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

Good morning. We're going to get started. I'm Ben Swinburne, Morgan Stanley's media analyst, Quick disclosures. Please note important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. Really happy to welcome back to the conference, Sean Gamble, the CEO of Cinemark Holdings. Sean, good to see you. Thanks for coming.

Thanks for having us Ben.

I feel like whenever we talk to you, whatever happened the prior weekend shapes the entire conversation. So it's nice to have an outperformance coming into this week.

Maybe before we talk about the box office, can you tell us a little about Cinemark's strategy to sort of grow the business and what your priorities are as you guys look to continue to see the business come back from the pandemic?

Sure. Maybe I'll start in reverse order. You just mentioned it. Obviously, our industry is still in a bit of recovery mode. So when we consider that and we can kind consider where we are with the recovery of content taking place. 2 of our near-term priorities are continuing to navigate this fluid period of recovery, so staying very mindful of our cost management, our margin generation and cash generation in this period. Secondly, just continuing to work on expanding our pipeline of content and audiences as we are looking to bring new content into the flow and expand our reach. And then the third thing I would add to that, which kind of gets into your second piece is just evolving our company more long term for future growth and stability in this dynamic media and entertainment landscape, which seems to be more and more dynamic every day. Specific with regard to growth, I mean, it all starts with the experience we provide our guests. So we're very focused on continuing to take that to the next level. We've been adding more premium amenities to our theaters, looking at e-commerce, trying to make it a more frictionless, easy experience when our consumers deal with us. I mentioned building audiences and content. So we're using all the sophisticated tools that we've built within our marketing department to attract consumers to our theaters and work on new sources of content to have a broader reach. Beyond that, looking for new compelling types of revenue opportunities. So when our guests are interacting with us, there's additional ways to capture more value through food and beverage, merchandise and so forth. We've also been expanding our reach beyond our walls with third-party sales channels and partnerships I guess the last thing I'd call out is just optimizing our footprint further, so to make sure that we are situated in the locations that have the most potential for growth and profitability.

So when you look out, if we assume that the backup is fully recovers, do you think the company will be operating at a higher level, generating similar and even higher returns long term from all these investments that you've made?

Well, certainly, that's our aim and the potential is there. I mean we've been working on a wide range of new revenue and productivity initiatives, right, to improve just our overall efficiencies and opportunities. You look at our results in 2022. We are very pleased with almost -- over $335 million of EBITDA margin that we captured. Certainly, the overall ability to do that will be dependent on the continued recovery of attendance and box office on the whole. There are a number of other factors that influence that too, obviously, some of the tailwinds in terms of just further growing our market share per cap expansion, ATP and then other headwinds to contend with, whether it's inflation on labor or cost of goods sold and just overall potential supply chain nuances. So we'll see. But certainly, our aim is to be able to get back to where we were pre-COVID, and we think we have a good opportunity to do that, but it's going to be a derivative of a number of things.

Yes. Well, let's talk about one of the major derivatives, which is the actual box office performance. Let's start with demand. So if we look at last year, box office was up, but it was $7.5 billion, still way down from 30% plus down from pre-pandemic I think there are certainly some investors and people who think the consumers structurally change their approach to the theatrical experience. When you think about your outlook for the business, and it sounds like you're generally expecting kind of an 8.5 to 9, I don't want to put words in your mouth to $9 billion this year, which is sort of where we are. What do you look at in terms of data points, proof points that the demand side of the market is strong and coming back?

Well, first, let me speak to the part of what I think everybody is looking at when they're coming up with some of those forecasts is just the volume improvements, right? When you look at -- we expect somewhere over 100 wide releases this year, which is up from about 80%, so it's about 25% up year-over-year. So if you just look at that, there's a greater windup volume of films for consumers to see. So right there, that gives you some confidence of growth in box office year-over-year. In terms of demand, we've just seen consumer interest to be really strong in going to the movies. Movies continue to perform across all genres and audiences at levels comparable to or better than pre-pandemic. We just saw a huge result for 3 this past weekend. I look at like the attendance in the audience here, too. I mean all of a sudden, everybody is interested in the Atria think last year, when we did this, there was maybe 3 or 4 people in here. I look at almost to sell-out crowd, right? So I mean, the interest is really strong. And I think that, in particular, is -- and then when we just look at the film lineup for the year, there's a lot of really compelling titles that have a lot of potential to do some serious business. So we think when you put all that together, we're very optimistic about '23, taking a nice uptick from 2022.

