Cinemark Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 12 speakers on the call.

Operator

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.

Speaker 1

Good morning, everyone. I would like to welcome you to Cinemark Holdings, Inc. Q2 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 The company's plans, objectives, expectations or intentions.

Speaker 1

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 ks. 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.

Speaker 1

Cinemark.com. With that, I would now like to turn the call over to Sean Gamble.

Speaker 2

Thank you, Chanda, and good morning, everyone. We appreciate you joining us today for our Q2 2023 earnings call. We believe box office performance during the Q2 combined with moviegoing 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 moviegoing enthusiasm has been largely undeterred by the impact of the pandemic and the evolution of in home streaming offerings, And he 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.

Speaker 2

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 timeframe. An improved cadence of new diverse content this year has helped accelerate moviegoing 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 Q1, a series of strong releases exceeded expectations, including franchise topping successes for Creed 3, Scream 6 and John with Chapter 4, the outperforming horror thriller Megan, The long running adult drama A Man Called Auto and the highly successful faith based film Jesus Revolution. Then the Q2 kicked off with a bang as the Super Mario Bros. Movie quickly became the industry's 2nd biggest animated film of all time and our top performing animated title ever at Cinemark.

Speaker 2

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 $70,000,000 in domestic box office. Marvel's Guardians of the Galaxy Volume 3 generated $845,000,000 worldwide, which was comparable to its 2nd installment and Into the Spider Verse doubled the domestic results of its widely acclaimed first release, accumulating over $680,000,000 worldwide. Franchise fans were further delighted by Fast X and Transformers: Rise of the Beasts, while Families enjoyed elemental and The Little Mermaid, the latter of which reached nearly $300,000,000 in domestic box office and over $560,000,000 globally. And if there was any question about the strength of theatrical viewing habits coming out of the 2nd quarter, take a look at what just happened in July.

Speaker 2

The month got started with the faith based sensation Sound of Freedom, which has already eclipsed $150,000,000 in domestic box office and is still growing. The highly successful launch of that film was followed by the Mission Impossible Dead Reckoning Part 1, which has now generated more than $500,000,000 worldwide. And then on July 21, the Barbenheimer phenomenon swept the world. The list of records for Barbie and Oppenheimer is already Staggering and includes the first time ever 2 films opened to over $80,000,000 of domestic box office simultaneously, In addition to driving the 4th 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.

Speaker 2

These aggregate box office results to date and the many Great 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 moviegoing is strong and vibrant and remains a meaningful and preferential way of allocating The strength of the 2nd quarter's film lineup supplemented with the ongoing benefits we are achieving from our and 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 pre pandemic levels. Our box office results meaningfully outpaced industry performance year over year. And while our worldwide attendance trailed 2019 by 20%, We delivered the 2nd highest quarterly adjusted EBITDA in our company's history, bested only by the Q2 of 2019, which included Avengers: Endgame, Aladdin and Toy Story 4. Furthermore, our 2nd quarter adjusted EBITDA margin 24.6 percent was within 100 basis points of 2Q 2019 and amongst our highest margin results of all time.

Speaker 2

In addition to 2nd 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 in service we provide our guests to drive increased moviegoing 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 efficiency 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 upcoming events, drive interest in seeing them and improve conversion into ticket sales. In the Q2 alone, we generated over $2,000,000,000 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, continue to drive meaningful box office upside.

Speaker 2

Movie Club now exceeds 1,200,000 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 moviegoing 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 Q2 of 2019.

Speaker 2

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 for the past few years, which enabled us to fully capitalize on the 2nd 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 Q2 and this past month of July provide additional positive steps in moviegoing recovery, As we look ahead, we are cognizant that the potential impact on product flow from Hollywood's ongoing SAG AFTRA and WGA strikes are top of mind for our investment community.

Speaker 2

The evolution of these strikes is something we are watching closely and their degree of impact on near term film volume and 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 moviegoing or studio intentions to rebuild overall theatrical film output over the coming years. I've already commented on the strength and resilience of theatrical moviegoing 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.

