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

Good afternoon, everyone. My name is Meghan Durkin. I cover U.S. theaters here at Crédit Suisse. I'm here very pleased to introduce our next presentation. We have Cinemark. We have Mark Zoradi, the CEO; and Sean Gamble, the CFO. Mark and Sean, thanks so much for being here today.

Glad to be here, Megan. Thank you.

So I think this is a really interesting time to be here. I mean we've got some movies that have started to open. We've got some big stuff coming up. But we have a lot to talk about. I'm just going to jump right in. First, I wanted to get sort of a status report. Where globally are you still closed? And where are you operating under the biggest capacity restrictions?

Okay, Megan. Sean and I will kind of jump back and forth on these. I think I'll take this first one if that's okay. First of all, it's great to be here, and we were just mentioning this morning with Sean and Chanda and I, we look forward to maybe the next one. It's not going to be virtual, and we're actually going to be back together again. So we're looking forward to that. Now to answer your question, let's start in the U.S. In the U.S., we are effectively opened everywhere. I'll say, 99% only because there are 2 theaters that we actually have under construction. One damaged from some weather and the second one we're reclining. So effectively, we are open in the United States in all of our theaters. In Latin America, we're somewhere in the 60 to 90 days behind the U.S., and it really depends on the country itself. Our most important market in Latin America, Brazil, we're about 75% to 80% opened in that marketplace. So that's very important. However, in some of the neighboring countries in Argentina, in Chile and in Peru, we are effectively closed down now completely because of the virus, and we would expect to be able to open some of those theaters up in the coming 30 days as well. And the rest of Latin America, of the other 11 countries, we are effectively open everywhere. So Latin America is kind of a mishmash of what's going on. And the reasons for that are very simple. The economies there didn't have the same governmental support in regards to vaccinations or in regards to health care. So to the extent that Latin America gets those, which they're clearly getting at this point, we expect to have Latin America open and operating like it currently is in some parts, up to 100%. And you may remember that Latin America is somewhere around 20% to 22% of our business.

Okay. So here in the U.S., we still have capacity restrictions. Many states have actually removed the restrictions, but are you actually -- where you are allowed to sell 100% of seats, are you doing so?

Yes. The answer to that, it's interesting. On an opening weekend where there's some big movies, we'll actually have some theaters that are being sold out to 100%. It's -- that's not the majority, but it tends to be when there's a big movie opening like A Quiet Place 2. And in about 70% of the U.S., we have no capacity restrictions whatsoever, and we can sell all the way up to 100%. Today is a very important day in California. It's only 8:15 in the morning, but the anticipation that today is the day in which capacity limits in places like Los Angeles County, San Francisco, Sacramento, which are very important markets for us, are going to have the capacity limits removed. So it's our expectation by the time we open up movies this coming weekend and certainly Fast and Furious that the vast majority of the U.S. will no longer have capacity limits.

So in those theaters where you are selling on the big movie openings, the 100%, are you seeing big business? I mean are people comfortable with that? I mean are they -- are those theaters outperforming or doing COVID -- pre-COVID level numbers?

It really depends on the movie. I'll give an example, A Quiet Place 2, which you can compare to the original movie, has performed quite well. And we did have some actual sellouts on opening weekend of A Quiet Place 2, but not to the point to where we were hindered at all because what we do when we see sell-outs coming is we just -- we open up additional auditoriums and additional show times. So -- and then you have some movies that don't perform as far to the level as what you would expect, but that's no different from pre-COVID to post-COVID. Some movies are going to perform at or above your expectations and some are going to perform at or below those expectations. That's the movie business that we've all been in for 30-plus years. But what we are seeing is the -- we track each and every week. What does the audience say in terms of their comfort level of returning? And as of this week, it was into the high 70s, 76%, 77% of the people saying they are comfortable in returning. And then when you add in the fact of when you or others get vaccinated, that number jumps to the high 80s. So I think we're over that threshold now where the vast majority of people are feeling comfortable in coming back to the cinema. And many of them have done so over the course of the last couple of months.

Okay. So the last few weeks, you've had some more films opening. So how are your theaters doing in 2Q? How is attendance looking versus 2019? I know you might not want to talk about it, but we'd like to get a sense of how things are sort of starting to ramp?