Okay. You got ahead of me on the supply question, which is my next one to spend some more time on that. You have relationships and you guys are in constant contact with the studios. I think all of us have heard on media earnings calls about sort of the pivot away from streaming. But what are you hearing from traditional studios? And what are you hearing from the streamers around theatrical supply, not just in '23, but sort of broadly. And maybe even how they're thinking about not just volume, but also windowing, which seems to be also moving around in different directions.

Sure. Well, the general public commentary as well as private commentary has been one of our traditional partners commenting that they aspire to get back close to, if not beyond their pre-pandemic levels of production. So it's going to take a few years likely to get there. But all indicators are positive. I think what we continue to hear is their data is now showing them for streaming much like it's done forever for DHS, DVD, TV that the movies they're releasing theatrically are having a much bigger impact on their streaming platforms, right? So it's creating more overall value for those assets. And as a result of that, they're now leaning into theatrical more heavily like they did prior to the pandemic. So all the indications from the traditional studios are that they aim to get largely back to where they were before. And then on top of that, you have nontraditionals right? You got the new entrants. You mentioned some of the tech companies now that are seeing those same opportunities and also expressing an intent to get more heavily into the space. We're even seeing a nice uptick in alternative content, too, which has been a promise for a long period of time, kind of an unfulfilled promise. But finally, we're seeing with concerts in faith-based and multicultural and anime some movies doing some really big business and a greater amount of volume coming in. So we -- again, we look at all that gives us more confidence in some of the longer-term recovery of overall volume for the industry.

And you have talked about this in the past. I think it's really hard to analyze, I find the impact of shorter windows. I mean if I think about the debates on your industry prior to the pandemic, that was pretty much #1 was the whole elimination of the 90-day exclusive window we're there. You can see it's benefiting the studio's P&L, but do you think you're losing some audience for movies that are leaving the theaters after 2 weeks, 4 weeks, 6 weeks that used to run for months.

I think some of that is still a little bit TBD. I would say in terms of are there any longer-term effects of that. I think one of the good things is, certainly, there was this big unknown, right, which nobody likes to kind of sit with a gray uncertainty out there. Well, one of the positive things is, well, now we've got to get a better sense for the effect. Fortunately, the way things are starting to shake out. Everything is gravitating more towards a 45-day window starting point with larger, more successful films running longer than that and some smaller or softer performing films potentially going a bit below that. And this dynamic window is actually working pretty well. I mean we've seen -- again, we just -- if you look at the results of films and the results of the movies, they're doing business at levels that we would have estimated prior to the pandemic for their performance, and in many cases, even better. I think really the big positive of that dynamic structure is, particularly for the studios, right, is it's a better financial model for them. They can ride the upside in success but mitigate their downside if something doesn't quite work. And what that ultimately, we think will lead to and what they're telling us, it's helping with is more volume, right? They can afford to take more shots because now they know if they miss, they're not going to take a bath on that title. They can get into the home faster, manage their downside. And you're even seeing now some -- they're leaning into some of the movies they made for streaming and putting them out theatrically. We started to see some romantic comedies, which I haven't seen in eon. So we think that mid-tier, smaller film content will start to fill out a bit more because of that, which is a good thing for everybody.

Let me ask you about some of the tech companies because, obviously, if you want to get -- look beyond traditional Hollywood in theory, they've got a lot of capital and are focused on the media business. What are you hearing? And what are your thoughts on Amazon's plans post the MGM acquisition? And I think Creed is an MGM distribution. So I guess we're pretty happy with that one. They've got air coming out, I think, next month. So what do you -- how do you feel about that film? And what are you hearing generally about Amazon's kind of long-term approach to theatrical?

