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

Good afternoon, everyone. Sorry, we had some technical difficulties, but next up, we have Melissa Thomas, the CFO of Cinemark. Melissa, thanks for being here. You came to Cinemark about 6 months ago, right? And you were from tech background, and moving to exhibition is kind of an interesting time for the industry.

So I wanted to start by asking you, from this perspective, what's the most interesting thing you've learned so far about the exhibition business?

So first, thanks for having me today, Meghan. It certainly is an interesting time for exhibition, and this is a dynamic industry, which is one of the key drivers of my decision to join Cinemark. The opportunity to partner with the team to evolve the company for success in a changing landscape is something that was enticing to me. And as for what I've experienced thus far, there's a few things I'd highlight. Overall, I've been really impressed with how nimble the organization is and how quickly our team adapts to change. This was not only the case during the pandemic, but even as we emerge and begin to recover, our execution capabilities are really strong. I've also been amazed at how much the moviegoing experience has changed over the course of the past 5 to 10 years, including premium amenities like D-BOX and XD as well as mobile concession ordering. The list goes on and on. But there's still much potential to evolve the business, and I really look forward to working with the team to do just that.

And what are your first strategic goals as CFO?

Yes. So first and foremost, my goal is to support Sean and the rest of the team in executing on our strategic priorities. So that's going to include effectively navigating through the pandemic, reigniting theatrical moviegoing and evolving Cinemark for success in this post-pandemic environment. Also leveraging my background in tech to help the company maximize its data capabilities to identify revenue opportunities and drive efficiencies. And then the last point that I'd highlight is, from a capital allocation standpoint, really helping the company strikes the right balance between investing in the long term, while we, at the same time, refortify our balance sheet.

So this is our third virtual conference. I know you weren't at the prior two, but we've been talking about reopenings and closings for the last 2 years, but now content is starting to work, and it feels very encouraging. Top Gun, Jurassic World did really well. How are these titles playing at Cinemark? And are you maintaining that higher market share of the box office?

So we've been really pleased with the performance of both films. I'll start with Top Gun. Top Gun: Maverick had an impressive opening weekend, and it continues to hold incredibly well. In fact, it had the best holdover percentage of all time for $100-plus million opening film. It also -- as it pertains to our theaters, it successfully brought back those older audiences and females to the theaters, which is exactly what we had hoped for. And based on our analysis, more than 25% of our customers that came to see Top Gun had not visited a Cinemark theater in the past year, and more than 30% of those customers were over the age of 55. So we were really pleased to see that. And then one other data point that I'd call out on Top Gun was that it was one of our best XD results as a percentage of box office for a film of that size. So really, really encouraged there. On Jurassic World Dominion, also a very strong opening and delivered a box office essentially in line with the prior film, Falling Kingdom. We expect Jurassic World Dominion will continue to play well. Our circuit does tend to skew more suburban and family films like Jurassic tend to do particularly well for us, and we saw families were really excited to get out and see that film. So really encouraged by the momentum we're seeing in the box office and by the upcoming summer slate. I mean there's really something for everyone. As it pertains to your question on market share, so our share has benefited from us being the first circuit to reopen and remain open. I guess that had never experienced Cinemark before had exposure to our premium amenities, our second to none guest experience as well as a really strong value prop with Movie Club, and we continue to lean into our marketing efforts to really drive awareness of that differentiated experience that we offer. So far in Q2, our market share is within that range. So the one thing I would call out, though, I guess it's important to note that you should expect market share to ebb and flow quarter-to-quarter based on the individual films in -- how those resonate in our markets, which, as I mentioned, tend to skew that more suburban in nature and family-oriented, and then the volume of alternative content and special events in any given quarter. We over-index there. So that can also drive fluctuations, but we continue to expect to maintain a meaningful portion of the share gains that we've seen.

And Lightyear is coming. So it's really the first big, big family film we've had that's -- obviously, Disney hasn't been releasing the biggest films in theaters or doing kind of day-and-date type releases or putting them on Disney+. So do the presales show that families are returning? I mean do you see any evidence of that for this weekend?

