Cinemark Holdings, Inc. (NYSE:CNK) Q3 2023 Earnings Call Transcript

Cinemark Holdings, Inc. (NYSE:CNK) Q3 2023 Earnings Call Transcript November 3, 2023

Cinemark Holdings, Inc. beats earnings expectations. Reported EPS is $0.61, expectations were $0.47.

Operator: Greetings, and welcome to the Cinemark Holdings Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chanda Brashears, Senior Vice President, Investor Relations. Thank you. You may begin.

Chanda Brashears: Good morning, everyone. I would like to welcome you to Cinemark Holdings, Inc.’s third 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’d like to remind everyone that statements or comments made by 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 and 10-Q. 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 Web site at ir.cinemark.com. With that, I’d 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 third quarter 2023 earnings call. Consistent with our commentary over the past year, as we assess the fundamental drivers of our industry’s and company’s long-term health and prosperity, namely consumer behavior, new release volume and the impact of our strategic initiatives, key trends and indicators across all three categories continue to provide a positive outlook for the future. First and foremost, we have now witnessed a steady stream of record setting results quarter-after-quarter across all genres of films for more than two years that demonstrate consumer enthusiasm for shared, larger than life cinematic experiences remains strong and vibrant.

That trend has certainly been evident in 2023, as a diverse range of films delivered first half box office results that bested expectations, and those results have remained strong throughout the summer and fall. The third quarter epitomized the positive appeal and impact of a diverse slate of films. During the quarter, Barbie, an adventure comedy based on an iconic toy, and Oppenheimer, an R rated adult drama about the invention of the atomic bomb, collectively generated nearly $2.5 billion of global box office, as Barbenheimer became a global cultural phenomenon. The faith-based sensation Sound of Freedom reached almost $185 million domestically, as positive word of mouth propelled the film to broad audiences. And new installments from action adventure franchise favorites like Mission Impossible, Indiana Jones, Teenage Mutant Ninja Turtles and the Meg as well as suspense horror sequels, including Insidious: The Red Door and The Nun II all accumulated significant results.

For Cinemark, sustained consumer enthusiasm to experience these varied and compelling films in an elevated theatrical setting yielded our biggest month of gross box office in our company’s history in July, as well as the domestic box office results in the third quarter that was in line with our biggest third quarter ever. And in the fourth quarter, we’ve already seen that trend continue, as Gen Z came together in droves this past weekend, in many cases, dressed up as their favorite characters to experience Five Nights at Freddy’s on the big screen, a horror film based on an indie video game franchise which just delivered the fourth largest domestic October opening ever, with almost $80 million of box office. And that achievement happened only a few weeks after Taylor Swift produced the second largest October opening ever with her Eras Tour film, a record breaking title in event cinema that has now eclipsed $150 million domestically and is by far the largest concert film of all time.

And a steady stream of diverse films appealing to a wide range of audiences is slated to continue through year end, including heroic blockbusters, The Marvels and Aquaman The Lost Kingdom; epic sagas, Napoleon and Hunger Games: The Ballad of Songbirds & Snakes; animated family features, Trolls Band Together, Wish and Migration; and musical productions, Wonka and The Color Purple just to name a few. People continue to seek out theatrical experiences because the shared communal environment coupled with premium sight and sound technologies delivers heightened levels of fun, impact and engagement that just can’t be replicated at home. Consider the difference in excitement and energy of watching Taylor Swift’s extraordinary Eras Tour at home on the couch versus viewing it on a 50 to 80 foot screen with crystal clear ultra premium sound, together with fellow fans singing and dancing as everybody felt like they had a front row seat at the concert.

There is simply no comparison. So as we examine box office results and consumer movie going trends over the past two plus years, we remain highly encouraged about what they suggest for the future of theatrical exhibition. Likewise, we also remain encouraged about prospects for the recovery of new film release volume based on progress made to date, and input we continue to receive from our studio partners. Last year, new releases recovered to approximately 65% of pre-pandemic levels, and this year they are tracking to approximately 80%. Growing film production momentum at the start of the year also had 2024 volume on pace to recover even further. However, the writers and actor strikes in Hollywood over the past six months have caused a temporary disruption to that recovery trajectory, and updated expectations for 2024 are still evolving.