Well, we think all the -- everything you're seeing now is really encouraging with regard to Amazon, right? They've been expressing plans to get more significantly into theatrical distribution for some time, and that's starting to actually take place now. I think I mentioned the reality is we're hearing from all our traditional studio partners, their data is showing them that theatrical movies drive greater interest, engagement, acquisition retention of subscribers for platforms, right? So if it's having that effect for them, it's -- you would expect that, that same phenomenon would be the case for the tech companies, right, when they're trying to attract people their platforms. Amazon, they purchased MGM, -- they've been staffing up their distribution team, their marketing team, their production team, right? So they've really been leaning into putting all the building blocks in place. Now they're starting to capitalize on it. I mean MGM, huge success, way outperformed with Creed III this weekend. And air, I mean the movie is a sensational movie from everybody you talk to, it's really -- and it's really their first big play on is on label. I unfortunately missed it. Everybody on our team who saw it has said it's phenomenal, and everyone I've heard even from other studios who've seen it have commented that it's an outstanding felt. So we got really high expectations for it.

I'll ask you a question that Red Hastings was asked on the deal book, do you think they left money on the table with Glass Union and the approach that they had with that moving? 2-week limited release.

It was 1 week release. Well, look, I think by their own account, they expressed, they thought they left money on the table. That seems to be the overwhelming public sentiment on that film. We certainly were disappointed they didn't take advantage of a more significant theatrical release just based on the overwhelming consumer demand, right? There were a lot of consumers who didn't have the opportunity to see it. They wanted to see it theatrical than they weren't giving that chance. But look, we look at it as a positive step forward, and we remain very optimistic that in time, they'll take advantage of larger theatrical releases just because there's a lot of value to pursue there.

Yes. And maybe lastly, just to complete the tech discussion with Apple. They seem to be obviously best picture last year. So that's got to make them feel good, but they've also got a big Formula One film, I think, headed for, I believe, next year, but are you optimistic Apple will be a major or many major over the longer term in terms of theatrical supply?

Yes. Similarly, Apple has expressed those same types of interest in getting into the theatrical space. I mean, really, it provides a great promotional platform for these films. Apple is very focused on quality, quality of their brand, quality of their products, and that's one of the things that theatrical helps provide for films as they're seeking to have consumers engage more with their devices and their platforms. It's a big help for that, right? So they've expressed plans to do that. They actually likewise, have started scaling up their resources. I mean they just hired Ricky Strauss, who is a longtime career in marketing in Disney. So they've been putting some of the team in place. They're going to be releasing Killers of the Flower Moon through Paramount, which is the Martin Scorsese-Leonardo DiCaprio film. So that's their movie that they're going out theatrically with. They're just doing it through Paramount as a distribution partner. So they're also starting to take some bigger steps into the space, and I think they're certainly ramping up to do that in a greater way going forward.

Okay. Let's talk a little bit more about the company and the performance of late and as you think about the drivers in '23, your market share, as you mentioned earlier, has been growing and it's nicely above where it was sort of pre-pandemic levels. What's driving the share pickup? Obviously, there's a lot going on in the industry -- in your industry. which we don't need to get into here, but how sustainable do you think the market share gains that you guys have captured since COVID, and you keep going over time?

Sure. Well, look, we benefited from being one of the first theater circuits open coming out of the pandemic. So we saw a big jump in our market share as a result of that. And then ever since we've been working very aggressively with various consumer initiatives, marketing initiatives, just showtime planning, loyalty programs in order to maintain a good chunk of that -- those advancements that we made. We've commented that we expect we should be able to sustain somewhere around 100 basis points of the uptick that we -- relative to our pre-pandemic market share levels on a go-forward basis. So we're going to be -- we're certainly going to be working to do that as things continue to evolve in our industry. I would say fourth quarter, we were a little bit higher than that. Some of the things it will fluctuate quarter-to-quarter. Fourth quarter in addition to all those various things I mentioned initiatives to sustain our share advances. We also further benefited from -- to a certain degree, the reduced volume in the marketplace, right? That allowed us to capture a greater share on the larger films just because we could over program them. There was a good degree of alternative content, which we tend to outperform on. So that also supported us. And then 3D on Avatar in particular, we have the brightest screens, the brightest 3D screens in particular, in the industry. And so we were able to utilize that to really over index on that film as well. So that gave us a slight further uptick in even relative to that.

Okay. Let's talk about some of the sort of specific drivers of the business. So one thing we've seen kind of across live entertainment or consumer experiences, has just been really strong pricing and spending growth. I was looking at your domestic concession per caps are up 30% from '19 if we look at '22. And that's interesting and obviously helpful from the Cinemark and theatrical point of view, but we've seen data like that across concerts and parks. And it just brings to mind some concern that maybe we sort of have over -- the consumers sort of come out of the pandemic roaring and that there's some sort of roll back. You guys seem pretty confident you can keep growing the concession per cap, which obviously where there's so much profitability for the business. So talk about what you guys are doing strategically and operationally to maximize that opportunity as you look ahead.