So the success of films like Sonic as well as Bad Guys do demonstrate that there is strong demand for family content. I mean Sonic 2 performed better than the original film and was one of Paramount's top releases in the last 10 years. And Bad Guys has had a really great run and does continue to still hold really well. So we expect the momentum in family to continue as we've got a strong slate ahead. We've got Lightyear, Minions: The Rise of Gru, DC League of Super-Pets, to name a few. As we think about Lightyear specifically, presales went on sale last week, and we've been pleased with the numbers that we're seeing. So there is clearly excitement and enthusiasm for the origin story around Buzz Lightyear. And we did get to watch the first 30 minutes in CinemaCon and the footage looks fantastic, so we're excited for that one.

Yes, it did look good. So exhibitors are clamoring for more content. I hear from distributors that it's very, very difficult to date a film, especially the mid-tier films because tentpoles are just taking up all of the screens. How do you think that gets resolved? And it just -- it has to get resolved, right, in order for the business to fully recover.

So there's a couple of things I'd highlight here. I think from a momentum standpoint continues to build, we're seeing outperformance of the films that we are seeing in the box office, but the point you mentioned on volume is important. The volume of content is lower, particularly actually in that small to mid-tier category. We do need a more consistent supply of diverse films for the business to recover. Now -- well, I can't speak for the industry, we will -- we, as Cinemark, will always find room for quality film and that's regardless of the size. And we have several examples that demonstrate that if you look at our strong holdover rates on films more recently like Everything Everywhere All at Once, Dog, Lost City. I mentioned Bad Guys earlier as well as results -- the results we delivered on content such as Jujutsu Kaisen 0, RRR and BTS. So we do have examples of the success that we've seen scheduling the small to mid-tier firms -- excuse me, films. So I can't speak to the industry, but that is something that we certainly do achieve.

You touched on those concerts. So how big of a role can alternative play, if you do need more content and studios aren't providing that?

Yes. So alternative content continues to be part of our overarching strategy, and we're exploring and we're testing opportunities on an ongoing basis there, whether it be concerts like BTS, the multicultural film, sports, gaming. But it is important to note that the Hollywood content does remain our primary box office driver. So the way we think about alternative content is that it has the opportunity to supplement Hollywood content and to drive traffic during those nonpeak times and also allows us to provide a broader range of content to customers. So certainly, a role to play to fill in some of the gaps.

And how are ticket prices in food and bev per caps holding up? They've been really driving your revenue because attendance is obviously down more than your box office and your F&B revenue would suggest. So I just wonder if higher gas prices and inflation is starting to cause consumers to trade down or anything like that?

So our industry has historically been pretty recession-resistant, and even in recessionary times and inflationary environments, particularly coming out of COVID, people still want and need entertainment and going to the movies does remain one of the most affordable out-of-home options. In fact, we've seen in North America, industry box has actually grown in many past recessions. So overarchingly, it's been more of a function of film content in those periods. As we think about what we're seeing today with average ticket prices and concession per caps, those remain strong. Consumers are continuing to indulge on the concession side. We see that in our incidence rates, but we continue to also see them trade up on premium amenities, so including XD. If we look at where we're at on XD right now, it's representing over 15% of our box office domestically. That same percentage pre-pandemic was 10%. So we are still seeing consumers trade up and spend in our theaters.

So you've been spending on marketing to support the recovery. You've been talking about this. What types of campaigns are you doing? And how do you measure the ROI that you're spending? Because others don't seem to be doing as much as you are.

So there's 3 key areas that I would highlight on the marketing front. So our efforts are focused on reigniting theatrical exhibition, growing loyalty and expanding our audience. As you think about the types of campaigns we're doing under that umbrella, there's a few that I would highlight. So we recently launched a new XD campaign and that's designed to drive awareness of our premium large format. As I mentioned, we've seen a nice mix shift there. We want to continue to drive that. We're also promoting Snacks In A Tap, our mobile ordering platform. And of course, we're looking to continue to acquire members for a subscription program for Movie Club. We just reached 1 million subscribers. We're going to continue to push on that because the behavior that we see there is certainly stickier, and we like it. As you think about our approach, I mean it's an omnichannel approach. We are, I would say, approaching it from a full funnel perspective. So we're spending an upper and mid-funnel in areas like Connected TV and paid social. And then in lower funnel, those more conversion-driving channels like page search and affiliate marketing to make sure that moviegoers are exposed to our messaging at each of the touch points they're using throughout their day. Now our spend is guided by our returns and what we're seeing there. From an ROI standpoint, our measurement and pay back horizons, those are going to vary across channels. With the transactional kind of lower funnel spending that I mentioned, it's going to be focused on driving conversion and that's how we're going to be thinking about measuring that. And then when you think about brand-related spend, that's really focused on building awareness over time. So we're very much looking at our returns as well as our cost of acquiring customers across our channels.

