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

All right. Great. We're going to get started. So happy to have back at the conference, from Cinemark, Sean Gamble, President and CEO. Sean, thanks for being here.

Thank you very much for having us. I really appreciate it.

Sure. So Sean, we're about midway through your second year as CEO at Cinemark. At least so far in 2023, you're operating in a much healthier environment relative to last year, I'd say. So how are you kind of setting priorities as the industry continues to rebound?

Well, look, as you said, I think we're very encouraged by the progress that both our industry and company continue to make, rebounding from the pandemic. As we set out for this year, in 2023, I'd categorize our priorities really into 3 buckets. First is just continuing to effectively navigate this ongoing period of recovery, so being mindful about cash management, expense management, staying flexible and nimble with some of the dynamics we're still dealing with and just keeping employee morale up. Second is expanding our pipeline of content and audiences, so working proactively with our studio partners to get more of that content back on screen, activating new sources of content and using our industry-leading marketing and loyalty program capabilities to attract more people to our theaters and keep them coming back for more after they come. And then finally, it's just positioning Cinemark for ongoing growth and stability in this evolving media and entertainment landscape, so making sure that we continue to deliver a AAA experience to our guests, finding new and diversified sources of revenue growth and then being very aggressive with productivity and efficiencies of our operations.

Got it. Okay. So we're coming off Fast X last weekend, Guardians earlier in the month. As we look ahead, Little Mermaid in a few days, and pretty much straight through to the August doldrums, the usual August doldrums, I'd say, a very strong lineup of content. So what's kind of your confidence for the market demand to absorb this slate?

Look, we're very -- we have a lot of high confidence in market's ability to handle a lot of product. I mean, again, we're recovering back towards where we were. So we've seen from history, the market can certainly absorb a lot of quality films. I think -- certainly, we've seen significant sustained consumer enthusiasm for these larger-than-life cinematic types of experiences we provide to enjoy films. And that's cut across all genres of films, all audiences. We've seen it throughout the year. So it's been evidenced by record after record being set across so many films now over the past 2 years. So we certainly think there is an ability to absorb a greater volume of films as we get through the summer period here. Ultimately, it's really going to depend on just the quality of titles, how well they resonate with moviegoers. And I would say based on what we recently saw at our industry trade event at CinemaCon, look, we're really encouraged about the potential for these movies that are coming up over the next several months.

Got it. So I would certainly agree, right, when it comes to the franchises and the tent poles, that they can perform to pre-pandemic levels. I think there's been ample evidence of that. I think when it comes to the midrange or smaller-budget films, it's probably more of a debate. And recently, we've seen a bit more of a mixed performance. So I don't know, I mean, some of that you could attribute to quality or marketing, you can do that for any film probably, but I wanted to get your take on this.

Well, I'd take on that debate because I don't think there is much of a debate because there's been so many examples of smaller and mid-tier films that have been delivering exceptional results. I mean, you look at the first quarter alone, you had adult dramas like A Man Called Otto and 80 for Brady. You had a horror film in M3GAN. You had like a mid-budget comedy suspense with Cocaine Bear. You had animation, animated film Puss in Boots. Obviously, there's the big Avatar film. So we've seen those types of movies coming. So whether it's adult dramas, comedies, specialty films, even romantic comedies have made a bit of a resurgence here with Ticket to Paradise and Lost City earlier in the year. So I think what we're seeing is when compelling films are coming to our theaters of good quality, they're working. And it doesn't matter whether they're large films or small films. So I think that's been a good sign. And I mean, we can talk about it, but I think some of the evolution of the way these films are being distributed and the distribution models have actually lent themselves to a better risk proposition for the studios, and I think that will allow for more and more of these films to come to our screens.

Got it. I could debate [ The Box ] forever, but we'll move on.

We'll tell the tale in time.

Sure. I guess as it pertains to kind of film supply, I think you said 110 films are dated for this year at this point. That's still below the 130-ish run rate pre-pandemic. I'm interested, how much do you attribute that gap to, prior production shutdowns, studio consolidations or bankruptcies? And kind of what gets that figure back to where it was?