Sure. It is interesting. We've definitely seen a surge in just consumption of services and experiences and things like that coming out of the pandemic, right? And to your point, like we have expected a little bit of normalization of that. We expected it last year didn't happen. We expected a year before that. It didn't happen. Like so we haven't seen that really change. Maybe we'll see some of that going forward. But at least at this point, there's no indication of a slowdown there. When we look forward, we feel pretty confident in our ability with the various initiatives we have to continue to see growth in per caps, albeit perhaps at a more modest level than what we saw in 2022. We're pursuing a wide range of efforts, everything from just continued introduction of new product offerings to further optimizing many of the initiatives we've put in place over the last couple of years just to squeeze more value out of them. We've got a lot of interesting initiatives just in our category management, assortment strategies, strategic pricing, simplifying just the overall ability for consumers to self-purchase, self-select items as well as our online platform, which is still relatively new. So when you just look at all the different things or at least when we look at all the different things that we're working on, gives us confidence in our ability to continue to see sustained growth in the coming years.

That's great. And also on average ticket prices, I think you expect growth in '23 as well. That's also been strong. And one thing we obviously have to think about is sort of the broadening of the box office to more lower-priced dayparts, more budget films. But why do you feel confident you can keep driving ATP in '23?

Well, pricing is an interesting one because we're always hyper focused on the perception that our pricing leaves in the consumers' mind, right? We want to ensure that our consumers maintain that perception of value when they think about Cinemark. And that leads to just increased frequency and overall increased volume of consumption, right? When we look at 2023, we think through strategic pricing and just through general inflationary increases that, that will lead to some modest growth as we consider '23 versus 2022. There are some headwinds that we'll be contending with. You mentioned, one, just the mix of content from a daypart perspective, there is favorable ticket type mix in 2022 compared to '23. We certainly saw that in the fourth quarter, in particular with regard to Avatar 3D. 3D contributed about 30 to everybody in the retail space was staffing up. It seemed like people didn't really want to work, and it was really hard to attract employees, but we've gotten through that cycle now. Supply chain as well has improved quite a bit. There are certain pockets that are still a bit challenged. But on the whole, that's gotten to a better place. So at least for the moment, we feel like there still are some inflationary pressures, but it's bringing itself in and is more in line with what we would have expected from a pre-pandemic type. Obviously, the base has grown. So we're growing off of that. It's not like it's reset down, but the actual continued growth is more of a normalized level.

Yes. Great. Questions for Sean. Please raise your hand and wait for a microphone if you have one. Otherwise, I'll keep going.

I'm sure he's got more of them.

Sean, the thing that I think a lot of investors are focused on is the free cash flow generation of the business. You guys gave CapEx guidance. Where are you guys spending on the CapEx front? And how do we think about that longer term? Because it's running well below where you were pre-pandemic levels?

Certainly. Well, we've had a -- unsurprisingly, we've had a significant focus on cash flow generation, and we got back to positive cash flow -- free cash flow generation in 2022. And if you backed out some of the deferred rent and repayment of debt that we did in the year, we actually had positive overall cash flow generation. So we really pleases a big milestone coming out of the pandemic, and we're looking to increase that as we go forward in 2023. Yet, we are expecting an uptick -- a bit of an uptick in CapEx in '23, about $150 million relative to the $10 million or so that we spent in 2022. Really, the governor is just going to be the ongoing recovery of our industry. So we're focused heavily on both investing in the future success of our business, while ultimately trying to pay down some of the debt we took on during the pandemic and restrengthening our balance sheet, right? So those are 2 of our key capital allocation priorities right now. Specific to CapEx, we historically would spend about $80 million to $100 million in maintenance CapEx. We expect to return to that level on a go-forward basis. So that's kind of the norm that we believe we need to keep our theaters in really good healthy operating condition. And then beyond that, there are ROI generating opportunities. We've got many more opportunities ahead of us than we're able to pursue right now based on our cash generation objectives. But we see that just continuing to improve. I mean those range from -- we're through the bulk of the recliner conversion cycle for us. We got 65% of our circuit reclined. So there still are a few of those opportunities, but they're less there -- we expect there will be some further newbuild opportunities. Some of the new builds that we've opened during the course of the pandemic from commitments that were made prior to the pandemic. They've performed -- they have actually delivered results in line with our pro forma expectations even at these reduced levels of attendance. So they've been home runs in terms of how well they've done. So there'll be some of that less in the near term. And then there's just a range of other things from premium amenities and things investor that we'll continue to pursue.

