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

Okay. We're going to get started. Good afternoon, everybody. I'm Ben Swinburne, Morgan Stanley's media analyst. A quick disclosure statement. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. Now that I've read that for the tenth time today, get that out of the way, we're really excited to welcome to the conference Cinemark and for the first time in person, CEO, newly promoted CEO, Sean Gamble, and newly hired CFO, Melissa Thomas. Sean and Melissa, thanks for being here.

Thanks for having us.

Absolutely. I think all of you are aware, but just in case, Cinemark is a leading global film exhibitor with theaters throughout the U.S. and Latin America, including here in the Bay Area in San Francisco. So thanks again.

Maybe, Sean, we'll start with you. You've been with the company since 2014. You took on the CEO role fairly recently. What are your priorities for the company now that you look out and, hopefully, beyond this pandemic as you sort of look at this reimagining this business?

Sure. Well, I would say in the near term, and this will include the pandemic, but there's really 3 main areas we're focused on, first is continuing to navigate the ongoing effects of the pandemic. Obviously, we've seen material improvements in the state of the health environment over the course of 2021 and certainly over the past month, but we're still very mindful of managing our operations appropriately, expense management and just overall liquidity. In addition to that, reigniting theatrical moviegoing, which entails getting back to a more steady stream of new film releases, so working actively with the studios in order to drive that as well as improving consumer sentiment and awareness with regard to returning to coming to the movies. And then the third area is just positioning our company for ongoing success in this evolving media and entertainment landscape while the emerging new norms are taking shape. And that involves a range of things, starting with taking the entertainment experience we provide our guests to a new level through premium amenities and elevated guest service, includes building audiences more broadly by focusing on a wider range of diverse content and leaning into our marketing strength in order to attract consumers to our theaters, looking at new sources of revenue opportunity, also streamlining our processes to do all those things as efficiently as possible while optimizing our footprint as the last -- looking at how we can continue to grow optimize, recalibrate and strengthen our circuit as appropriate in the new environment.

Got it. Well, I want to touch on all of those priorities as we have this conversation, but I want to ask Melissa. Now that you've come to Cinemark, what attracted you to the role and to this company and this industry?

Yes. So a couple of things. First and foremost, the people and the culture. Cinemark has a strong company culture and a really strong management team. So that was certainly a factor. And second, I would highlight interesting industry and a very dynamic one. For me, when I see an industry that's going through as much change as the industry that we're in, it provides -- with change provides opportunity. And for me, it was really exciting to be able to come in and partner with the team to capture that opportunity and really help evolve in this post-pandemic period.

I think we're all trying to figure out what the movie business looks like going forward. You've had this unfortunate forced experiment on the business over the last few years. But I'm wondering if you could talk, Sean, about what you guys have learned about the company and the opportunities and how you run the business that maybe you never would have learned had you not had to go through the last couple of years.

Sure. Well, I guess to start with, I would say an area of validation of just how incredible our Cinemark team is in being able to navigate what they've done over the past 2 years. I would also say validation of what we long believed prior to the pandemic of the value of having a strong balance sheet. We've seen how that has truly been an asset as we've dealt with everything we've had to deal with during the pandemic. As far as lessons learned, I would say one of the biggest things is just the importance of staying nimble and flexible. Obviously, there's been so many starts and stops with regard to content flow and surge of variants. It's really required a lot of flexing. And we were fortunate to have worked quite a bit on enhancing our processes to be able to tackle that. And by way of doing so, we were the first major circuit to be open and stay open. We were able to more than cover our variable costs during the course of the pandemic while being open. So it was actually more beneficial to us remaining open than being closed. The other thing I would say is we also -- prior to the pandemic, it was always more of a theoretical exercise in terms of what our base level of minimum labor is to run a theater. And unfortunately -- I guess fortunately or unfortunately, we got a firsthand look at that when we reopened and we're dealing with highly reduced levels of attendance. But as a result, we were really able to fine-tune many of the processes we've had, and that's generated material productivity that's going to continue with us along the way. So it's another learning we had that's going to be to our future benefit going forward.

