Cinemark Holdings, Inc. (NYSE:CNK) Q2 2023 Earnings Call Transcript

Cinemark Holdings, Inc. (NYSE:CNK) Q2 2023 Earnings Call Transcript August 4, 2023

Cinemark Holdings, Inc. beats earnings expectations. Reported EPS is $0.8, expectations were $0.54.

Operator: Greetings. Welcome to the Cinemark Holdings Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Chanda Brashears, Senior Vice President of Investor Relations. Thank you. You may begin.

Chanda Brashears: Good morning, everyone. I would like to welcome you to Cinemark Holdings, Inc.’s second quarter 2023 earnings release conference call hosted by Sean Gamble, President and Chief Executive Officer; and Melissa Thomas, Chief Financial Officer. Before we begin, I would like to remind everyone that statements or comments made on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company’s actual results may materially differ from forward-looking projections due to a variety of factors.

Information concerning the factors that could cause results to differ materially is contained in the company’s most recently filed 10-K. Also, today’s call may include non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company’s most recently filed earnings release, 10-Q and on the company’s website at ir.cinemark.com. With that, I would now like to turn the call over to Sean Gamble.

Sean Gamble: Thank you, Chanda, and good morning, everyone. We appreciate you joining us today for our second quarter 2023 earnings call. We believe box office performance during the second quarter, combined with movie going results witnessed year-to-date and over the past 2 years, provide conclusive evidence that consumer enthusiasm to view compelling films in a shared larger-than-life cinematic environment is as strong as ever. Theatrical movie going enthusiasm has been largely undeterred by the impact of the pandemic and the evolution of in-home streaming offerings, and it continues to demonstrate resilience against macroeconomic inflationary and recessionary dynamics. Year-to-date through July, North American industry box office results are up 20% over 2022 and have improved to within approximately 85% of 2019 driven by further recovery in wide release volume and sustained consumer demand for an in-theater viewing experience.

On par with box office results, wide release volume has also reached almost 85% of 2019, which represents a meaningful uptick from last year when volume had recovered to approximately 65% of pre-pandemic levels over the same time frame. An improved cadence of new diverse content this year has helped accelerate movie going momentum across all categories of audiences, leading to a continued extension of impressive and, in many cases, record-breaking results throughout the year. In the first quarter, a series of strong releases exceeded expectations, including franchise topping successes for Creed3, Screen 6 and John with Chapter 4, the outperforming horror thriller Megan, the long-running adult drama a man called auto and the highly successful fate-based film Gesa’s Revolution.

Then the second quarter kicked off with a bang as the Super Mario Brothers movie quickly became the industry’s second biggest animated film of all time and our top-performing animated title ever at Cinemark. During the quarter, Amazon also expanded further into theatrical exhibition with air under its Amazon film label, which delivered solid results. Evil Dead Rise, a movie initially made for streaming further reinforced the positive impact of a theatrical release just as Smile did last year, grossing nearly $70 million in domestic box office. Marvel’s Guardians of the Galaxy Volume 3 generated $845 million worldwide, which was comparable to its second installment and Spider-Man into the Spider-Verse doubled the domestic results of its widely acclaimed first release, accumulating over $680 million worldwide.

Franchise fans were further delighted by Fast X and Transformers 7: Rise of the Beasts, while families enjoyed Elemental and The Little Mermaid, the latter of which reached nearly $300 million in domestic box office and over $560 million globally. And if there was any question about the strength of theatrical viewing habits coming out of the second quarter, take a look at what just happened in July. The month got started with the faith-based sensation Sound of Freedom, which has already eclipsed $150 million in domestic box office and is still growing. The highly successful launch of that film was followed by the action packed Mission Impossible: Dead Reckoning Part One, which has now generated more than $0.5 billion worldwide. And then on July 21, the Barbie and Oppenheimer phenomenon swept the world.

The list of records for Barbie and Oppenheimer is already staggering and includes the first time ever 2 films open to over $80 million of domestic box office simultaneously in addition to driving the fourth biggest box office weekend on record for our industry. For Cinemark, as a result of Barbie’s and Oppenheimer’s success, coupled with the impact of Mission Impossible and sound of freedom as well as other significant titles during the month, including Indiana Jones and the Dial of Destiny and Insidious, The Red Door, July delivered our biggest single month of admissions revenue in the history of our company. These aggregate box office results to date and the many discrete and varied examples of titles just described, which cut across all genres of films, all types and ages of audiences and all times of the year demonstrate that consumer interest in theatrical movie going is strong and vibrant and remains a meaningful and preferential way of allocating discretionary time.