I would say, again, you can't make a generality on this, Meghan. It really depends on the movie itself. And some movies are performing at or above the level that we would expect, whether it was pre-COVID or post COVID. And as we go forward, it's our expectation based on content lineup in other countries are a little further along for us, for example, China or Japan, where they've had big local titles and COVID [indiscernible] and COVID under control. We've seen levels all the way up to 2019 and beyond. And we expect, for example, with -- we have a couple of big movies coming at the end of this month with Fast and Furious and then 2 weeks later, you have Black Widow. Based on pre ticket sales and the anticipation of those movies, we expect both those to be very, very significant performers across the country. And to that effect, also in Latin America, especially the Fast and Furious franchise, which has always overperformed in Latin America.

And I would just add to your question on relative to 2019, I'd say we're still in the aggregate down a bit from 2019, but with that, it's also obviously important to remember that we're still digging out of the pandemic, so we're not fully there yet. While we have just about all of our theaters open, we estimate the overall industry is still about 85%. So it's getting there, but it's not fully there yet in terms of being completely open. And then we're also not yet to that point where there is just a steady cadence of larger new release films as people were accustomed to prior to the pandemic. And we're in this mode still where we'll have a weekend of some bigger releases and then several weeks of smaller releases and then big releases. And it's really not until we get to the end of next week with Fast and Furious 9 is really the first major blockbuster coming out. And then in the second half, we're kind of off to the races. The second half is really more indicative of a pre-pandemic type of slate with a consistent set of releases coming out week after week after week. So far, though, the recovery, as Mark is saying, the momentum just keeps building. Those bigger weekends are getting bigger than the prior bigger weekends and in between weeks are getting bigger as well. And the recovery is pacing so far ahead of what we were expecting only a few months ago. So the speed of things and the speed of the recovery is moving at a good pace.

Maybe just one last thing because I don't know if this was in your questions or not, but June 22 marks Cinema Week for the industry. and Cinemark as well as other exhibitors throughout the country as well as all the studios are putting together quite a promotional effort to get to the consumer and just to remind them that cinemas are open, that there's great new content. And so we're putting a big effort with all of our digital assets, as are the studios, as are other exhibitors across the country.

Right in time for Fast 9, right? Exciting.

Yes. Certainly, Universal is happy about that.

Yes. So you've been gaining share. And is that still -- is that sort of normalizing in 2Q? Regals open, others have opened? Is that -- I think you've been talking about key things on that share gain. Is that...

Yes. Meghan, that has been very heartening to us because our marketing and our film team worked really hard throughout the pandemic to increase share in a difficult marketplace. And for much of the pandemic, our market share was about 20%, where historically, our market share has been about 13%. In 2019, we had about a 13% share. So we're asked quite often will so how much of that are you going to hold on to? And I think the correct answer there is I think we're going to be able to hold on to a meaningful portion of that market share growth. It's certainly not going to be at the 20% level when all of the other exhibitors opened up, both in the United States and in Canada. But we also don't think that we're going to go back to a 13% market share. So perhaps somewhere in the mid-teens, but that's very substantial to get several point market share increase off of a 13% base. And it's because there's been a tremendous amount of effort put forward, and we've kept our theaters in tiptop shape. And I think we've trained some consumers to have the ability to come to Cinemark theaters and see what a good experience it is.

So how was Movie Club reopening? Have people been opting back in? How is that trending?

Again, that's a really good question. During the heart of COVID, we paused our Movie Club members. When we put our members on pause, we had about 950 -- slightly over 950,000 paying members. We put them on pause during COVID. And we're right now, over the course of of middle of June through the end of July, we're starting to unpause those members, and we will start to rebuild. So come the end of the second quarter, likely at our earnings call, we'll have some specific data. But we continue to generate 20% to 30% of our business with Movie Club members even when they were paused. In other words, they could use their benefits, they could use their credits. They could get their discount on concessions. No online ticket fees, even pause, but now we're starting to take them off the pause, starting to recycle the billing process, and we'll have some real data to report to everyone in the coming months.

So let's get to the topic du jour, the flexible windows that everyone wants to hear about. The day and date availability was a surprise this year, but do you expect if these are simply COVID decisions and why? And it feels like they're having some impact on the box office. I don't know what you think about that, the day and date releases anyway?

