well, and in terms of the stock impact, we've heard it from some of our investors today, that kind of same concept. And they were saying, in some ways, they had kind of a fear of the unknown with what could happen with windows. And now, in some ways, as windows are evolving and there's more flexibility in their solution being found, that's kind of relieving some of that angst and uncertainty. There's still a lot to play out in terms of how things move forward and where things settle out, and there's still a lot of dynamics that are going to be moving. But that clearly, I think, is something that already is being received as a positive sign in terms of the way things are progressing.

Yes, I get that sense as well. All the studio execs who you've spoken to, really, think there'll be a huge sort of box office for the first 18 months post-pandemic. But longer term, I think the outlook of how it plays out is a bit more cloudy. I guess do you ultimately see less films for theatrical? And how does that impact the view of your business?

Well, I guess one of the comments we touched on already that I'll mention is, theatrical exhibition still remains an important ingredient in kind of the studio recipe for maximizing revenues and elevating content and building brands. While near-term content distribution dynamics have been distorted somewhat by the pandemic in this drive to acquire subscribers for streaming platforms; over time, I think that the impact of those dynamics will fade somewhat. Prior to the pandemic, as I know you know, theatrical exhibition generated over $11 billion in box office domestically and over $40 billion globally. I mean, those are huge numbers, and they have a significant impact on studio earnings. Furthermore, theatrical releases create an event that builds franchises really unlike any other launch platform. And these are franchises that are driving a large portion of the spin-off sequels and episodic series and consumer products and the attractions that fuel these larger media companies. So a theatrical release, we think, too, as we kind of look forward and look at how these streaming platforms evolve, we think theatric release can also help promote streaming by elevating that content above kind of a broad sea of clutter, which is sometimes difficult to sift through. And we've already seen how streaming platforms are utilizing those tactics in the way they market a lot of their content on their platform. So there's a broad benefit that a theatrical release provides content that goes well beyond just the revenue from our window, which in and of itself is significant. So I struggle to think how over the long-haul that the traditional studios will want to materially minimize that opportunity. At the same time, we talked about there's new content suppliers like the traditional streaming companies, the Netflixes and the Amazons of the world, that are starting to provide incremental volume of films like we've talked about.

Yes. I think you're right. It's hard to extrapolate what seems normal now when all these companies are trying to ramp their streaming platform so aggressively and what may seem to make the most economic sense a couple of years from now when it's more about retention and generating box office revenue. Yes, I think you're right, it's very much in flux.

Yes.

Just in terms of your circuit and where you are, are you where you hope to be in terms of finishing up all the conversions, but also maybe more importantly, in terms of the XD theaters? I would assume folks going back really went that kind of event type of experience, is there still a room for further opportunity there? Or are you kind of where you need to be?

We still think there is ample runway in regard to additional premium formats, XDs, in particular. We had been starting down a path of investing in additional XD auditoriums in our theaters ahead of the pandemic. We've clearly pulled back on that for the time being, just as we've been more in capital preservation mode, but that's still I'd say, on the radar going forward, as we start to rebuild our balance sheet and flip back to a positive cash flow because we've seen how those tend to over-index, and we think there's more upside there. I would say, two, also with some of the other premium formats like D-BOX seats and things of that sort and some of our enhanced food and beverage concepts. In the near term, we've seen our food and beverage, conceptually, we talked about before, has overindexed quite a bit as people come back and they kind of overindulge for the first time and we expect that perhaps some of that dynamic may also play through to premium formats like XD. After being away -- again, if you're being away, people come back, they splurge. They're looking for the best moviegoing experience. And while all of our auditoriums are fantastic, XDs clearly kicked that up a notch.

And then just moving to Latin America. I don't want to forget about that. What's going on in Latin America? And what is the time line for recovery there? Do you think the window change in the U.S. also take hold in other markets?

Well, recovery in Lat Am has obviously been moving a bit slower than in the U.S. I'd say, throughout the pandemic, they kind of trailed the U.S. by about 3 months and that seems to be -- continue to be the case, certainly due to the limited availability of vaccines. The interest in getting vaccinated is very high across the region. It's really just -- the issue has been the supply of vaccines throughout Latin America. Currently, we have a little over 50% of our theaters across Lat Am, open and operating. That continues to build now after a brief step backwards a few weeks ago when everything kind of shut down again. But much like the U.S., we are very confident that moviegoing in Latin America will recover extremely well as the pandemic subsides. And we've already seen some glimpses of that based on how certain pieces of new content have performed recently, even with significant capacity restrictions. Just one example, I'll give you. In the midst of kind of surging COVID cases and at a 25% capacity restriction, Godzilla Versus Kong, a month or so ago when it got released in Argentina, wound up doing more in box office than the prior Godzilla film did in 2019. So even in that environment, with that high limitation on capacity, it performed that well. So we think that's indicative like what you've seen in China, what you've seen in Japan. We think that's just indicative of substantial pent-up demand for commercial content when it becomes available in the region. And going to the movie is still a very big part of Latin culture. As far as windows go, we don't see that necessarily being as large of a focal point in Latin America in the near term, largely considering that just there are existing limitations in infrastructure and penetration of internet services.