The strength of the second quarter’s film lineup, supplemented with the ongoing benefits we are achieving from our strategic initiatives translated into exceptional 2Q results for Cinemark across our entire global circuit. We sustained our market share advances in excess of 100 basis points compared to prepandemic levels. Our box office results meaningfully outpaced industry performance year-over-year. And while our worldwide attendance trailed 2019 by 20%, we delivered the second highest quarterly adjusted EBITDA in our company’s history, vested only by the second quarter of 2019, which included Avengers Endgame, Aladdin and Toy Story 4. Furthermore, our second quarter adjusted EBITDA margin of 24.6% was within 100 basis points of 2Q ’19 and amongst our highest margin results of all time.

In addition to second quarter content mix that resonated especially well across our global circuit, our strong results are a direct byproduct of the focused efforts our sensational team has pursued to enhance the top-notch experience and service we provide our guests to drive increased movie going frequency while expanding our audience base through more sophisticated marketing techniques, loyalty programs and showtime planning to grow concession consumption through expanded offerings, enhanced sales channels and category management optimization and to gain incremental operating efficiencies through labor and cost management initiatives. A few examples include our continued expansion of premium offerings with recliners that now span almost 70% of our domestic circuit, premium large-format auditoriums, which represent approximately 5% of our worldwide screens and drove over 14% of our box office in the quarter and D-Box motion seats which delivered a 65% increase in revenue year-over-year.

We also continue to strengthen our ability to increase awareness of upcoming events, drive interest in seeing them and improve conversion into ticket sales. In the second quarter alone, we generated over 2 billion marketing impressions through our actions to further enhance and leverage our omnichannel digital communication platforms. Likewise, the persevering appeal of our global loyalty programs, including our industry-leading subscription program, Movie Club continued to drive meaningful box office upside. Movie Club now exceeds 1.2 million members and accounted for 24% of our domestic box office in the quarter. Importantly, customer satisfaction with Movie Club remains in excess of 95%, and we continue to find the program drives increased movie going frequency and food and beverage consumption.

We’re also benefiting from a wide range of additional food and beverage initiatives that we’ve been pursuing to increase purchase incidents and overall concessions revenues. Such initiatives include strategic pricing actions, growing and optimizing the portfolio of products we offer and simplifying the purchase process through streamlined lobby designs, self-service capabilities and our online mobile ordering platforms. Through the successful execution of these initiatives, we have grown our worldwide per cap 35% compared to the second quarter of 2019. Finally, we continue to make significant advances in our operating hours and workforce management practices. These advancements have yielded meaningful labor efficiencies as a result of actions that include enhancing theater-level demand forecasting capabilities, introducing more sophisticated staffing tools and techniques, simplifying and/or automating varied administrative routines and improving our ability to actively scale operating hours and labor needs based on attendance dynamics.

I’d like to thank our entire global Cinemark team for all the tremendous impact they have made, strengthening our company over the past few years, which enabled us to fully capitalize on the second quarter’s rebound in film product. I’d also like to commend our studio and creative partners for continuing to produce such diverse and compelling content that provides something for everyone to enjoy in our theaters. While the second quarter and this past month of July provides additional positive steps in movie going recovery. As we look ahead, we are cognizant that the potential impact on product flow from Hollywood’s ongoing SAG Astra [ph] and WGA strikes are top of mind for our investment community. The evolution of these strikes is something we are watching closely, and their degree of impact on near-term film volume box office will ultimately depend on how long negotiations progress.

We certainly remain hopeful for a timely resolution, not only with regard to implications for the theatrical exhibition industry and our studio partners, but also for the sake of the many individuals within the extensive creative community who are directly affected by this work stoppage. While the strikes are currently delaying the production of new films and they have the potential to shift certain movie releases, which could extend the recovery trajectory of theatrical film volume a bit. It’s important to recognize that there has been nothing to suggest that they will affect key fundamentals associated with consumer interest in movie going or studio intentions to rebuild overall theatrical film output over the coming years. I’ve already commented on the strength and resilience of theatrical movie going based on box office results generated over the past 2 years as compelling content returned to the big screen.