And I know it's not your job to try to forecast the future. That's what we try to do, usually incorrectly. But how do you think about the post-pandemic movie-going audience compared to what we saw in all those years before? And do you think it's changed? Do you think it's smaller? Do you think it's different from a demographic point of view? How are you guys sort of preparing for all that as we hopefully are coming into it over the next couple of years?

I think our sense is in time it will be reflective of a similar demographic to audiences pre-pandemic. We're already starting to see that. I mean we're highly encouraged by several of the recent examples of film performance from the third quarter, fourth quarter and certainly into this year that have just validated ongoing consumer appetite and demand to see great films in a shared immersive cinematic environment, right? So there's an ongoing sustained level of interest theatrical moviegoing, which we think when the health environment fully improves and moviegoing is fully back into swing, that's going to be encouraging. And that will cut across all audiences, and we started to see some of the areas that have been lagging already recouping in the near term. So I think we're encouraged by the overall demographics returning to some of their pre-pandemic levels.

Yes. I think one point that I would just add there is that, as we have seen consumer confidence increase, that is bringing those audiences back. And one data point that we look at based on some NRG surveys that are out there, latest data shows that 82% of respondents are now comfortable with moviegoing and most 88% are comfortable doing so in a month from now. So those are really encouraging signs for us, particularly given the strong film slate ahead.

And you guys, for many years ahead of the pandemic, you were investing in premium amenities. I know you mentioned that in your opening remarks, Sean. Is that something that you think you guys will look back and -- or lean back into, excuse me, for the bad pun, as you look forward in terms of really training to try to differentiate the product versus other options? Or are you happy with sort of where you are from a footprint point of view?

So in 2022, we do intend to step up our investments in our theaters once again, albeit below pre-pandemic levels. But our planned investments do place a focus on -- or reflect our focus on premium amenities and include recliner conversions, premium large format screens and laser projector conversions. I would highlight on the recliner front that we do have the highest recliner penetration already out of -- amongst the major players, but we do continue to add more recliners and expect to this year and every new build that we do also features new recliners. On the premium large format side, I'd also highlight there, we are looking at investing in additional XD screens. But in addition to that, leaning into marketing campaigns to really drive awareness to that overall experience. And beyond that, food and beverage is also another area of focus as it pertains to premium amenities.

I would just add to that, to your earlier question on crystal ball the future, I mean we've certainly seen trends recently of an uptick in consumption of those premium amenities as moviegoing has started to resurge. That's a trend we think will likely continue going forward in all the areas that Melissa just described. So it's an area that we certainly plan to lean into and take full advantage of as we go forward.

Yes. I want to come back and dive into that a little bit more. But before I do, I certainly want to hit the sort of windowing question because we have to. I'm sure Mark misses me asking about premium VOD. He's not here, but it feels like, in many ways, that debate is -- I wouldn't say it's resolved itself, but again, the pandemic has sort of forced change. I was just talking to Bob Bakish earlier today about their 45-day approach. Do you feel like the industry is sort of settling into a new window strategy and that it's something that you guys feel comfortable operating in or maybe even feel better than comfortable operating through?

Sure. It's interesting. I tend to think that there may not be necessarily just a single model going forward like there was prior to pandemic. There could be a range of scenarios. That said, as you just mentioned, most of the more meaningful commercial and higher-quality films tend to be converging toward a 45-day window. Numerous examples of films released recently have demonstrated, again, even in this environment, the value of a theatrical window in terms of generating bigger box office results, reducing piracy, creating larger cultural moments and just overall increased revenue generation. So those are all near-term benefits of a theatrical window. In reality, there's long-term value that a window provides to studios and content in the ways that it elevates the perception of films. It creates a greater overall emotional connection with the movies and the characters and the worlds that are created. And all that leads to a greater scale of brand building and greater promotional value like we've seen forever that a theatrical window has provided a content that will benefit streaming platforms and all ancillary windows. So we think, simply put, like our expectation is that there will continue to be a window of some form, like 45 days under the higher content because it's just -- it's in the best financial interest of everybody.