That said, the writers concluded negotiations with the studios and have been back at work for the past month, and we’re hopeful the actors and studios will follow suit soon. Furthermore, it’s important not to lose sight of longer term indicators and what they imply with regard to a positive rebound of volume over time. First, our traditional studio partners continue to reinforce their intentions of rebuilding annual theatrical film output to pre-pandemic levels over the next two to three years and we’ve received no indication that those plans have been altered by the strikes. Movies are a core component of content mix, distribution strategies and financial results for these entertainment companies, and the material benefits that a theatrical release provides a film’s promotional impact and overall asset value has been clearly validated over the past few years.

Next, Amazon and Apple are also stepping up their theatrical ambitions and have expressed plans to develop theatrical slates that would approach levels comparable to our traditional studio partners by 2025. Doing so would effectively add two new major studios into the mix. Amazon has continued to maintain MGM’s traditional level of theatrical output since acquiring the company in 2022, and also enjoyed the successful release of Air in April. In the fourth quarter, they’re releasing the psychological thriller Saltburn, the smart satirical comedy American fiction, and an uplifting true underdog story about the 1936 U.S. Olympic rowing team called The Boys in the Boat. Apple is in the midst of a meaningful increase in their theatrical scale as well with the launch of Martin Scorsese’s critically acclaimed Killers of the Flower Moon a couple of weeks ago, and upcoming releases of Ridley Scott’s epic spectacle Napoleon in November, and Matthew Vaughn’s star studded spy thriller Argylle in February.

Finally, non-traditional content in events cinema continue to grow in popularity, and have been performing remarkably well at the box office. A wide range of multicultural titles, Anime, faith-based films and concerts have delivered impressive results this year, which is a trend we expect will continue. In the third quarter, non-traditional content accounted for almost 14% of our domestic box office results at Cinemark driven by the breakout hit Sound of Freedom and a sustained series of multicultural titles. And the fourth quarter is already benefiting from Taylor Swift’s highly successful Eras Tour, as well as After Death, which just delivered the second best opening ever for a documentary. And still to come this year is Renaissance, a film by Beyoncé, faith-based title The Shift and an array of additional alternative programming.

Altogether, these collected data points with regard to new release volume and consumer movie going behavior provide highly encouraging signs that bode well for the future prosperity of our industry and company, even if product flow faces some near-term headwinds as a result of the Hollywood strikes. Moreover, specific to Cinemark, we remain well situated to capitalize on our industry’s ongoing recovery and deliver long-term shareholder value on account of our solid financial position, outstanding team, industry leading operating capabilities and the significant benefits we are deriving from our strategic initiatives. Our team’s skilled operating discipline and the meaningful advancements our initiatives are having in shaping Cinemark for the future were evident in our second quarter results and further exemplified in 3Q.

Following last quarter’s delivery of our company’s second highest quarterly adjusted EBITDA of all time, this quarter, we achieved a third quarter record high adjusted EBITDA of $197 million on third quarter record high revenue of $875 million. Furthermore, on worldwide attendance that was 16% lower than the third quarter of 2019, we generated 6% more revenue and 16% higher adjusted EBITDA than our 3Q ’19 results. And beyond that, this quarter’s adjusted EBITDA margin of 22.5% exceeded 3Q ’19 by 180 basis points, and was our highest third quarter margin rate since 2016. As we’ve highlighted on previous calls, our top priorities this year remain focused on effectively navigating the dynamic ups and downs of our industry’s extended recovery, while driving actions to set ourselves up for future growth and efficiency.

As such, we continue to emphasize near-term revenue and margin generation, staying diligent on expense and cash management and nimbly flexing based on fluctuating demand forecasts, while at the same time actively working to refortify our balance sheet and investing in opportunities to grow, drive incremental productivity, and further strengthen our circuit. While we are realizing material upside from the many actions we’ve already executed, as demonstrated by our results year-to-date, what really excites me is the wide array of additional opportunities that remain before us and that are fully within our control to further enhance the experience we provide our guests, build audiences, generate new and diversified revenue streams, streamline processes, and opportunistically optimize our footprint.

Some examples include continuing to expand premium offerings through new enhanced food, beverage and merchandise options, as well as proven amenities like recliners, D-BOX motion seats, and Cinionic laser projectors, leveraging our sophisticated Showtime planning strategies, marketing capabilities, loyalty programs, and global reach to over 30 million addressable consumers to stimulate incremental movie going frequency, further enhancing our concessions distribution practices to expedite in-theater purchases, grow e-commerce transactions and extend availability across varied third party sales channels, and driving additional workforce management refinements, forecasting improvements, operating our optimization and process automation to strengthen efficiencies.