Considering this positive recovery to date has been achieved on the heels of a major global health crisis that was accompanied by a significant ramp-up of in-home streaming platforms, we have high confidence that consumer demand for theatrical experiences will remain strong even during periods of fluctuation in film product flow. We have also received no indications from our traditional studio partners that they intend to alter their plans for scaling theatrical film volume back to prepandemic levels. Furthermore, as we mentioned on prior calls, Amazon and Apple are now expressing intentions to scale theatrical film production over the next few years to levels that are comparable with the major studios. Amazon already had tremendous success with the release of Cree 3 and Air this year.

And Apple will release 2 Epic films in the fourth quarter with Martin Scorsese’s killers of the flower Moon and Ridly Scott’s Napoleon. Apple also recently announced plans to release its third major theatrical title early next year with the Spy Thriller, Argyle. Emerging genres of content in the form of faith-based, multicultural and anime and concerts are also scaling up. These types of films contributed 7% of our box office in the first half of 2023, and we remain optimistic about their potential for further growth ahead. The reason why our traditional studio partners, streamers and alternative content providers are fully leaning into theaters is their data and analysis continue to show that the best way to maximize value for these types of filmed entertainment assets is with an exclusive theatrical release.

Furthermore, a theatrical release also drives material upside for subsequent distribution channels, including streaming platforms. Confirmation of these findings have been publicly communicated multiple times by the majority of the major media companies, and they continue to be reaffirmed in our direct discussions with our content partners. In addition to providing a premium viewing experience that is important to consumers, filmmakers and talent, a theatrical release provides tremendous promotional and financial impact by eventizing movies and increasing their perceived quality. Doing so, heightens awareness of and interest to see films and all forms of content, strengthening long-term recall value. Furthermore, experiencing content in a shared larger-than-life cinematic environment produces an elevated degree of energy and engagement that form stronger emotional connections with stories and characters.

These connections help build larger brands, bigger franchises and more significant cultural moments. Again, just look at the cultural frenzy that is currently underway with Barbie and Oppenheimer. For all of these reasons, as we consider prospects for the recovery of new film releases as well as varied forms of content over the next 2 to 3 years, we continue to believe there is a high potential for overall volume to return to, if not exceed pre-pandemic levels. In the meantime, Cinemark is well situated to confront any ongoing fluctuations in content flow. On account of our solid financial and operating foundation, the disciplined way we approach capital allocation, including the prudent steps we’ve already taken to fortify our balance sheet, the varied enhancements we’ve made to our operating practices that have improved our agility and ability to scale and flex in a dynamic landscape and the many ongoing initiatives and opportunities we continue to pursue to drive further revenue and productivity benefits.

The actions we’ve taken to strengthen our company have enabled us to generate positive adjusted EBITDA every quarter throughout all of the ups and downs over the past 2 years, and they were a key driver of our robust 2Q ’23 results. Furthermore, we believe the benefits of these actions, along with our ongoing strategic initiatives will continue to enable us to effectively navigate periods of variability while positioning Cinemark to capture an outsized portion of our industry’s ongoing recovery and deliver long-term growth and shareholder value. Melissa will now provide further information on our second quarter results. Melissa?

Melissa Thomas: Thank you, Sean. Good morning, everyone, and thank you for joining the call today. We were pleased to deliver such solid results in the second quarter, which demonstrate the strength of Cinemark as well as the industry’s ongoing recovery potential bolstered by steadfast consumer enthusiasm for the in-theater experience and a compelling film slate that resonated across our global footprint. Globally, we entertained 64.4 million guests during the second quarter, an increase of 24% year-over-year and the highest attendance level we’ve achieved post pandemic. With our worldwide revenue increasing 27% to $942.3 million, we drove significant operating leverage over our fixed costs, growing adjusted EBITDA 67% to $231.5 million and achieving a robust adjusted EBITDA margin of 24.6%.

We — this quarter’s margins were a function of the heightened attendance levels, coupled with ongoing operational and strategic execution by our team that is second to none. Domestically, we served 38.8 million moviegoers during the second quarter, an increase of 14% year-over-year. Admissions revenue grew 21% to $373.4 million on an average ticket price of $9.62 for the quarter. Our average ticket price was up 6% versus the second quarter of last year, driven by strategic pricing initiatives and premium format penetration, somewhat offset by ticket type mix given the increase in family content during the quarter. The strength of the box office also flowed through to our concessions with domestic concession revenue increasing 26% year-over-year to $296.3 million.