Well, look, it's hard to say, and there was clearly a COVID decision on the part of Warner Bros. They made that very clear that 2021 decision to go day and date with HBO Max was a COVID-related decision. And then they've also made it very clear that in 2022, they're going to go back to a more traditional window in the 45-day range. So clearly, Warner Bros. came out publicly, stated that to us privately and to the industry publicly. And there's -- I don't think there's any really any news there. Paramount has come out with effectively a 45-day window. Universal, as you all know, was a 17-day for their smaller midsized movies, minimum and a 31-day 5 weekends for their larger movies minimum. Disney has been in a test-and-learn phase. They're going to continue that with upcoming Black Widow. And so we'll have to see what they choose to do in a post-COVID environment. They've not made any specific announcements on that either publicly or privately. So we will see there. So I think that it's kind of gone both ways. Clearly, the windows situation is reduced from what used to be 74 days probably more in line with that dynamic window of the high -- of the low 30s to the mid-40s. And how that's going to affect consumer movie going, I think we're just going to have to wait and see. We don't think it's going to be dramatic. It may be slight, but we'll have to see when those movies actually start to come out in the third and fourth quarter.

I would add too, Meghan. The other thing that also we think, has been affecting some of this decision makings. We all know prior to the pandemic, we were on the verge of all these new streaming platforms coming out. We expected that there may be some decisions being made in the near term as all these companies are focused on consumer acquisition that may not be the ultimate best decisions in the long term when they start to mature and you get more into a customer retention mode. All those dynamics were clearly exacerbated by a pandemic with theatrical being undermined and led to maybe more extreme versions of that. So we're going to have to see just how things continue to play out as we get back to a period where theatrical is firing on all cylinders again, these platforms are are becoming a bit more mature. And we fully believe that theatrical is still the best way to differentiate and elevate content in place through to adding a lot of value to the studios and to these platforms and plays a big part in the kind of role like it as forever in the home entertainment space and driving value and content across all distribution channels.

I mean these flexible windows, even though they may go back to longer windows next year, they still resulted in sort of a new shorter window with Netflixes of the world and it's a test, I guess, and you guys did a 7-day window for Army of the Dead. And I'm wondering how did that film do? How -- have any of the traditional guys come to you and said, "We'd like a shorter window." Is there any sense that, that could shorten your traditional deals?

Yes. Army, the Dead was kind of the first larger commercial film that we did a wide release test with Netflix on. And I'd say we both were very pleased with the results. We're obviously still in somewhat of a test and learn mode, but the results were really encouraging about the prospects of future releases. In some ways, the changes that were going on with the windows and more dynamic behavior during the course of pandemic, that kind of opened up this opportunity. We've always -- we've indicated numerous times, we've always been interested in showcasing Netflix content and content from other more of the traditional streamer creators on our screens, really, the limitation was just coming to an agreement on terms, and we've been able to do that and work some deals that have been agreeable to both parties now during the course of pandemic and we're going to continue to experiment with that. As far as the traditional studios, obviously, some of the showing of Army of the Dead and some of these other tests, and they actually followed some changes in the windows. We already had done a deal with Warner Bros., and we're showing Warner Bros. content day and date with HBO Max. There are select Disney films that were kind of day and date with Disney+ premier access. So it's become quite varied during this period. So I wouldn't say that, that particular test that we did with Netflix kind of led to any requests from the studios. If anything, it was something that was created as a result of -- an opportunity that was created as a result of some of the changes that took place during the course of the pandemic.

So I'm going to jump around because since we're on the topic, you guys have been saying that the film rentals wouldn't really be impacted by these flexible windows or that it wouldn't be a meaningful impact. So can you sort of explain why that is? I think there's some moving parts there and maybe there's just some bigger films mixing in? And can you just explain that comment?

Meghan, we were motivated to be agreeable to more flexible dynamic windows because there were some -- obviously, some concessions given relative to the film licensing terms. And that could be everything from film rental reductions to marketing considerations to marketing support. We will continue to aggressively market our movies as well. So we'll be adding some expense there. And when we report our film rental line, it's a combination of both what is the film rental and also how much marketing money we spend. So to the extent that analysts are looking and saying, is that number going to come down dramatically? I think the answer to that is probably no, it won't be dramatic. Will it come down and have there been some concessions relative to shorter window? The answer to that is yes. But it's not specific. And obviously, we can't -- excuse me, obviously, we can't give specific details of what that is. And it really depends on each individual studio because the longer the window is -- longer the window is, the less the concession would have been on our side in order to motivate us relative to these flexible and dynamic windows.