So as we look ahead, and as we consider pertinent developments in the fundamental drivers that impact our industry and company, we remain highly optimistic about our future health, growth and prosperity. Throughout unprecedented disruption in our industry, consumer enthusiasm for movie going and theatrical experiences has held strong. The financial and promotional value that a theatrical release provides content remains significant. A growing number of film studios and new content providers are leaning more actively into theatrical exhibition, and the range of opportunities to further grow and strengthen Cinemark are plentiful. With that, I’ll turn the call over to Melissa who will provide additional information on our third quarter results.

Melissa?

Melissa Thomas: Thank you, Sean. Good morning, everyone, and thank you for joining the call today. We were exceptionally pleased with the third quarter’s box office performance as well as our team’s ability to deliver another quarter of strong results by further advancing our strategic growth initiatives, while maintaining discipline around cost management and driving productivity. Across our global circuit, we served nearly 62 million patrons during the third quarter, an increase of 28% year-over-year, and we grew revenues 35% to 874.8 million. With heightened attendance and revenue, we realized meaningful operating leverage over our fixed costs in the quarter growing our worldwide adjusted EBITDA 98% year-over-year to 196.8 million and delivering a healthy third quarter adjusted EBITDA margin of 22.5% with margins expanding 720 basis points year-over-year.

Turning to our domestic segment. We entertained 37.5 million movie goers during the third quarter, an increase of 27% year-over-year, and we grew our admissions revenue 36% to 350.4 million. Our average ticket price grew 7% year-over-year to $9.34 driven primarily by inflationary and strategic pricing initiatives and favorable ticket type mix as a third quarter film slate skewed more adult. As anticipated and as discussed on our last earnings call, the third quarter film mix wasn’t as strong for our circuit as the content in the first half of the year. As a byproduct of the film mix, our market share declined slightly year-over-year, although it remained well above pre-pandemic levels. While our market share will fluctuate quarter-to-quarter based on the film mix, we continue to focus on driving initiatives to sustain, if not grow, our share.

U.S. concession revenue increased 34% year-over-year to $268 million and concession per cap grew 5% to $7.15 for the quarter, driven by inflationary and strategic pricing initiatives. As expected, our per cap growth rate moderated during the third quarter, given the more adult skewing film slate. That said, our third quarter 2023 domestic per cap was up nearly 40% versus the third quarter 2019 and concession revenue surpassed that of Q3 2019 by 16%. Our ability to continue to improve the monetization of the attendance we drive to our theaters has been a key driver of our results. Other revenue was 64.1 million, an increase of 20% year-over-year, primarily due to our attendance growth in the quarter. In total, our domestic operations generated 682.5 million of revenue, up 33% year-over-year and delivered 151.2 million of adjusted EBITDA, a sizable 114% increase over the third quarter of last year.

Our domestic adjusted EBITDA margin of 22.2% expanded 840 basis points year-over-year and 130 basis points relative to the third quarter of 2019. Shifting to our international operations. We welcomed 24.4 million guests during the third quarter, an increase of 29% year-over-year. We delivered 93.4 million of admissions revenue, 71.8 million of concession revenue and 27.1 million of other revenue. Altogether, our international revenue increased 39% to 192.3 million. Through disciplined operational execution, our team grew adjusted EBITDA 58% year-over-year to 45.6 million. And we delivered a 23.7% adjusted EBITDA margin, which represents 290 basis points of margin expansion versus the third quarter 2022 and 390 basis points compared with the third quarter of 2019.

Turning to global expenses. Film rental and advertising expense was 55.9% of admissions revenue, 20 basis points higher than the third quarter of 2022 as we stepped up our marketing spend to capitalize on the box office strength in the quarter and the outsized returns we’ve been seeing on our investments. Lower film rental rates were driven by the content mix in the third quarter, and partially offset the heightened level of marketing spend. Confession costs as a percent of concession revenue were 18.5% in the third quarter, up 20 basis points year-over-year, driven by ongoing inflationary pressures and an uptick in strength, partially offset by inflationary and strategic pricing initiatives. Global salaries and wages were 107.9 million, an increase of 11% year-over-year.