Our concession per cap reached a new all-time high of $7.64 driven by strategic pricing initiatives and higher incidence rates fueled by the content mix in the quarter. Notably, our domestic concession revenue in the second quarter exceeded that of Q2 of 2019 by 8% despite 23% lower attendance levels due predominantly to higher purchase incidents. Other revenue was $65.2 million, an increase of 15% and relatively in line with our attendance growth in the quarter. Altogether, our Domestic segment generated total revenue of $734.9 million, an increase of 22% year-over-year and adjusted EBITDA of $180.8 million, up 63% and — our resulting domestic adjusted EBITDA margin was 24.6%, an expansion of over 600 basis points compared with the second quarter of last year.

Turning to our International segment; we serve 25.6 million patrons in the quarter, a sizable increase of 42% year-over-year. Our attendance recovery in international outpaced that of the U.S., reaching 85% of 2019 levels in the quarter, with a film slate that translated extraordinarily well across the Latin region, including Super Mario Brothers, FastX and Spider-Man across the Spider-Verse, to name a few. We delivered $105 million of admissions revenue, $77.1 million of concession revenue and $25.3 million of other revenue. In total, our international revenue increased 45% to $207.4 million. Adjusted EBITDA grew 86% to $50.7 million, resulting in a 24.4% adjusted EBITDA margin or 540 basis points of margin expansion year-over-year. Shifting to global expenses, film rental and advertising expense was 58.1% of admissions revenue, down 20 basis points compared with the second quarter of 2022, primarily due to marketing expense leverage and a higher mix of international box office, somewhat offset by the content mix in the quarter.

Concession costs as a percent of concession revenue were 18.1% in the second quarter, down 30 basis points year-over-year as we successfully offset inflationary pressures with strategic pricing initiatives. Global salaries and wages were $112.1 million, up 12% year-over-year. As a percent of revenue, salaries and wages declined 160 basis points, driven by operating leverage due to the strength in attendance and benefits derived from our ongoing focus on labor efficiencies, which were partially offset by ongoing wage rate pressure. Facility lease expense was $87 million, up 8% year-over-year. As a percent of total revenue, facility lease expense decreased 160 basis points compared with Q2 of last year as we gained leverage over our lease costs, particularly in our domestic segment, where lease costs are predominantly fixed in nature.

Utilities and other expense was $120.2 million, an increase of 13% compared with the second quarter of 2022, primarily driven by variable costs such as credit card fees, utilities and repairs and maintenance that grow with attendance. G&A was $50 million in the quarter, an increase of 4% from the second quarter of last year, driven by incremental headcount to support business recovery and our strategic initiatives, wage and benefit inflation and higher stock-based compensation. That said, our headcount levels remain below 2019 levels, and we remain highly focused on controlling our discretionary spending. As a percent of revenue, G&A declined 120 basis points compared with Q2 of last year. Globally, we generated net income attributable to Cinemark Holdings, Inc.

of $119.1 million in the second quarter, resulting in diluted earnings per share of $0.80. Turning to the balance sheet. We generated $215 million of free cash flow and increased our cash balance by $108 million to end the quarter with $758 million of cash. We remain balanced in our approach to capital allocation with a near-term focus on continuing to strengthen our balance sheet and invest in the long-term health of our company. We took steps to proactively address our 2025 debt maturities in the second quarter with the redemption of $100 million of our 8.75% senior secured notes and the successful refinancing of our credit agreement, where we secured a $650 million term loan maturing in 2030 and an upsized revolver of $125 million maturing in 2028.

We maintain our 2x to 3x net leverage ratio target and expect to achieve that over time through adjusted EBITDA growth and free cash flow generation, both of which are contingent upon the timing and extent of overall box office recovery. We continue to make prudent investments in our global circuit with $28 million of capital expenditures in the second quarter and a full year target of $150 million. We expect roughly half of our capital investment this year to be allocated to maintaining a high-quality circuit and the remainder to ROI-generating opportunities, mainly premium amenities, newbuild theaters and laser projector installations. As we look forward, we’ll continue to align our capital expenditures with our box office recovery and free cash flow expectations.