Well, as we've looked at the key drivers of that, certainly, the bulk of the impact has come from the effect COVID had on the production cycle of movies, right, with the film productions being shut down, and these movies generally take 2- to 3-plus years to make, so that stalled that whole process for that period and it obviously lagged even into the recovery cycle a bit. And then on top of that, obviously, there was that momentary situation where you had some of the studios mining their backlog of films to support their new streaming platforms as they needed content for those platforms. I mean, that dynamic has now evolved and changed. We're not seeing as much of that. Lesser so, to a degree, to any consolidation, there's perhaps a little bit of that. What gives us confidence as we look ahead is really threefold in terms of the recovery of content back to levels that it was pre-pandemic. First and foremost is that's what our studio partners are telling us their intent is, right? Their expressed intent is to get back to where they were. And in the case of at least a couple of studios, they've actually expressed an intent to go beyond that and do a couple more. Second key driver is just the performance of these movies, the value that they're delivering to content creators, right, not only from a theatrical financial performance but also the lift that they continue to have in all their downstream revenue channels, not just on streaming platforms where they're certainly seeing a lift there but across the board. And then I think the third bucket is now we're obviously starting to see some of these larger streaming companies get more significantly into the game, with Amazon and Apple expressing an intent to deliver content at the level of a major studio. So when you put all that together, we see content recovering to levels consistent with pre-pandemic, if not even a touch higher, as we look forward. It's really a question how long that trajectory takes to get there.

Yes. Let's touch on that last point with the streamers because I'm interested to know how you think they'll gauge success in theatrical maybe differently than traditional, right? So you take a film like Air, we don't have to talk about Air if you don't want to, but is Amazon focused primarily on viewer lift that they'll get in Prime from having a theatrical window and box-office growth is like a secondary consideration insofar as it makes back its marketing budget?

Sure. Well, look, I mean, Air was a phenomenal film. I mean, I'm happy to speak -- I don't want to speak on Amazon's behalf, but we know they've been very pleased with the results of that film. I think to your question on the way they're looking at it, they're maybe -- every studio has a little bit of a different angle, but I think they are similar in many respects. I mean there -- it seems like their primary interest is going to be to create a greater interest in those titles for their streaming platforms down the line to create greater engagement with those streaming platforms. Obviously, they are also interested in improving the financial results of those films as well as creating value for their consumers. And many of these consumers want to see these films on the big screen. So when you look at what we're seeing, I mean the good thing is -- for theatrical, is we're really hitting on all those areas. The movies -- the data is now showing that the movies that are being released theatrically, those are the movies that are being sought out more by consumers on the streaming platforms. They're leading to increased engagement, increased retention, which is exactly in line with what they're aiming to achieve. And I think it's -- the increased scale that they're expressing they plan to pursue is a testament to that. And I think the data will continue. If the current data continues to hold, I think that's just going to be more and more encouraging for them to put more of these films out theatrically because it's going to serve that promotional and financial value that they're seeking that helps their platforms.

And have you gotten a sense of the types of film slates that the streamers might bring to the market? Or is it just going to be varied like a traditional studio?

Well, what has been expressed to us is somewhat of a varied slate. So some larger films, some mid-tier films, some smaller films. It will have a range. I think you look at the scale, I think I mentioned it, the scale that they're talking about investing, it's at a level comparable to a major studio. So they've got that potential. You look at Apple's upcoming releases with the Killers of the Flower Moon and Napoleon, I mean, these are big epic-scale films, Martin Scorsese and Ridley Scott producing and directing these films. I mean these are big, big things. So you have a range of that. Air was more of a mid-tier type of film with some good star power and a great story. So I think it's going to run the range of and be a nice diverse set of titles.

Got it. Sean, you bring a bit of a unique perspective, having sat on the studio and the theatrical side. So interested to know, in your conversations with studio execs, how they kind of view that shortened -- usually, it's around 45-day window or, in some case, a little shorter than that -- like, what does that mean for them economically relative to the old system? And what's then the read-through on supply?

Well, I think they're viewing it positively. I mean, based on the discussions we're having, they see this as a positive advancement in the evolution of the window and, I would say, really more of a flexible window versus this rigid film. And what they really didn't like before was this big gap period that existed where a film ran its course in theatrical, then there was this dark zone before it came out in theaters. I think there's an overall recognition that there needs to be enough time in the theaters for the theatrical release to do its job in terms of creating that cultural event, building that promotional value and delivering the financial upside. And then a shorter window, it's all kind of leaning towards 45 days as a starting point, that then enables it to then get into the home and still ride that momentum in the home and have a good lift there. So the flexible scenario where the movie starts at 45 days in general and can flex up in success and allow the studios to capture more upside and also flex down a bit if it just doesn't connect with audiences and allow them to minimize their downside, I mean, that creates a better risk model for the studios. And getting back to the content discussion, what we're seeing is it enables them to take more chances. And we've had multiple films now. You look at a film like Smile or Magic Mike or Evil Dead Rise, like there's been a series of these titles that were designed for streaming that they've put out now theatrically because they said, "Oh, there's a model here that works now for this type of content." So I think that can lead to a resurgence of those types of films. So all that is leading to a financial equation that's better. In some cases, we're actually hearing from some studios that their overall film results are performing better now than they ever have, even pre-pandemic.