Got it. And your subscription plan, how much of your attendance do those loyalty members represent and those 1 million subscription members represent? And how often are they coming these days?

Yes. So Movie Club members, in Q1 specifically, represented about 20% of our overall box office. And if you compare that back to full year 2019, we were around 14% Movie Club members as a percentage of Fox. As you would expect, these are our most loyal moviegoers, which is what we set out to achieve when we designed the program. Prior to COVID, these numbers, they purchased 3x more often than our standard moviegoer, and now we continue post-pandemic to see that our Movie Club members are visiting more frequently. And as the film slate continues to fill out and normalize, we expect that to continue.

Can you walk us through the film rental line? There's a lot going on there, and will the higher marketing expense continue into the future? Is there a chance that, that sort of runs off after next year that eases at some point because it's pressuring you just as you're starting to recover and see a larger box per film?

Yes. Yes. So there's 2 elements of our film rental that I'll take in 2 pieces. So first, with respect to film rental rates, we have been successful in seeking economic consideration with the short and theatrical window. But as we see a higher mix of these larger tentpole films, this will likely offset the benefits that we've achieved there to some extent, given that those films skew towards the higher end of the sliding scale. Our film rental line item does include marketing, as you mentioned, which we have meaningfully stepped up. As we think about the go-forward spend there, our spend levels are going to continue to be guided by what we're seeing on the return front. So we'll be monitoring that along the way as we have been and that will really dictate at what point we level off there. But in the near term, as we're looking to reignite moviegoing, we're certainly going to lean in as consumers are coming back to the theaters.

Understood. And labor has been very topical across the entire market, not just exhibition, but how are things going with hiring for the summer season? Are there any issues with getting kids just when you need more employees?

Yes. So we feel good about our ability to ramp our staffing levels to meet the demands of the summer season. There are certainly locations, though, where we are seeing pockets of hiring challenges, but it's not nearly as pervasive as what we saw in the fourth quarter of last year. So there are some locations that we might have some additional wage rate pressure as a result of the dynamics that we're seeing with labor in those markets, but like I said, it's not near where it was previously. And just as a reminder, in the first quarter, our average hourly wage rates were up about 14% year-over-year. We have been working really hard as an organization to drive efficiencies on the labor front and to build out those tools and capabilities to be much more flexible with our labor hours, and that has allowed us to offset a meaningful portion of the pressure that we've seen on wage rates, which has come along to some extent with the labor shortages we've seen.

Is any of that just more hours as the schedule ramps up? Is that part of that equation getting better?

Yes. Yes. So we've definitely -- our tools and processes have allowed us to flex both our operating hours as well as our labor hours based on our attendance projection. So that scaling up and down has really allowed us to drive efficiencies within our labor.

Now let's shift to Latin America. The tentpole slated this year seem to play well in most markets, but how are the consumers holding up down there? And is the recovery progressing as it was expected to?

Latin America has, for most of the pandemic trail the U.S. recovery, by about 60 to 90 days. But at this point, vaccination rates have more than caught up and are actually higher than where most countries are at, and COVID lockdown now been predominantly lifted. So the recovery is progressing more in line with the U.S. at this stage. And Latin America is a very strong moviegoing culture, and we see that continue to play out. It's -- if we think about the conditions there, it'd be remiss to not point out you have economic, political and inflationary environment that has been quite challenging in Latin America. But we continue to see consumers to return to the movies, but the -- in Latin America, consumers are more accustomed to these types of environments. But the underlying trends, they do remain encouraging, but they are offset to some extent by foreign currency deflation that we're seeing, but we feel good about the box office recovery in the region. When we think about the balance of the year, the film slate, we do think caters well and will play well with consumers there.