As a percent of revenue, salaries and wages declined 260 basis points driven by operating leverage due to the higher attendance levels and the benefits realized from our consistent focus on labor productivity, which was partially offset by wage rate pressure and expanded operating hours. Facility lease expense was 84.4 million, an increase of 9% year-over-year. As a percent of total revenue, facility lease expense decreased 230 basis points compared with the third quarter of 2022, as we gained leverage over our lease costs, namely in our domestic segment, where lease costs are largely fixed in nature. Utilities and other expense was 129.5 million, up 17% compared with the third quarter last year, primarily due to the growth in attendance, which increased our variable costs such as credit card fees, janitorial costs and repairs and maintenance.

Higher property and liability insurance costs also contributed to the increase year-over-year. G&A was 48.2 million in the third quarter, an increase of 7% year-over-year. Excluding stock-based compensation, G&A was up 5% in the quarter driven by incremental headcount to support business recovery in our strategic initiatives, wage and benefit inflation and our ongoing shift to cloud-based software, which was partially offset by lower professional fees. As a percentage of revenue, G&A declined 140 basis points to 5.5%. Globally, we generated net income attributable to Cinemark Holdings, Inc. of 90.2 million in the third quarter, resulting in diluted earnings per share of $0.61. Moving to the balance sheet. We continue to strengthen our financial position, generating 50 million of free cash flow in the third quarter and 246 million of free cash flow in the first nine months of the year to end the quarter with 806 million of cash.

We achieved a meaningful milestone in the third quarter, with our net leverage ratio reaching our target range of 2x to 3x for the first time since the pre-pandemic period. Our capital allocation priorities remain focused on strengthening our balance sheet, including delevering, and investing the long-term success of our company. We consistently invest in our global circuit to maintain and enhance the theatrical movie going experience, with 35 million of capital expenditures in the third quarter and a full year 2023 target of 150 million. We continue to expect roughly half of our capital investment this year will be allocated towards sustaining a high quality circuit and the remainder to laser projector installations, ROI generating opportunities, mainly premium amenities, and new build theaters.

As we look forward, we will remain flexible regarding our capital expenditures, targeting investment opportunities that meet our disciplined return thresholds while factoring in our box office recovery and free cash flow expectations. As a result of the strength of our balance sheet, coupled with our strong execution capabilities, we are well poised to withstand potential near-term impacts due to the Hollywood strikes. We expect to remain appropriately conservative with our cash and capital allocation in the interim, as we await a better understanding of the strike implications on the box office, while at the same time making prudent investments to ensure we continue to position the company for ongoing success. While our post pandemic recovery may be a bit more prolonged than we had hoped, we remain encouraged that the long-term fundamentals of the industry remain intact.

In closing, I’m incredibly proud of the entire Cinemark team for the strong results they continue to deliver. Given our performance over the last few quarters and the ongoing execution of our strategic initiatives, we are optimistic about the future potential of our business once industry recovery stabilizes. Operator, that concludes our prepared remarks. And we would now like to open up the line for questions.

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Q&A Session

Operator: Thank you. The floor is now open for questions. [Operator Instructions]. Today’s first question is coming from David Karnovsky of JPMorgan. Please go ahead.

David Karnovsky: Thank you. Sean, I know the actor strike is still ongoing but assuming production didn’t start until early next year, how do you kind of gauge at this point the impact to ’24 or even ’25 supply? And what kind of strategies do you think the industry has to deal with shortfalls of supply?

Sean Gamble: Sure. Thanks for the question, David. Clearly, it’s a big topic on everybody’s mind. I think, unfortunately, at this point, there’s still a lot to be clarified in terms of what ’24 looks like, to a certain degree ’25, but I think more the focus right now is on 2024. Assuming we get some near-term closure with the strikes, which hopefully some of the news over this past week has been optimistic, cautiously optimistic in terms of where things may be headed, we’ll see. I would say in general, it’s always a little bit challenging even this close to 2024 to fully gauge the slate, because a lot of the dating is still taking place. So our line of sight in just a normal year is limited. We’re usually basing it on estimates and how much we think things are going to further fill in.