Speaker 2

We've also received no indications from our traditional studio partners that they intend to alter their plans for scaling theatrical film volume back to pre pandemic 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 Creed III and Air this year, And Apple will release 2 epic films in the Q4 with Martin Scorsese's Killers of the Flower Moon and Ridley Scott's Napoleon. Apple also recently announced plans to release its 3rd 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.

Speaker 2

These types of films contributed 7% of our box office in the first half of twenty twenty three 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.

Speaker 2

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 forms 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.

Speaker 2

In 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 refortify 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 for the past 2 years, and they were a key driver of our robust 2Q

Speaker 3

'twenty three results.

Speaker 2

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 Q2 results. Melissa?

Speaker 4

Thank you, Sean. Good morning, everyone, and thank you for joining the call today. We were pleased to deliver such solid results in the Q2, 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 64,400,000 guests during the Q2, an increase of 24% year over year and the highest attendance level we've achieved post pandemic. With our worldwide revenue increasing 27% to $942,300,000 We drove significant operating leverage over our fixed costs, Growing adjusted EBITDA 67 percent to $231,500,000 and achieving a robust adjusted EBITDA margin of 24 point This quarter's margins were a function of the heightened attendance levels, coupled with ongoing operational strategic execution by our team that is second to none.

Speaker 4

Domestically, we served 38,800,000 moviegoers during the Q2, an increase of 14% year over year. Admissions revenue grew 21% to 373 $400,000 on an average ticket price of $9.62 for the quarter. Our average ticket price was up 6% versus the Q2 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 296,300,000 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 Q2 exceeded that of Q2 of 2019 by 8% despite 23% lower attendance levels due predominantly to higher purchase incidents.

Speaker 4

Other revenue was $65,200,000 an increase of 15% and relatively in line with our attendance growth in the quarter. Altogether, our domestic segment generated total revenue of $734,900,000 an increase of 22% year over year and adjusted EBITDA of $180,800,000 up 63%. Our resulting domestic adjusted EBITDA margin was 24.6 percent, an expansion of over 600 basis points compared with the Q2 of last year. Turning to our International segment. We served 25,600,000 patrons in the quarter, a sizable increase of 42% year over year.

Speaker 4

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 Bros, Fast X and Spider Man: Across the Spider Verse to name a few. We delivered $105,000,000 of admissions revenue, $77,100,000 of concession revenue and $25,300,000 of other revenue. In total, our international revenue increased 45 to $207,400,000 Adjusted EBITDA grew 86 percent to $50,700,000 resulting in a 24.4 percent adjusted EBITDA margin or 5.40 basis points of margin expansion year over year. Shifting to global expenses.

Speaker 4

Film rental and advertising expense was 58.1% of admissions revenue, down 20 basis points compared with the Q2 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 2nd quarter, Down 30 basis points year over year as we successfully offset inflationary pressures with strategic pricing initiatives. Global salaries and wages were $112,100,000 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 and Sees, which were partially offset by ongoing wage rate pressure. Facility lease expense was $87,000,000 up 8% year over year.

Speaker 4

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 $120,200,000 an increase of 13% compared with the Q2 of 2022, primarily driven by variable costs such as credit card fees, utilities and repairs and maintenance that grow with attendance. G and A was $50,000,000 in the quarter, An increase of 4% from the Q2 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 and A declined 120 basis points compared for Q2 of last year.

Speaker 4

Globally, we generated net income attributable to Cinemark Holdings Inc. Of $119,100,000 in the Q2, resulting in diluted earnings per share of $0.80 Turning to the balance sheet. We generated $215,000,000 of free cash flow and increased our cash balance by $108,000,000 to end the quarter with $758,000,000 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 2nd quarter.

Speaker 4

With the redemption of $100,000,000 of our 8.75% Senior Secured Notes and the successful refinancing of our credit agreement, where we secured a $650,000,000 term loan maturing in 2,030 and an upsized revolver of $125,000,000 maturing in 2028. We maintain our 2 to 3 times 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 $28,000,000 of capital expenditures in the 2nd quarter and a full year target of $150,000,000 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, new build 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.