And then -- so the marketing stuff that you're doing, is that near term to get people back in theaters and maybe it will roll off over the time?

Look, we have an outstanding marketing team And I think you or others have heard Sean and I talk about that in the past. And I think that we have figured out some ways to spend some of our marketing money creatively in order to motivate people to come back to the cinema maybe weren't doing that otherwise as well as just to be aggressive in the marketplace to indicate how positive Cinemark theaters are. So that could be everything from our XD auditoriums to the outstanding presentation we have. So we're going to continue to spend marketing money, not to an outlandish degree, but we've seen positive results in doing so. More as a traditional retailer would come on top of what the studios are doing, meaning that the studios are creating a great amount of awareness and a great amount of want to see. But I think it then becomes dependent upon us as the retailer of those movies, the exhibitor to then create the desire to come with some level of immediacy to our particular location. And that's everything from how we present our movies to our concession offers to the various promotional offers that we have. So you can expect to see us continuing to be aggressive from a marketing standpoint.

Understood. Is PVOD at all impacting that line? Because I think my understanding was that you were a little bit less stressing the PVOD part of the relationships and sort of more interested in the rental expense benefit. Is that the right way to think about it?

I would say it's both, and it depends on the particular studio because certain studios have more of an emphasis in PVOD and others don't. So those that have an emphasis on PVOD, then this could be a combination of both.

Got it. I was really interested in your gaming announcement last week. Can you tell us about how this partnership came about? And maybe what can it grow into over time? It seems like a small number of fingers to start.

It is, Meghan. It's 5 theaters, but this is just a continuation of a series of tests that we've done in the eSports area, both participatory where young people as well as young adults can come and participate themselves in playing video games on the big screen with their friends and family or to play in leagues as well. We've done that with Super League Gaming. We're now testing some things where kids can actually bring in their own switch and play with 7 or 8 of their friends on the big screen. So that's the participatory side. The other side is just the viewership side and having an audience there to watch great video games being done. Here's the key thing. This is very much in the test and learn phase. And we've been involved with everyone from Super League Gaming to the gaming awards to Coca-Cola eSports, to Blizzard, to Unisoft, to Riot. But what we're doing is trying to figure out how can we get this to work on a local level and then find a way to actually expand that and to get some scope to it. As we stand today, it's very much in a test-and-learn phase. And I think we tried to make that clear in our press release as well. There's no giant new revenue source that we're going to see necessarily in the second half of '21 or even in '22. But we're experimenting because we know there's a potential here into the future.

Yes, I know my son loves to Switch and his friend just sit there next to each other playing games. Well, they could do it all day.

And what we're hoping to do is to get your son and 10 of their friends to be able to go to a theater to bring their Switch with them and literally be able to play each other on the big screen. And maybe we'll fill up that auditorium. We will take turn to who gets to play. But there's technical issues to it. You need very good broadband and very good Wi-Fi in many of these auditoriums. So we're just -- we're trying to find the best way to do this. We tested the Super League Gaming, where there were literally sports leagues that would play one town against another town. But at this point, it's -- we're not announcing that it's going to scale. What we're announcing is that we're out testing different ways to do it. And we hope your son gets to go to our theater and try it out.

He would love that. So given you both have a studio background, I was really interested to hear your thoughts on the media mergers that have been announced lately. What do you think Discovery running Warner Bros. will do for a studio output and Amazon finally getting into the game and buying a studio. What do you think about those moves?

Maybe I'll take Discovery, you can take Amazon. First, look, we think that what David brings to this whole ball game is really significant. And we think the combination of Discovery and Warner Bros. is actually one that could be very positive for the overall industry. These are 2 very important brands. They clearly have a -- Warner Bros. clearly has a history in the theatrical marketplace. David clearly has the history of being very talent friendly and very entertainment friendly. So they can't come out and say anything now, obviously, because they're still in a merger process. But we're positive about this combination. We think that this could be very good for the industry. We think it could be very good for the Warner's product. that's been announced and will be announced. And so we're very up on this new opportunity that's going to come forward.