So is there a way to help investors with margins as the business recovers and ramps up here? And thinking about it versus pre-COVID 2019 margin structure, what are the biggest swing factors that we should consider? And are operating hours getting back to the pre-pandemic levels? Do screen closures impact the margins, COVID protocols rolling off, what -- anything that you could talk to, digitization, those types of things.

Yes. Yes. So biggest swing factors for us, as we think about our adjusted EBITDA margins and recovery going forward, is going to be the degree to which attendance and box office recovers and the timing of that. So that is the single largest factor. But there are other notable drivers that are important to consider. We've talked about average ticket prices and concession per caps remaining strong. Those are well above where we were at in the pre-pandemic timeframe. We're certainly executing on strategies to look to sustain those elevated levels, but we could see some normalization to the extent operating hours expand and audience mix returns to more normal levels. On the cost side, I also mentioned we talked about labor shortages, wage rate inflation. We're also seeing supply chain pressures and inflationary costs on the concession cost side, which is consistent with what you're hearing broadly from companies, no doubt. But we're working to offset the impacts wherever possible, again, whether it be labor productivity initiatives or on the concession cost side, broadening our supplier base and looking at product alternatives and then also evaluating price increases. So those are, I would say, the main puts and takes, but specific to your question around operating hours, I mentioned that we now can flex more quickly there and expand and contract both operating hours and labor hours based on projected attendance levels. So that being said, it is unlikely that we'll return to 2019 levels of operating hours for a full year. But depending upon film content, you might see periods where we'll be at 2019 levels, and then it will go up and down depending upon attendance. So we expect that to ebb and flow, but not get back to 2019 levels for the full year.

And how should that translate to free cash flow?

Yes. So for free cash flow, it's going to be similar to the factors that we just discussed with attendance and box office recovery being the most important. Outside of the other key drivers that we talked about, our CapEx levels, which we've indicated we expect to be much lower than 2019, which was around that $300 million mark, we're estimating $125 million of spend this year. So CapEx levels will certainly be a factor and then overall expense management as well. Maybe other point that I would call out is just working capital items. Given that we're in a recovery period, there'll also be some working capital dynamics at play with release timing of box office coming in and film rental payments. And then you always need to keep in mind the timing of our interest payments and how those are weighted, but we, as a company, are going to continue to remain nimble and adapt in this environment and cash flow certainly an important focus of ours.

Let's shift to the balance sheet and capital allocation priorities. Can you remind us your priorities? And what would give you the confidence to reinstate the dividend?

Yes. So our current capital allocation priorities are centered around both strengthening the balance sheet as we emerge from the pandemic and then positioning the company well for the long term, so making the right investments we need to do so there. In terms of the timing of dividend reinstatement, that's going to be heavily dependent on our near- and long-term cash flow projections, which are going to be a function of the timing of box office recovery. Ultimately, a decision on the dividend will be a Board decision, but based on what I mentioned our current capital allocation priorities to be, we, along with the board, would evaluate the optimal timing to reinstate our dividend within that context.

And anything you could say on those higher interest notes that you have, the 8.75% notes that are outstanding and then the convert as the stock price recovers.

Yes. So both of those were incremental debt that we took out during the pandemic period. So I'll start with the 8.75% notes. I think one important call out is that even leading into and during the pandemic, we successfully pushed our debt maturities to late 2024, 2025, and in some cases, beyond that. So we do have the ability to be opportunistic about how we address the 8.75% note. So if and when market conditions warrant, those are -- we will look to address the 8.75% notes. That is our near-term priority as I think about capital structure and what ultimately we would like to address first. And then over time, of course, our goal would be to delever. As for the convertible notes, the notes do not have a provisional call feature. There is, however, a contingent conversion feature where holders can convert their notes if our stock price reaches or is greater than $18.66 for at least 20 of the last 30 days -- trading days of the prior quarter. It is important to remember though that we have a call spread that we purchased at the time we took out those convertible notes that protects us from the impact of any stock price movements up to $22.08. And we do have the flexibility to settle in cash, stock or a combination thereof. So that is at our option, but no call feature there.

That's helpful. Well, thank you, Melissa. We appreciate you being here and of this information, it's very helpful. Appreciate it.

Thanks so much, Meghan. Appreciate your time.