Speaker 4

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 bode 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. A confirmation tone will indicate your line is in the question Our first questions come from the line of Ben Swinburne with Morgan Stanley. Please proceed with your question.

Speaker 5

Thank you. Good morning. Sean, 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.

Speaker 5

Really two things, the impact on the production shutdown may have on 24 volumes, if you still think, in case we can get this wrapped up by Remember 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 Q4 holiday impact from movies being moved around. So I know it's tough, but wanted to hear from you because you know more than we do. And then I just had a quick one for Melissa.

Speaker 5

I think CapEx year to date is about $100,000,000 $55,000,000 You guys still think you can spend $150,000,000 or so this year? Or is are there sort of supply chain stuff maybe that makes the number come in lower? I wanted to get an update there. Thank you so

Speaker 2

much. Sure. Well, thanks for the questions, Ben. I wish I had better clarity of answers to provide you both on the effect on 2023 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.

Speaker 2

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 WGA 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.

Speaker 2

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 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.

Speaker 5

Sorry, just a quick follow-up. Just to your comment on Amazon and Jump in. But on Amazon and Apple, is your comment about their 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 an emphatic point today.

Speaker 2

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, I guess since then We've seen Apple date another significant film at the beginning of next year with Argyle. So nothing I say incremental to last quarter, just Sustained enthusiasm about the direction that they're moving in.

Speaker 5

Thanks.

Speaker 4

And then with respect to CapEx, Ben, to your point, we did spend only about $55,000,000 of CapEx in the first half of the year. However, we do expect to still hit $150,000,000 of CapEx for full year 2023. So it's really timing of the spend is expected to be back half weighted.

Speaker 5

Got it. Thanks so much. All right.

Operator

Thanks for the questions. Thank you. Our next questions come from the line of Robert Fishman with MoffettNathanson. Please proceed with your questions.

Speaker 6

Hi, good morning. 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

Operator

pandemic, Can

Speaker 6

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?

Speaker 2

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 And when we look at moviegoing 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 prepared remarks, we're just continuing to hear the studios provide feedback of their intentions to Increased levels of production back to where they were pre pandemic. So we see all that as very positive.

Speaker 2

And I would say likewise, the work we're doing with our strategic initiatives to make sure that we drive the best results on that consumer enthusiasm and attendance ultimately Should translate into positive ongoing margin results.

Speaker 4

Yes. And just to follow on to that, To give a little bit of more context on our Q2 adjusted EBITDA margins, what you saw was our team's ability to really capitalize on the strength of the box office and a film slate that, as we stated, resonated particularly well with our circuit. And that led to especially strong Market share, concession per cap, as well as average ticket prices in the quarter. As we think about our long term margin potential, We certainly have many initiatives that we're pursuing both on the revenue side as well as the cost side to try to Get back to those pre pandemic margins over the long term, but there are, as you know, going to be a number of factors that that's Dependent upon not only attendance and box office recovery, which is the largest driver of our margins, but Beyond that, our market share gains, elevated concession per caps and average ticket prices, the extent to which those persist, As well as our ability to offset further inflationary pressures that may materialize and then the pull through that we get on Initiatives that we're executing on, but we're certainly pleased with our ability to deliver strong margins in the quarter and the momentum that we've seen.

Speaker 6

Great. And just a question about the competitive landscape, if I can. You've highlighted how Cinemark has had the sustainable market Sherry, you just mentioned it. Can you talk about where that has come from and maybe the opportunity to grow market share further? And How Cineworld's emerging out of bankruptcy could impact any of that if at all?

Speaker 2

Sure. I think We mentioned in the past, I mean, we obviously got a bump in share as we were exiting or as we were reopening During the course of the pandemic by being one of the first circuits to open. What we've seen is that that exposed a lot of audiences perhaps to our circuit who May not have been coming as frequently and they got a taste for the type of experience we're providing and they've stayed. A large part of it is not really one single thing, But we had spent a lot a large amount of time strengthening our marketing capabilities, which we think are industry leading right now in terms The type of awareness we build and reach we have to try to encourage consumers to come to more films and come to Cinemark when they see them. We've been working quite a bit on more sophisticated practices for planning show times and operating hours, which we think play into that.