And do you guys see an opportunity with the likes of Netflix, who was on the stage earlier today, and Amazon to sort of do more with their theatrical [apps] obviously. Even Apple, they're all getting bigger in the business.

Absolutely. I mean we're certainly optimistic about all of those companies getting deeper into film creation. Some of the traditional studios have been trying to catch up with those companies in the streaming world as those companies have been investing considerable money into making films in a grander scale. They have been ramping up their theatrical distributing capabilities because they're seeing the value of releasing those films, again, promotionally, how it just improves and enhances the perception of that content. It's also very important to the creative community, which we can't forget. And it's a way for those companies to attract the bigger filmmakers to making movies. So I think we're very optimistic. We've been testing a range of content already, and we've got more coming in terms of the potential for a wider range of content sources from those companies going forward.

So when you think about the shifts in windows, but also the expansion of who our studios and the impact on supply, all the health issues that we've gone through as a country and really globally, are you willing to sort of put a number on what you think the industry looks like long term relative to that $10 billion to $11 billion we saw in the past? Or you're going to pass?

I'm not going to take the bait on that, although I would say, look, we're optimistic how things ultimately play out in time. We just -- we talked about how there really is a lot of promotional value. So we think that that's not going to go away, and we really think that's going to be -- continue to be a benefit to all the content suppliers. You mentioned -- your question just a moment ago about new content creators really coming into the game and providing incremental opportunities. So I think there's a scenario actually where we could see over time more volume of films being released versus less. The other thing I would say, too, to that end is one of the challenges prior to the pandemic that some of the traditional users' experience was on a smaller to mid-tier films because of the rigid window, right? So the cost to make and market those film had gotten to a place where it was just -- it was a tougher financial model. So in some ways, a shorter -- slightly shorter window, a more dynamic window actually leads to a more viable model for those films. I personally could see a situation where more of that content starts to come back, the romantic comedies and the raunchy comedies and the dramas, which we've seen far fewer of in recent years, because there is a greater opportunity for those. So again, it just leads to more volume and potential.

So let's talk a little bit about market share because you guys have a really nice story there during the pandemic, but it seems like maybe we're going to continue to see share gains from Cinemark relative to pretty pandemic levels. What's driving that? And sort of what's your confidence of your ability to sort of maintain some of that market share you've picked up?

Sure. We're certainly going to be focusing on more gains. Probably the biggest driver to date of the lift we had and the step function we had was just the fact that we opened up before everybody else. And in doing so, a lot of guests who maybe previously had been going to our competition came to our Cinemark theaters, got exposed to the experience and the amenities and the food and beverage that we offer, and they've continued to come. And we built a lot of goodwill and loyalty as a result of that. So we've been able to sustain those guests as we've gone forward. Now we do think that there will continue to be some additional normalizing as everybody is fully open, everything gets back into full swing. However, we're going to continue to be aggressive in our marketing to drive that sustained benefits, leaning in, as we talked about a moment ago, to the premium amenities and guest service as a way to maintain that value and continue to create a distinction between our offering. Cinemark has for a long time had a perception of value. So we want to maintain that concept that, that perception as well with our guest base because we think that also leads to sustained loyalty over time.

Yes. And on the monetization front, we've seen really strong numbers out of you guys on the per caps concession. And we're trying to figure out how much of that is just the pent-up -- the consumer finally getting to go back to the movies and maybe buying more popcorn than they used to versus something that's more sustainable. And you sort of hinted at it earlier, Sean, you think that it may be something that will continue. But what are you seeing in terms of consumer behavior? And what are you guys doing strategically to continue to monetize that strongly over the coming months and quarters?

