Morning. We're going to get started. 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. 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. When we consider that and we can kind of sit where we are with the recovery of content taking place, two 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. 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. 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. 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 that 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.
When you look out, if we assume that the box office fully recovers, do you think the company will be operating at a higher level, generating similar, even higher returns long-term from all these investments that you've made?
Well, certainly that's our aim. The potential is there. I mean, we've been working on a wide range of new revenue and productivity initiatives to improve just our overall efficiencies and opportunities. You look at our results in 2022, we were very pleased with almost over $335 million of EBITDA and almost 14% 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. We'll see.
Certainly, our aim is to be able to get back to where we were pre-COVID. We think we have a good opportunity to do that. It's going to be a derivative of a number of things.
Yeah. Well, let's talk about one of the major derivatives, which is the actual box office performance. Let's start with demand. If we look at last year, box office was up, but it was $7.5 billion, which is still way down from +30% down from pre-pandemic. I think there are certainly some investors and people who think consumers structurally changed 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 billion to 9, I don't want to put words in your mouth, to $9 billion box 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's looking at when they're coming up with some of those forecasts is just the volume improvements. When you look at we expect somewhere over 100 wide releases this year, which is up from about 80. It's about 25% up year-over-year. When you just look at that, there's a greater lineup volume of films for consumers to see. 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 times. We just saw a huge result for Creed III this past weekend. I look at the attendance and the audience here, too.
I mean, all of a sudden, everybody's interested in the theatrics. I think last year when we did this, there was maybe 3 or 4 people in here. Now I look at it's almost a sellout crowd. I mean, the interest is really strong. I think that in particular is encouraging. 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. We think when you put all that together, we're very optimistic about 2023 taking a nice uptick from 2022.
OK. You got ahead of me on the supply question, which is my next one. I thought we'd 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. What are you hearing from traditional studios? What are you hearing from the streamers around theatrical supply, not just in 2023 but sort of broadly? 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. It's going to take a few years likely to get there. 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 VHS, DVD, TV, that the movies they're releasing theatrically are having a much bigger impact on their streaming platforms. It's creating more overall value for those assets. As a result of that, they're now leaning into theatrical more heavily like they did prior to the pandemic. All the indications from the traditional studios are that they aim to get largely back to where they were before.
On top of that, you have nontraditionals. 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. Finally, we're seeing with concerts and faith-based and multicultural and anime, some movies doing some really big business and a greater amount of volume coming in. Again, we look at all that. It gives us more confidence in some of the longer-term recovery of overall volume for the industry.
You and I 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 number one, was the whole elimination of the 90-day exclusive window. We're there. You can see that it's benefiting the studio's P&L. Do you think you're losing some audience for movies that are leaving the theaters after two weeks, four weeks, six weeks that used to run for months?
You know, 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, 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's 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. This dynamic window is actually working pretty well. I mean, we've seen again, 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, 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. What that ultimately we think will lead to and what they're telling us it's helping with is more volume. 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. You're even seeing now some they're leaning into some of the movies they made for streaming and putting them out theatrically.
We've started to see some romantic comedies, which you haven't seen in eons. 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? I think Creed is an MGM distribution. I guess they're probably pretty happy with that one. They've got Air coming out, I think, next month.
April 5th.
Yeah. How do you feel about that film? What are you hearing generally about Amazon's kind of long-term approach to theatrical?
Well, we think everything you're seeing now is really encouraging with regard to Amazon. They've been expressing plans to get more significantly into theatrical distribution for some time. 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 showing them that theatrical movies drive greater interest, engagement, acquisition, retention of subscribers for platforms. If it's having that effect for them, you would expect that same phenomenon would be the case for the tech companies when they're trying to attract people to their platforms. Amazon, they purchased MGM. They've been staffing up their distribution team, their marketing team, their production team. 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.
Air, I mean, the movie is a sensational movie from everybody you talk to. It's really their first big play under the Amazon label.
They've seen it.
I unfortunately missed it. Everybody on our team who saw it has said it's phenomenal. Everyone I've heard, even from other studios who've seen it, have commented that it's an outstanding film. We got really high expectations for it.
I'll ask you a question that Reed Hastings was asked at DealBook. Do you think they left money on the table with Glass Onion and the approach that they had with that movie? It seems like a 2-week, limited release.