Speaker 2

And then of course, there's just the overall experience that guests have when they come to us. So we spent a lot of time. This Even predates me joining the company. I'd say it's in the DNA of Cinemark really delivering a fantastic guest service to our customers when they're here. As we look forward, our aim obviously is to continue to sustain that.

Speaker 2

We felt that 100 basis points of improvement versus our pre pandemic levels is a reasonable assumption now that most of the theaters are in screens are operating again. That will just to point out, that will fluctuate quarter to quarter somewhat based on the type of content mix that's in the marketplace and how Different films resonate with different demographics. For instance, what we saw in the Q2 was the film content played particularly well in our markets with The level of family and horror and the style of action, particularly with Hispanic markets, even on the flip side in July, Even though July was our biggest month of admissions revenue ever, the nature of the title skewed a bit lower for our audiences compared to other markets around the company. So we expect we might see Q3 tick down a little bit for us overall. So it will ebb and flow a bit, but our focus certainly is on Continuing to drive those initiatives to sustain our advances.

Speaker 2

It's hard to comment on your other question on Cineworld and Regal. We certainly suspect them having a stronger financial position. We'll put them in a better position to be Competitive going forward and we certainly hope for we always believe that delivering consumers Widely across the industry, a really positive experience, lifts all boats and is a positive thing for all of us. So our hope coming out of that is that they will continue to deliver a heightened experience and a positive experience, and that'll be a good thing for everybody.

Speaker 6

Thank you so much.

Speaker 2

Thanks, Robert.

Operator

Thank you. Our next question comes from the line of Eric Handler with Roth

Speaker 7

Good morning and thanks for the question. Sean, granted, I know Cinemark has a long history of being conservative with its balance sheet, but You're at the point now, you're at 3.4x net leverage. You've got a pretty good war chest of cash available to here. I mean, do you how are you thinking about maybe loosening the purse strings a little bit and increasing CapEx for some additional ROI projects, maybe buying back some debt in the open market for get some nice accretion off of that and just your thoughts there.

Speaker 2

Sure. I'll let again, I'll tag Tim and Melissa. I'll let her hit a chunk of that. As we will say, it's a topic we talk quite a bit about. We do have a focus in terms of the balance, in terms of where we're aiming for, to be strengthening our balance sheet as well as Pursuing different kinds of initiatives, but Melissa, I'll let you dive deeper.

Speaker 4

Sure. So in terms of capital allocation priorities, Those remain centered around 2 main areas, strengthening our balance sheet, which includes delevering and then making The right investments to position the company well for the long term. As we think about the go forward, certainly, as I mentioned In my prepared remarks, we're targeting a net leverage ratio in the 2 to 3 times range. As Sean mentioned, we are in regular conversations Around our capital allocation priorities, but one thing to keep in mind is we'll look to be opportunistic in Paying down debt and delevering given our cash position, but at the same time, given some of the current industry dynamics that could Caused some potential shifts in film slate. You can expect us in the near term to be conservative with that cash

Speaker 2

Yes. And the only other thing that I would kind of supplement that was obviously we view that as a good position with kind of contending with any of Any near term uncertainty that may be out there, but also then being able to be really opportunistic as different types of things, different kinds of opportunities may Shake out of this environment. So we feel that, hence we commented on being in an advantage position. We think we're not only in a position of strength to navigate ongoing fluctuations, but also to capitalize on opportunities as they come our way during the course of the coming year.

Speaker 7

Great. That's helpful. And then just as a follow-up, with National CineMedia's bankruptcy and reemergence and restructuring, What's different, if anything at all, in your agreements?

Speaker 2

Well, for the time Being it is largely business as usual. They have a plan, a bankruptcy plan that's been approved and As I understand it, we're expecting to emerge sometime this month or next. They've accepted our pre existing contracts, so we continue to operate According to that, so for now, there haven't been modifications to that contract. Any future modifications will be something that Would be mutually agreed upon and that's to be determined.