And similarly, we're very optimistic about the Amazon purchase of MGM. We look at it as as some of the traditional studios have been getting into streaming, clearly, these larger established streaming platforms, whether it's Netflix, Amazon Prime, they are developing more and more film production capability, and they're investing more money into making bigger and more diverse [indiscernible] content. And as the studios are going with streaming, we're seeing, like we were talking out with Army and the Dead, the traditional streamers are looking to theatrical as a way to help elevate and differentiate their content. So we look at it as a positive that you got a company like Amazon coming in, who's clearly got the intent to invest more in content, take this IP from MGM, use it to staff for. And that just leads to more overall content ultimately for our screens and opportunity out there. So we look at just investments in content and making more varied types of films as an overall positive for the industry. And similar to the conversations we've had with Netflix. We've been having conversations with Amazon, too, about potential opportunities there.

Okay. So getting back to the business fundamentals, concessions per caps have been really positive recently. And I think both you and AMC and others have said that early adopters early fans coming back, we're just super excited and just buying a lot. But I'm wondering, is that still going on? Is that -- is mobile driving that? What's going on there?

Well, definitely, I mean you said it. It's still going on. We would expect it to continue for a period of time. We do attribute it largely to people who haven't been to the theaters for a while, coming back and somewhat overindulging and over-indexing in their consumption. We heard time and again during the course of pandemic from our guests just how much they missed, not only moviegoing experience, but that movie theater popcorn. And we're seeing it now in their consumption behavior with their purchases and incidents going up and up as they return to the theater in these early days. And as more and more people come back, we expect the same -- we do think that over the time here that things will settle back a bit to their pre-pandemic levels, both in terms of kind of the per caps as well as the per cap growth trends. Our digital Snacks In A Tap offering is fairly new. It's another area that we've seen great early results. We think that will just be 1 more addition to the many new types of things we've added into our food and beverage distribution and offerings that will just help us to sustain per cap growth into the future. So the early days, the over spiking is really kind of that over indexing, but we're encouraged that we have the right kinds of opportunities in place to have sustained growth into the future.

And are you ramping up the menu items? Or like when is that going to be fully back up to full expanded menu?

We have started reintroducing some of our enhanced offerings and expanded offerings. We're going to continue to do that over the next few months. Part of that, the kind of balancing act with that is multifaceted. One is, we're obviously ramping back up. We've got a lot of new employees, a lot of rehires. So there's a lot of moving pieces, and we want to be careful that we don't throw too many things at them all at once. Because ultimately we're really hyper focused on giving our guests just a great experience when they come back. We don't want hiccups. And the other balancing act is just trying to get a better handle on what kind of more of a stable attendance expectation is. Things are coming back faster than we expected. And on one hand, we don't want to over order and have a risk of perishable things going bad and having waste. And on the other end, we don't want to be advertising and promoting something, and then our guests come in and we've run out because we didn't order enough. So right now, we're focused on our core. But as I said, we've already started putting some of the expanded items back in. We're going to continue to do that over the next few months.

And what about your other cost buckets, like we hear a lot about labor and having trouble hiring this year? What's going on there? And anything else that you've been able to cut out of the budget since you're back?

Well, the hiring situation, it certainly is a challenge. We're, like many other retailers out there We're -- we've been hiring thousands of field employees back in. So you've got that kind of challenge of a lot of other retailers are in that same camp. So there's a lot of demand for people, and there's still a lot of people who are either hesitant because of the pandemic to go back out into the workforce or are still enjoying the benefits of the stimulus money, which is also a little bit of a challenge in the near term. We have the benefit of flexibility of our hours just because of the way the content ebbs and flows. We also tend to stack a large part of our summer workforce with college students and high school students who aren't dependent on the stimulus money. They're really looking for a way to generate some income to bring back to school, and they're happy to have more of those flex hours and obviously working in a movie theater. It's fun. You get to see movies. So we have that advantage. So the challenges are definitely there. They haven't been insurmountable for us yet, something that we're very focused on, though, obviously, as we're getting more people back. As far as kind of our cost structure, we've been very focused on finding incremental efficiencies. We've been working on a range of productivity actions throughout the course of the pandemic. One of the biggest things we've kind of reset all of our stacking templates prior to the pandemic, our minimum labor requirements was a bit of a theoretical exercise, but we've obviously been operating in somewhat of that mode for a month. We've learned to operate with fewer resources than we thought we initially could. So that will be something that resets the foundation, and we'll have benefits as we move forward. And then there's been a range of other things we've been working on as well as we'll continue to work on going forward just to gain incremental efficiencies.