So that’s the norm. And with the strikes, obviously that’s created a little bit of a further challenge as we try to predict what’s going on. We do know, in our conversations with the studios, they’re clearly focused on trying to minimize the disruption as much as they possibly can. I think for everybody’s benefits, they’re trying to do whatever they can to do that. And that’s clearly going to be a big focal point as all the production schedules get sorted out once the strike is resolved. But at this point, I’ll say we’re still a bit in a waiting game here just to see when things ultimately conclude and then how those schedules play out and what it ultimately means for next year.

David Karnovsky: And maybe just one more. With your net leverage now in the target range, wanted to see if you could update on capital allocation, thoughts on the dividend and I guess how the strikes maybe complicate that?

Melissa Thomas: Sure. Thanks for the question, David. So in terms of capital allocation, so we did achieve, as you mentioned, our net target leverage ratio 2x to 3x for the trailing 12 months ended 9/30. But I would expect for us to continue to be conservative regarding capital allocation in the near term, while we await better insight into the implications of the Hollywood strikes on the 2024 box office. Near term, our priorities will continue to remain centered around strengthening our balance sheet which includes delevering and then making the right investments to position the company well for the long term. Now, that said, with respect to your question on the dividend, we do expect to remain conservative at this stage. But it is worth pointing out that those are active conversations that we have around capital allocation, around our balance sheet with our Board.

Those are ongoing conversations, including potential timing of reinstating the dividend. But ultimately, the dividend was a significant aspect of our capital allocation priorities prior to the pandemic and will remain a key consideration as our box office and cash flows continue to recover.

David Karnovsky: Great. Thank you.

Sean Gamble: Thanks, David.

Operator: Thank you. The next question is coming from Eric Handler of ROTH MKM. Please go ahead.

Eric Handler: Good morning, and thanks for the question. You talked about your revenue generating CapEx, premium amenities remains at the forefront. Where do you still have opportunities with premium amenities? Are there new initiatives? Are there still a lot of backfilling going on with theatres? Where are you there?

Sean Gamble: Sure. Thanks for the question, Eric. We still see a range of opportunities. Improvement is — some of it is continuing to pursue the types of initiatives that we’ve been pursuing for a while. So looking at further installation of D-Box motion seats, screen formats, laser projectors, even recliner seats to a certain degree, although nowhere near where we were before, given that our circuit’s almost 70% reclined at this point. So there’s a range of those types of things. I would say also just investing in further enhanced food offerings and things of that sort. We continue to test and have success with just new types of options in our theaters. So there’s different — even technologies in the sense of distributing that food to simplify purchase and things of that sort, which can help.

So there’s a range of things like that. I would say, beyond that too, with regard to broader CapEx, we continue to look at what other opportunities there ultimately will be for expansion and things of that sort. So that does come into play. Clearly, that’s a bit of a balancing act right now, which is where things continue to progress with recovery in our cash flow levels and other objectives with refortifying our balance sheet. But it’s clearly on the mind as we look to continue to strengthen our circuit going forward.

Eric Handler: Great. And just as a follow up, when I look at your international recovery, particularly Brazil, it seems like it’s been a while since we’ve seen a resilient movie, local language movie, actually break out and do well. And we’ve seen that a number of times in the past. I’m curious, sort of what’s the state of the movie industry in Latin America right now?

Sean Gamble: It’s a great question. I would say, big picture on the state of the movie industry, it’s been positive I think in terms of — I’ll just talk specific to the theatrical space. Exhibition has recovered to a level, I’d say, comparable with the rest of the U.S. or the rest of the world. In terms of movie going, there’s even pockets of LatAm, like Argentina, where we’re seeing movie going behavior match pre-pandemic levels and even exceed that in certain circumstances. So I’d say, while the whole region lagged the rest of the world a bit in terms of its recovery during periods of the pandemic, it certainly has caught up. One area that still is definitely lagging has been local production. To your question on Brazil content, we’ve seen that in some of the other countries as well.

That has been slower to come back. We know that here in the U.S. in Hollywood, the studios have been working to replenish their backlog of films and get overall volume back to where it was pre-pandemic. It’s been a slower slog internationally throughout LatAm. Now, we’re starting to see some signs of that picking up. We know that, particular to Brazil, there’s focus on trying to breathe some more life into an activity into local production activity. It’s something that even the government is focused on down there. So that could lead to a resurgence of those types of films in the not too distant future. But local product in LatAm is still an area that I would say is lagging a bit with regard to recovery from the pandemic.