Speaker 4

The other thing that I would just mention there is based on the terms of They're restructuring. So as you know, we have our ESA, which is where we earn ad revenue, but then in addition to that, we have our investment in NCMI. Based on the terms of their restructuring, we do expect their outstanding debt will be converted into equity and our ownership interest will reduce from 25% today to less than 5%. So that would impact the value of our investment and any share of any potential Future dividends that they may pay out.

Speaker 2

And as you probably will see in our financials, that investment, We've reduced that considerably over the years. So I'd say the degree of exposure on that is minimal at this point.

Operator

Thank

Speaker 2

you. Thanks, Eric.

Operator

Thank you. Our next questions come from the line of Omar Mejuez with Wells Fargo. Please proceed with your questions.

Speaker 8

Hey, guys. Thank you for taking my question. Sean, maybe first, we've seen a few films Shift away from the back half of the year to 2024 as a result of the writers and actors strike. Do you expect any additional films to move out of the 2020 And Melissa, maybe on the strength of your ATPs and per caps, you guys have previously talked about modest growth for the back half of the year, but that remains elevated with average ticket pricing and burn caps running around mid single digits and low double digit range. Can you discuss maybe what's driving that and how should we think about 3Q and 4Q?

Speaker 8

Thanks.

Speaker 2

Sure. Thanks, Omar. It's still hard to say for the end of the year with regard to any There's a lot of work and a lot of planning underway to try to limit the amount of impact They'll be on that. A lot of that is going to ultimately just depend on how long The conversations and negotiations continue and, the availability of Writer different resources that may be required in the form of writing and or just promotional support. So we're going to have to see.

Speaker 4

And then with respect to average ticket prices and per caps, I'll start with the average ticket prices. We do continue to believe We can modestly grow our ATPs for full year of 2023 relative to 2022 levels, but our average ticket prices will Quarter to quarter. If you think about the back half of this year, we expect our average ticket price growth rate to moderate due to the film mix And that's particularly given we'll be lapping the significant lift from the 3 d penetration on Avatar from last year. So that's something to keep in mind. And then in terms of per caps, we again continue to believe can grow our per caps Year over year in the second half of twenty twenty three.

Speaker 4

However, per cab similar to average ticket prices, those fluctuate quarter to quarter with film mix. For context, if you think about our Q2 per cap, that benefited from the film mix in the quarter With the film slate that not only drove an audience mix that skewed younger and tends to purchase more on the concession side, but it also provided more opportunities for us to sell film stained merchandise. Conversely, as we think about the second half of the year, We are expecting our year over year concession per cap growth to moderate and that's again driven by Upcoming film slate and we've already seen that play out in our per cap in July with a more adult skewing film slate that drove an audience mix that's just typically less inclined to indulge on the concession side.

Speaker 8

Great. Thank you very much.

Operator

Thanks, Omar. Thank you. Our next question comes from the line of David Karnovsky with JPMorgan. Please proceed with your question.

Speaker 7

Thanks. Maybe to follow-up on the pricing. Melissa, maybe in Q2, can you unpack a bit What strategic pricing versus PLF? What the offset was from the mix? And Sean, I don't know if there's detail you could provide with the strategic pricing you've noted it for a few quarters now, what's sort of resonating there?

Speaker 7

Any incremental color on that would be great.

Speaker 4

So on the average ticket pricing, if we look at domestic ATPs were up about 6% in the quarter, about Five points of that strategic pricing, a point of that is format mix, so premium format mix and then offset by

Speaker 2

And just in terms of reference to strategic pricing, I think It's one of the areas that we have viewed as an area of opportunity for a while in terms of Strengthening our use of data and analytics around pricing. We've for a long, long while had Very pricing throughout the day, throughout the week that's tailored to high level demand patterns that we've seen over time. And we just continue to Drive that down further to more discrete levels on a buy feeder basis, but with the use of data. So it ranges in Just tailoring levels of price on a more active basis to varied levels of demand both for moviegoing in terms of our tickets as well as our food and beverage prices. So with that, we found success in Capturing upside both from price in certain circumstances, but importantly just in terms of frequency and consumption and really getting that equation right to maximize box office, maximize attendance and maximize overall concession revenues.