It was a one-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. There were a lot of consumers who didn't have the opportunity to see it. They wanted to see it theatrically, and they weren't given that chance. Look, we look at it as a positive step forward. 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.
Yeah. Maybe lastly, just to complete the tech discussion with Apple, they seem to be obviously best picture last year. That's got to make them feel good. They've also got a big Formula One film, I think, headed for, I believe, next year. Are you optimistic Apple will be a major or a mini-major over the longer term in terms of theatrical supply?
Yeah. Similarly, Apple has expressed those same types of interests in getting into the theatrical space. I mean, really, it provides a great promotional platform for these films. Apple is very focused on quality, the quality of their brand, quality of their products. That's one of the things that theatrical helps provide for films, is they're seeking to have consumers engage more with their devices and their platforms. It's a big help for that. 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. 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 or Leonardo DiCaprio film. That's their movie that they're going out theatrically with.
They're just doing it through Paramount as a distribution partner. They're also starting to take some bigger steps into the space. I think they're certainly ramping up to do that in a greater way going forward.
OK. Let's talk a little bit more about the company and the performance of LatAm and as you think about the drivers in 2023. Your market share, as you mentioned earlier, has been growing. 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. How sustainable do you think the market share gains that you guys have captured since COVID can you keep going over time?
Sure. Well, look, we benefited from being one of the first theater circuits open coming out of the pandemic. We saw a big jump in our market share as a result of that. 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 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 relative to our pre-pandemic market share levels on a go-forward basis. 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. That allowed us to capture a greater share on the larger films just because we could overprogram them. There was a good degree of alternative content, which we tend to outperform on. That also supported us. 3D on Avatar, in particular, we have the brightest screens, the brightest 3D screens in particular in the industry. We were able to utilize that to really over-index on that film as well. That gave us a slight further uptick in core queue even relative to that.
OK. Let's talk about some of the sort of specific drivers of the business. 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 2019 if we look at 2022. That's interesting and obviously helpful from a Cinemark and theatrical point of view. We've seen data like that across concerts and parks. 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 rollback. You guys seem pretty confident you can keep growing the concession per caps, which obviously where there's so much profitability for the business.
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. To your point, we have expected a little bit of normalization of that. We expected it last year. It didn't happen. We expected it the year before that. It didn't happen. We haven't seen that really change. Maybe we'll see some of that going forward. 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. 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, it gives us confidence in our ability to continue to sustain growth in the coming years.
That's great. Also on average ticket prices, I think you expect growth in 2023 as well. That's also been strong. One thing we obviously have to think about is sort of the broadening of the box office to more lower-priced day parts, more mid-budget films. Why do you feel confident you can keep driving ATP in 2023?
Well, pricing is an interesting one because we're always hyper-focused on the perception that our pricing leaves in the consumer's mind. We want to ensure that our consumers maintain that perception of value when they think about Cinemark. That leads to just increased frequency and overall increased volume of consumption. When we look at 2023, we think through strategic pricing and just through general inflationary increases that that'll lead to some modest growth as we consider 2023 versus 2022. There are some headwinds that we'll be contending with. You mentioned one, just the mix of content. From a day part perspective, there was a favorable ticket-type mix in 2022 compared to 2023. We certainly saw that in the fourth quarter in particular with regard to Avatar. 3D contributed about $0.30 to our fourth quarter ATP. It was a really big driver.
We don't expect 3D to be that substantial in 2023. Again, when you look at it in total, we still feel pretty good about modest growth. We're going to continue to be very careful there. We use a lot of data to drive our decision making in terms of what we do in evaluating the elasticity because we really want to maintain that value perception and don't want to go too far because it can lead to reduced visits.
Yep. Ok. Makes sense. I'm going to ask you 1 more. Then if there's anyone in the audience who has a question, give you an opportunity as well to ask Sean. We talked a little bit about margins. There's been a lot of inflationary cost pressure in the business that you guys have had to navigate. When you think about the growth we expect in 2023, what are the big puts and takes around expenses that we should be thinking about? Have you seen some of the cost inflation, whether it's labor or energy costs or other things that came up last year, start to moderate at all?