I guess, given all those positives about Latin America sort of structurally, are you -- do you have an interest in eventually maybe expanding your presence there?

Potentially, we have been -- we had been continuing to organically grow, and we had done some smaller acquisitions ahead of the pandemic. I think globally, in the U.S. and in Latin America, we're going to be careful in the near-term with any type of expansion. Part of that will be a limitation just by virtue of the state of our balance sheet. Part of that will just be trying to make sure we have a good line of sight to what the new norm is and what appropriate returns would be that one might expect for any given deal. We still think over the long haul, Latin America is a good long-term growth opportunity. Even if the region had struggled in the recent years, even before the pandemic, we've got a top-notch team there that's very self-sufficient, and we enjoy leading market shares in the majority of companies we operate. So we're kind of pleased with our current footprint, but we'll continue to keep an eye on opportunities as they surface and evaluate them. But as I said, we're going to be kind of just careful in some of that decision-making as we look forward, particularly in the near term.

I've got another question from the audience. Just any thoughts if potential Amazon MGM combination would impact your business?

Well, I think that's to be determined. I think like we kind of discussed earlier, it's clearly a move like that would be indicative of a desire for Amazon to go even deeper into film production and invest in existing IP and production capabilities and really established brands. We think that kind of fits in with how -- what they've expressed their intentions are. Clearly, larger commercial films. We've been having, I'd say, positive conversations with Amazon about the potential for bringing some of their content to our screens. And we're optimistic that, that also will happen sometime in the not-too-distant future. So I think it remains to be seen kind of what they would ultimately do with that. But we look at it as a positive of a greater investment in content and a desire to continue -- for them to continue to build out their film production capabilities.

How does this crisis come or even the new window structure, all these changes that are going on, impact how you think about what is an optimal balance sheet and your capital allocation?

Well, we have a history of maintaining a strong balance sheet, and that strength has allowed us to act nimbly when opportunities present themselves. And clearly, it's been an asset over the course of the pandemic. One of our key priorities as we continue to emerge from the pandemic will be to refortify our balance sheet to its pre-COVID standing. Clearly, we'll also -- as I just mentioned, we'll clearly also be focused on growth opportunities and other capital allocation decisions and those will be contemplated with the priority in mind of restrengthening our balance sheet and just overall forward-looking cash flow projections.

I guess, along those lines, when do you think you get back to sort of into cash-positive territory? And I guess, when does the deferred rent start coming back?

Well, let me -- I'll take that in kind of reverse order. The deferred rent, with regard to deferred, we've already started paying a portion of the rent that had been deferred during the pandemic, and those payments will continue throughout this year and into next year. Even with those repayments, we mentioned on our last earnings call that we've seen our average monthly cash burn decreased from $65 million per month to $50 million per month, which has been entirely driven by stronger recovering operating results. And we expect that those results are going to continue to improve as vaccine penetration further expands and a consistent flow of new films start to fill our screens. So based on our current projections, we anticipate returning to a positive cash flow generation before the end of the year.

Okay. I think we have time for just one more, I'll grab one more for the audience. The -- is there a certain genre film, whether it's family or live-action that you see may be more pent-up demand in terms of willingness for consumers to sort of get back to the theaters?

Interesting question. I think so far, it's been broad. If anything, interestingly, it seems like the family films have really been performing particularly well. One data point on that. Those have over-indexed with the Private Watch Party feature that we introduced during the pandemic, where you can rent out an auditorium just for your party. The content that has performed best in those scenarios has been the family content. So currently, we've seen that over-indexing. But again, it's -- that's -- I suspect part of that is because there's been limitations on some of the other genres and how broad those genres have been. So when Kong versus Godzilla, Mortal Kombat and Demon Slayer, recently, released in the US. All of those outperformed our expectations at this point in time. So we think some of that is also just indicative of general pent-up demand. We think it's indicative of the recovery happening perhaps at a pace, a bit ahead of where we thought would be at this point. I think as we look forward, we got a wide array of varied genres, and that demand is going to play to all areas of content, not just family. But clearly, in the near term, family has been perhaps a touch stronger than some of the others.

All right. Well, we are out of time. Thank you so much, Sean, for jumping in and doing this with me. I really appreciate it.

Likewise, Alexia. Thank you, and thanks to everybody for calling in.