We've been really pleased with the outsized growth that we've seen in concession per cap over the pandemic period and really over 2021. Domestically, our concession per cap were over $6 really throughout 2021. We attribute that to the point you made, Ben, some of it is just higher indulgence in concessions as consumers do come back. We also believe that we have kind of a favorable audience mix that has skewed towards consumers who purchase -- have higher purchase incidents, and then our operating hours, which we have -- while we've reduced them, they are concentrated in those periods that are more conducive to concession consumption. As we think about the go forward, we do certainly expect some normalization there, but we are deploying strategies to try to maintain those elevated per caps to the extent possible. A couple of areas that I would highlight. The first is really leaning into Snacks in A Tap. That's a product that we launched in late 2021. Now we have the opportunity to really promote it and drive adoption there. It creates a frictionless experience for the customer who can now purchase their concessions with their app and have delivery to seat, also gives us the ability to up-sell and cross-sell to those consumers through the app. So we're leaning in there. The other benefit, too, is it creates shorter lines for those who want to purchase concessions in a more traditional way. Proactive category management is another area. So reactivating some concession offerings that we did not provide during the pandemic, also expanding our offerings to include new products, flavors, et cetera, really just to drive purchase incidents. And then the third piece, I would say, would be strategic pricing. We do think we have some opportunity, and that's something that we continue to evaluate.

And how are you guys thinking about ticket pricing? Especially just given we're in such inflationary environment, do you -- you guys have always been pretty conservative there, but it seems like there's some tailwinds on that as well.

Yes. So our strategy overall -- our primary objective is really to maximize attendance box office and then further monetize with ancillary revenue opportunities. That said, we do believe that there is an opportunity on the pricing side. We look at that very strategically. We're looking to leverage data and analysis to get more sophisticated with our pricing over time. We're not deploying a one-size-fits-all strategy. We're definitely playing segmentation and de-averaging. We're currently testing into it to really see how elasticities have evolved over the pandemic period. And then from there, we're making adjustments on the price side. I would mention that there could be increases in some cases, decreases in other cases, but all with an eye towards maximizing, making sure that we're not hampering demand. We want to make sure that we're maximizing the attendance that's coming through.

Increasingly getting to more dynamic pricing on a sort of real-time basis. Let's shift to sort of the efficiency side and cost and margins because, obviously, you've been through a lot over the last couple of years, as you mentioned. How do you think about sustaining or returning to pre-pandemic margins on maybe what could be a smaller business? You guys have learned how to flex your cost structure quite a bit. But what are your thoughts there?

Yes. So on the margin side, I think I'd highlight that we've historically had industry-leading margins in the pre-pandemic time frame. And as we look to emerge from the pandemic, we certainly have an eye towards delivering strong adjusted EBITDA margins. A couple of factors that I mentioned first that the box office is, as you know, that the single largest driver of our EBITDA margins, given that we do have a percentage of our cost structure that certainly is more fixed in nature. But as we think about the go forward, there's a few things that I'd highlight outside of the box office, first, on the top line side, we talked about how average ticket prices and concession per caps have been elevated over 2021. As we look forward, where -- while we have strategies to maintain those elevated levels, we may see some of that normalize. So that's something that we're certainly placing focus on. And then the second side, I turn to the expense side. And there, while we've really had an eye towards driving efficiency and continue to do that with various productivity initiatives particularly on the theater labor side that have had success there. We also, like many other companies, have experienced wage rate inflation as well as COGS rate impacts driven by supply chain constraints. So I'd say there's lots of puts and takes there, but we certainly have an eye towards trying to offset some of those headwinds that we've seen.

Okay. And I wanted to ask about Movie Club and how that fits into your strategy. And how has retention in that product done during the last couple of years now that we're -- you're sort of turning it back on again?

Yes. Look, Movie Club, currently, much like it was pre-pandemic, remains a key initiative and priority for us. We've seen how it just -- the program has driven tremendous loyalty. It -- we continue to see -- it's a great channel for communication with those members and engagement with those members. One of the things I would point out that's great about the program is because of the features for rolling over credits and sharing credits with guests, it has tremendous versatility. So if you're a moviegoer who goes 3 times or more a month, it's a phenomenal program. But it's also a phenomenal program if you're a family of 4 and you go to the movies 3 times a year because of its versatility. So it has really broad reach. And we've seen that in your question on retention, the degree of retention that we've had. We fully reactivated Movie Club over the course of the summer, really through July. And between July and year-end, we've already returned to weekly gains of new subscribers and at year-end, we were within 1% or our pre-pandemic membership levels. So it's just -- it's a great indicator of how well received the program is, is going to continue to be a big strategy for loyalty for us. It's just a great value and convenience for those members.