I think the puts and takes, you just hit on a couple of them. I think some of the bigger pressures we've seen over the past year were in labor and cost of goods with regard to just supply chain challenges, to a certain degree in utilities as well and janitorial and things of that sort. Starting with labor, I think the positive there is we've seen that normalize quite a bit versus what we were seeing a year ago. Now the historic pattern of inflation that we were seeing there is more what we're seeing at this point in time. It doesn't mean that that couldn't shift again if there's a market shift. There was that moment coming out of Omicron in 2021 where everybody in the retail space was staffing up. It seemed like people didn't really want to work.
It was really hard to attract employees. We've gotten through that cycle now. Supply chain as well has improved quite a bit. There's certain pockets that are still a bit challenged. On the whole, that's gotten to a better place. At least for the moment, we feel like there still are some inflationary pressures. It's reined itself in and is more in line with what we would have expected from a pre-pandemic type of obviously, the base has grown. We're growing off of that. It's not like it's reset down. The actual continued growth is more of a normalized level.
Yeah. 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? How do we think about that longer term? It's running well below where you were pre-pandemic levels.
Certainly. Well, unsurprisingly, we've had a significant focus on cash flow generation. We got back to positive cash flow, free cash flow generation in 2022. 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. We're really pleased that was a big milestone coming out of the pandemic. We're looking to increase that as we go forward in 2023. Yep, we are expecting a bit of an uptick in CapEx in 2023, about $150 million relative to the $110 million or so that we spent in 2022. Really, the governor is just going to be the ongoing recovery of our industry.
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. Those are two of our key capital allocation priorities right now. Specific to CapEx, we historically would spend about $80 million- $100 million in maintenance CapEx. We expect to return to that level on a go-forward basis. That's kind of the norm that we believe we need to keep our theaters in really good, healthy operating condition. 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. We see that just continuing to improve. Those range from we're through the bulk of the recliner conversion cycle for us.
We got 65% of our circuit reclined. There still are a few of those opportunities. They're less. We expect there will be some further new build 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've actually delivered results in line with our pro forma expectations even at these reduced levels of attendance. They've been home runs in terms of how well they've done. There'll be some of that less in the near term. There's just a range of other things from premium amenities and things of that sort that we'll continue to pursue.
Ok. you would say 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 maintenance, proactive maintenance, to 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. That helps with doing that. We think we're in good shape there. We were catching up that we weren't behind. We were ahead. Now we're kind of close to catching up on that. Going forward, we're going to be back at those levels. It's just a matter of what incremental investments we can make to just capitalize on growth.
Do you want to get down to 2x-3x leverage before you really start putting other priorities ahead of deleveraging? 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. We recently issued a guidance of an aim to get back to 2x-3x leverage really just to give everybody some sense for what we're targeting with regard to the refortification of our balance sheet. It just gives a little toggle point to know, ok, 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. We want to get back there as quickly as we can. That unlocks further opportunities for additional growth and dividends and so on and so forth.
Also creates a lot of equity value if we get there.
Absolutely. Better equity value. 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.? 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. There was a period during COVID where it lagged by a few months largely because of the vaccine penetration. Now, in most countries, vaccine penetration actually exceeds the U.S. That's caught up. Consumers are going to the movies again. Really, their main challenge is similar to the U.S. It's just the overall volume of content. We see that continuing to recover in line with the U.S. as we go forward. 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, movie-going 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 under-penetrated in terms of the number of theaters that they have relative to population. We think there's growth potential. For us at Cinemark, we have a significant market share in the bulk of the countries we operate in there, very seasoned local teams. We're in a great position to fully capitalize on the further recovery and continue to outperform there. 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 two most important questions of the interview, which film are you most excited about for this year?
That's always how I always get my studio friends upset when I don't pick one of their films. I'll give you an honest answer. 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. I'm going to be taking my kids to see that version. Very high on the potential for that film. It's just got a huge, huge fan base.
Do you share James Gunn and David Zaslav's enthusiasm for The Flash, which I think is now being a controversial film, now being screened at CinemaCon?
Well, yeah, I'm looking forward to seeing it. I'll tell you, the buzz is 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. Very optimistic about what it has to offer. It could be another big, big breakout film for the year.
Yeah. Great. Well, we're out of time. Sean, thanks so much for coming.
All right. Thanks, Ben. Thanks, everybody, for taking the time.