So what does it all sort of add up to? If you get back to 2019 levels of attendance. Do you have the potential to have better EBITDA, better margins? What is -- what are you -- what can you tell us about how the cost structure is fundamentally changed?

Sure. I mean, that's kind of been our focus. There's obviously still a bit of uncertainty as to where the kind of attendance settles back? How fast it may recover to 2019? So we've been working on these varied initiatives, both to cover any shortfall in attendance in the near term relative to 2019, but to the extent that things come back quicker and get back to 2019, it just presents upside. So I would look at it as were we to get back to 2019 attendance levels, we would expect that our EBITDA would recover comparably to that and likely be a bit better as a result of these various productivity efforts that we've been working on.

So in the meantime, I guess, the cash burn, how is that running lately as you guys are certainly not in a position where AMC is. But how is that trending lately with the movies opening?

Well, we feel like our liquidity is in a good position. We mentioned at the -- in our first quarter earnings call, we closed the first quarter with a little over $510 million of cash. That actually increased in April to about $645 million as a result of some tax refunds that we got in April. At the start of the year, we were expecting about a monthly average burn rate for the year of about $65 million per month. At the end of the first quarter, we communicated that had already reduced to about $50 million as we were looking for really as a result of just improved operating results and better performance as the recovery was kind of kicking in. Clearly, we expect that's just going to continue to reduce as more and more people are coming back to our theaters. But even at that level, we saw a runway that would get us through into the second quarter of 2022 without any incremental liquidity raises. And we still have a range of levers at our disposal. We don't have -- our revolver is undrawn, the other borrowing opportunities should we need that. Although we don't believe at this point in time that we will have a need for incremental liquidity beyond some of the actions we took during the course of the pandemic. So we feel like we're in a great position here as things are continuing to rally back.

So I think we have a few minutes left. So Mark, are you looking at any theaters that are available for sale? I know ArcLight is out there, but I hear they're asking a high-price Would you consider adding to the portfolio here?

Meghan, the answer is yes. We look and review every potential deal that's out there. I think the anticipation in the heart of COVID was that there was going to be more theaters that were actually going to be going back to a landlord or looking for a sale. Even those that went chapter 11 are typically operating within Chapter 11 and they're going to come out of chapter 11 just with new ownership. So they're not really changing hands. They're -- effectively, they went to the lenders, and they're going to be come out of bankruptcy and continue to operate. Relative to whether it's specific ArcLight or anyone like that, of course, we're looking at that. And one thing that we've done over the course of the past 6 or 7 years that Sean and I have been involved and even prior to that, is Cinemark has been very disciplined in our approach on M&A. And we will do our analysis, we'll sharpen the pencil and we will come up with what we think the value of a particular asset is. And if the price goes beyond that asset, we're very willing and able to turn our shoulder and say, thank you very much, but this isn't right for us. We're going to continue to do that. So we'll look -- again, not only a specific ArcLight, but we'll look at anything else that comes to the marketplace. And I would say that we would be really open to those kinds of acquisitions. What I would say is an opportunistic availability. In other words, we're not going to overpay for assets. We don't feel like we have to. We've increased our market share without acquisitions during the pandemic. We have 4 brand-new theaters that are opening up this year. We anticipate all 4 of those to be very significantly successful. And if opportunities come our way, and we also seek them out, then we will take it. And that could be either with a landlord, it gets a property back, it's looking for someone to operate it potentially with a fixed lease, but potentially on a management deal as well or we're open to a fixed lease deal if the terms are correct and we think the opportunity is there. But again, Meghan, I would just emphasize, our strategy hasn't changed, and that is be very disciplined in your approach to taking on new fixed lease assets and consider yourself -- consider all the ups and downs there. We've done that, I think, very successfully over the past 6 years.

You sure have. Well, thanks, guys. I appreciate you being here again this year, and next year, hopefully in person, like we said.

Thank you, Meghan. We appreciate it very much. Okay.

Thanks, Meghan.

Thanks.

Okay. Bye now.