Got it. I think one of the things that stood out to us in your results recently is market share. So that's sustained nicely at levels above pre-pandemic. How much do you attribute some of this to film mix, right, because with horror, faith, family tent poles, those are all performing really well versus the factors that are more in your control?

There's -- we're going to have ebbs and flows quarter-to-quarter based on content mix. So I think first quarter is an example where we perhaps got a little bit of a benefit from some of the mixed profile of content and how it played well for our circuit. As we've looked at the key drivers of that share improvement, there's a range of factors that we think are really the core drivers. One was just being the first circuit to reopen in the U.S. ahead of other circuits. I mean, that gave us exposure to consumers who may not have been coming to Cinemark before, and now we've been able to keep them. Second thing is just our -- I mentioned earlier, just our marketing and loyalty capabilities. Like, we have the ability to really get out there and attract more consumers to our theaters and then keep them there with our loyalty programs, and we can do things that others can't. Also, our showtime management processes, we've spent a lot of time working on the sophistication of that to make sure we've got the shows that we're showing at the right times and in the right auditoriums to maximize the opportunity for attendance in box office. Our pricing strategies, we feel like we've been driving those in a direction that have led to upside there. And then finally, I'd just say this, our focus on the overall experience that guests have when they come to our theaters from a guest service standpoint, from a premium amenity standpoint, we still have the highest penetration of recliner theaters with almost 2/3 of our circuit reclined, the major circuits. Those are the types of theaters that have rebounded and held the best coming out of the pandemic as consumers have sought more of these types of premium experiences.

Got it. You touched upon this a second ago, right, that part of the market share gain, price optimization strategies. I don't know if there's anything you can kind of share on that. And then maybe secondarily, do you kind of expect the industry more broadly at some point to follow through with price increases as supply and demand trends normalize?

When we think about pricing opportunities, for us, it's really more about sophistication of our pricing capabilities as it pertains to honing demand and elasticity curves. What -- certainly, there can be opportunities to increase price, but you got to be careful with that. It really cuts both ways. In some circumstances, it could be increasing pricing. But if you go too aggressive, that can work against you. In other cases, it's actually reducing pricing. So it's really just honing that ability. We know from years and years of research that the #1 reason that consumers start -- or stop coming to the movies as frequently as when they think that it costs too much. So we place a great emphasis on the perception of value for our consumers, and that factors into the way we think about how we're pricing to best optimize attendance, box office and food and beverage incidents and we go -- so we think there's a lot of opportunity. We're in the early phases of really ramping up some of the increased sophistication we have around using data and analytics and all that in terms of the way we manage our overall pricing across the circuit because it gets very discrete by market, by time of year, by day, by film. So there's a lot of opportunity there. I do think the industry as a whole will start to proceed a bit more down that path, but it's not just necessarily increasing pricing as the only way it goes. It's -- to really maximize value, it goes both ways.

Right. But if you look at the industry, I think, right, price increases was a regular part of box-office growth for a long time. There's logical reasons why there -- you would hold back on that during the pandemic. But would you think that we would get back to the sort of that price increase pace at some point?

Yes. I think we were seeing before the pandemic average prices were increasing about 2% a year. It was roughly in line with inflation. Obviously, inflation has been a bit higher right now. So we've had the competing forces of like, well, you try to match that while, at the same time, you're trying to stimulate increased attendance and growth of people coming back. Those are competing forces a bit. So it's been a little bit of a balancing act. But I do think we'll get back to a place where you will see just the normal type of inflationary price increases over time. And by the way, as more premium amenities enter the equation where there's opportunities, that also has a mix factor that also takes price up a bit as well because those have a higher cost with them.

Yes. You touched upon this a bit, but some of the price actions that you've done in the concession space, can you just speak to some of the strategies you've deployed there, how you've been able to execute that without disrupting incidence too much?