Okay. So you would say you're still -- you're spending enough certainly within that $150 million to sort of keep the assets healthy?

Very much so. There's a little bit that we -- I mean we were generally in a mode where we would stay well out ahead with our deferred proactive maintenance stay out ahead. I think that's one of the differentiators of Cinemark versus others in our industry in that we historically spent a bit more to maintain our theaters simply because we know from history that one way to get people to come less is to not offer them a great experience, right? So that helps with doing that. So we think we're in good shape there. We were catching up that -- we weren't behind if we were ahead. So now we're kind of close to catching up on that. And then going forward, we're going to be back at those levels. And then it's just a matter of what incremental investments we can make to just capitalize on growth.

And do you want to get down to 2 to 3x leverage before you really start putting other priorities ahead of deleveraging? Or how do we think about the balance between getting the balance sheet where you want and these investments?

I mean, generally, we hadn't historically but we recently issued a guidance of an aim to get back to 2 to 3x leverage really just to give everybody some sense for what we're targeting with regard to the refortification of our balance sheet, right? So it just gives a little toggle point to know, okay. When we get to that level, we'll feel comfortable. We feel like that's been a historic benefit in terms of managing the company, being opportunistic when those opportunities come along, we certainly saw the benefit it provided us during the pandemic in a down environment. So we want to get back there as quickly as we can. And then that unlocks further opportunities for additional growth and dividends and so and so forth.

It also creates a lot of equity value for.

Absolutely. Our equity value -- we think we've seen that to be a real asset in terms of long-term value for our various stakeholders, shareholders, guests, employees, creditors, et cetera.

Got it. I want to make sure we at least give you an opportunity to talk about the Latin American business, which is not insignificant for you guys. Where is that in the recovery phase relative to the U.S.? And what's the prospects for that business longer term relative to where you were pre-COVID?

Well, Latin America at this point is largely caught up with the U.S. in terms of the recovery cycle. So there was a period during COVID where it lagged by a few months, largely because of the vaccine penetration. Now in most countries, vaccine penetrate actually exceeds the U.S. So that's put up. Consumers are going to the movies again, really their main challenges that similar to the U.S., it's just the overall volume of content. But we see that continuing to recover in line with the U.S. as we go forward. So we're very optimistic about further recovery there as we are here this year and going forward. When we look at just the big picture on Latin America over time, it still is a very active moviegoing culture. Latin audiences tend to over-index in their consumption of movies relative to other demographics. When you look at just theater penetration across the region, it's still fairly underpenetrated in terms of the number of theaters that they have relative to population. So we think there's growth potential. For us at Cinemark, I mean we have a significant market share in the bulk of the countries we operate in there, very seasoned local teams. So we're in a great position to fully capitalize on the further recovery and continue to outperform there. So we have -- we're positive about where things are and where they're headed going forward.

Great. All right. Well, maybe in the minute we have left the 2 most important questions of the interview. -- which film are you most excited about for this year?

That's always a get my studio friends upset when I don't pick one of their films. But I'll give you an honest. I think for me, partly because I have small girls, I would say, Little Mermaid. I think that film really has the potential to be a huge breakout from the footage I've seen. It looks sensational. I'll tell you, too, if any of you saw any of the 3D footage on that movie connected with Avatar, it just looks unbelievable. So I'm going to be taking my kids to see that version. So very high on the potential for that film and a huge, huge fan base.

And then do you share James Gunn and David Zaslav enthusiasm for The Flash, which I think is now being controversial being screened at CinemaCon.

Well, yes, I'm looking forward to seeing it. I'll tell you the buzz huge on that film. I know Warner Bros. Discovery is very, very high on it. Everybody who's seen the film has nothing but sensational things to say about it. So very optimistic about what it has to offer and it could be another big, big breakout film for the year.

Yes. Great. Well, we're out of time. Sean, thanks so much for coming.

All right. Thanks, Ben. Thanks, everybody. For taking the time.