Great. How about on alternative content? We talked a lot about the unknowns, the known unknowns in terms of the movie business, but you're sitting on really interesting distribution assets. Are you thinking differently about content than you have in the past? And what should we be looking for?

Sure. Look, we've been advocates of alternative content for quite some time. And if anything, I would say, it hasn't met its potential in prior years but it's something that we're continuing to dig into. We've had numerous events recently and over time that just show how engaged fans are for some of these. Like we've done examples in the gaming space in traditional sports where there are events. I mean one example that we just did at year-end with ESPN, we were showing the NCAA football playoffs and championship. And the guests that came to our theaters to watch were just showing -- like the enthusiasm was through the roof, like the guest satisfaction of having these events where people come together as a community and get to see these things on the big screen and enjoy it together, even though it's free at home, we have people generally paying high ticket level prices to just come and enjoy these things. So all that being said, we're -- we continue to be encouraged about the enthusiasm. It's all boiled down to finding sustained scale of content to put through that channel. So we're dabbling in a range of different areas to continue to find that, but we're encouraged about the potential. We think there is growth opportunity there.

I could see that with the Alabama watch party over here and a Georgia watch party over there. I can see people paying for that.

Absolutely. I mean this -- I'll say this, this coming weekend, there's a BTS -- we're hosting a live BTS concert. I mean like the heat on this is through the roof globally. I mean there's such a huge fan base and being able to come and see this event in a big theater together, it's just another example of the potential in this space.

I can definitely relate to the college football. BTS is not on my age range. That's more my problem. Maybe in the couple of minutes we have left, I want to make sure we hit Latin America, which is obviously something that has been dealing with a lot of the same issues here. But where is that business in terms of the recovery? And what are your expectations?

Latin America has made a tremendous ground. So throughout the pandemic, LatAm trailed the U.S. probably about 2 to 3 months. A big part of that was early on was just due to the lack of availability of vaccines. That has changed. At this point in time, actually, most countries in Latin America have leapfrogged the U.S. in terms of vaccine penetration. So there are higher vaccine rates in LatAm currently than the U.S. We saw how film content rebounded and film going rebounded in the fourth quarter comparable, if not even stronger, to the U.S. So I think they've picked up some ground. They're still trailing a little bit simply because there still are some government capacity restrictions in place that we don't have here in the U.S. But we're highly encouraged about ongoing improvements in that area as those capacity restrictions wean over the coming months and the long-term prospects of the region. I mean this is -- these countries moviegoing is still a big part of the culture. It's a very family-oriented event that takes place. We've seen that with Spider-Man. We saw this past weekend with Batman, I mean it's just -- it's a great moviegoing community. We think there's a lot of under-penetration across the region. So we're encouraged about the long-term prospects as we've always been.

Great. And maybe to close, just to ask you on sort of capital allocation and the balance sheet as you guys start to lean back in on CapEx. What do you -- how should we be thinking about capital spending this year and going forward? And what are your priorities around capital allocation?

Yes. So we've historically taken a balanced and disciplined approach to capital allocation and really been guided by returns. As we think about our capital allocation priorities for this year, it's really going to be around strengthening our balance sheet and making sure that we're making the investments we need to make to position the company well for the long term. And then as you think about balance sheet and the company kind of leading into the pandemic and through the pandemic pushed out maturities on debt to late 2024 or 2025 and beyond. So while over time, delevering is a priority, this year, we'll likely just focus on looking to address high interest rate debt versus delevering.

Great. Well, listen, I really appreciate the time, and I look forward to talking not about post pandemic as we get back together next year. Thanks so much.

Thanks for having us, Ben, really appreciate it.

Thank you.