In closing, I would like to echo Sean’s commentary regarding the long-term prospects associated with the theatrical exhibition industry and our company. At Cinemark, every aspect of our operations, strategy and capital allocation is focused on setting the company up for long-term success, which benefits all of our key stakeholders, including employees, guests, creditors and shareholders. We believe this approach has boded well for the company over the years, and we will remain disciplined in this regard. Operator, that concludes our prepared remarks, and we would now like to open up the line for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Ben Swinburne with Morgan Stanley.

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Q&A Session

Ben Swinburne: Thank you, morning. I know it’s impossible to predict how the labor strikes are going to impact everything, a lot of moving pieces. There seems to be at least some — I don’t really want to call it consensus, but some thought that maybe September is a realistic time for a ramp back up in production. So, if you — I would love to hear your insights based on what you’re hearing and what you think really 2 things. The impact on the production shutdown may have on 24 volumes if you still think tables can get this wrapped up by September that next year is higher than this year on supply? And then talent availability is the other thing that is causing some uncertainty more near term. And I’m wondering if you think that at this point, you have any line of sight on kind of the fourth quarter holiday impact from movies being moved around.

So I know it’s tough, but I wanted to hear from you because you know more than we do. And then I just had a quick one for Melissa. I think CapEx year-to-date is about $50 million — $50 million, $55 million. Do you guys still think you can spend $150 million or so this year? Or are there some of the supply chain stuff maybe that makes the number coming lower? I wanted to get an update there.

Sean Gamble: Sure. Well, thanks for the question, Ben. I wish I had a better clarity of answers to provide you both on the effect on 2023 and 2024 film slates. What we do know just from conversations with our studio partners is they’re obviously doing everything they can to minimize the disruption of product flow and their aim is certainly to avoid further shifts to the extent possible. A lot of that is going to really just depend on how long the ongoing negotiations take place. Obviously, there’s been some reports that certain conversations with the WDA are going to be recommencing today. So hopefully, that can see some progress. I know sometimes these types of discussions have a way of coming together quickly when they appear far apart and other times, they can take a little bit longer.

So — at this stage, I’d say even year-end is a little tough to predict. Our typical cycle at this point even for next year when we consider — we’ve been optimistic about continued recovery in volume year-after-year like we saw this year versus last and last year versus the year before. But typically, as is normal, we don’t have full line of sight to what next year will be this far out. A lot of the slate is still coming together. And obviously, some of that may ultimately be affected by the duration of the strikes. But again, what we know is that our studio partners are working hard to formulate plans to try to minimize disruption, and we’re just going to have to see how long these conversations continue.

Chanda Brashears: So, just — sorry, just a quick follow-up. Just to your comment on Amazon and Familjump in. But on Amazon and Apple — is your comment about there ramping up of production and increase in enthusiasm or clarity from last quarter I couldn’t tell. I know you’ve been expecting them to ramp up but it sounded like you were making maybe more of a emphatic point today.

Sean Gamble: No, I would say it’s just more of a restatement of last quarter. I mean we’re highly enthused by what we’re seeing even the line of sight we had last quarter in terms of public comments made by Amazon and Apple oil, I guess since then, we’ve seen Apple date another significant film at the beginning of next year with Argyle. So nothing, I’d say, incremental to last quarter, just sustained enthusiasm about the direction that they’re moving in.

Melissa Thomas: Okay. And then with respect to CapEx, Ben, to your point, we did spend only about $55 million of CapEx in the first half of the year. However, we do expect to still hit $150 million of CapEx for full year 2023. So it’s really timing of the spend is expected to be back half weighted.

Operator: Our next questions come from the line of Robert Fishman with Moffat Nathanson.

Robert Fishman: Two questions, please. Sean, maybe a big picture question to start. It’s clear that the momentum is back in your favor given all the recent and record box office. So after a tough couple of years navigating through the pandemic, can you just share more about the entire company’s confidence level in achieving record levels of success and the likelihood of profit surpassing pre-pandemic levels?

Sean Gamble: Look, I’d say — I’ll tag team that one with Melissa. I’d say, as I mentioned in the prepared remarks, we’ve been very pleased with what we’ve seen now with regard to consumer behavior. Obviously, that was a question during the pandemic in terms of how consumers would operate coming out of it. And when we look at movie going activity since it certainly points to a high level of sustained excitement about going to movies. In terms of that translating to us, it gives us, I would say, confidence and optimism about where things progress longer term. As I mentioned in the prepared remarks, we’re continuing to hear the studios provide feedback of their intentions to increased levels of production back to where they were pre-pandemic.