Speaker 7

Okay. And then, Sean, you noted the 3 films from Apple earlier. Just wondering, do you have a sense yet for Apple or Amazon, what run rate fleets Might look like not in the next 6 months, but in the next couple of years, right? What could this maybe contribute to overall box office in terms of of volume or revenue.

Speaker 2

Sure. Well, Amazon has they've publicly Expressed an intention to release up to about 8 to 12 films per year. So when you look at the volume of that And clearly, we while I haven't said it, our expectation is those would probably range in size from small to mid tier to More significant films, more blockbuster tentpole type films. So that level of volume is commensurate with a major studio. And Apple has they've kind of given indications of similar amount, maybe not quite that number, But there have been indications out there of each spending somewhere around $1,000,000,000 annually.

Speaker 2

So to the extent that flows through, again, those are sizable levels. So there's the potential for us to see almost to incremental major studios entering the marketplace, which would obviously provide a huge tailwind in terms of overall

Operator

Our next questions come from the line of Steven Lazachek with Goldman Sachs. Please proceed with your questions.

Speaker 9

Hey, great. Thank you. Maybe for Sean, with the actors Other influences unable to promote movies like they typically would given the strikes. I was curious if you see the need or maybe the opportunity for studios and perhaps the theater operators and partnerships to invest more in advertising in the back half of the year. Just curious if you think that there's added return opportunities on this type of spend?

Speaker 4

Stephen, I'll take this one. Regarding our marketing spend, we do not expect Any meaningful changes in our spend on account of the strikes, our spend does vary quarter to quarter based on our attendance and ROI, but for the full year, we're still expecting marketing expense as a percent of revenue to remain largely in line with 2022 levels.

Speaker 9

Got it. And then maybe just a higher level question on merchandising. We saw a series of merchandising initiatives around the Barbie movie last month. I think Cinemark partook in that with some collectible items. I'm just curious how you think about the merchandising opportunity Going forward, is there something you think you might want to get bigger into, maybe as it seems that content becomes more linked to Consumer IP, If that's something to lean deeper into.

Speaker 2

Thank you. Sure. Well, we do. I mean, we think there is incremental opportunity there. A lot of that often depends on the types of films that are in the marketplace.

Speaker 2

So in terms of getting boosts here and there, so obviously the I think Melissa commented the first half Was particularly strong with regard to the types of films and the number of opportunities they provided for Merch sales, while the second half might be a little bit lighter. But on the whole, we see there's opportunity and it's When we look at just what consumers are doing, we see the level of consumption there has been really strong. It's not growing. We are actually in addition to Expanding what we offer within our theaters, it's something that we started to ramp up to from an e commerce standpoint. So now through our app, Through our online website, you can purchase that merch as well, which is a great thing.

Speaker 2

We've seen is in Circumstances where we sell out of merchandise in our theaters, now we have the opportunity to continue to offer that to consumers online. And we've seen a great uptick with high demand type items in people flowing through to online purchases. And then I would just add, The online store also gives us more of a sustained venue. We have limited space in our theaters, but there is a wider Array of things we can offer on a perpetual basis to drive incremental sales in that category. So, we definitely view it as a positive opportunity as we look ahead, something that can continue to contribute to future per cap growth.

Speaker 5

Great. Thank you.

Operator

Thanks. Thank you. Our next questions come from the line of Jim Goss with Barrington Research. Please proceed with your questions.

Speaker 10

Thanks. Good morning. I wanted to ask about the emerging genres you mentioned. I think you indicated there was about 7% of your revenue base that was coming from a combination of perhaps Faith based films or cultural may play a role Indian, Japanese, Hispanic or maybe some other areas. And to some extent, you're identifying some new audiences that took advantage of the hold that was available.

Speaker 10

And how sustainable is that? And clearly that's providing some of the increment that's helping you reclaim higher ground.

Speaker 2

Well, look, we think, so it's a great question, Jim. You're right. We did comment that it was about 7% of our box office results in the first half. We do think it is a sustainable category. If anything, For a long, long while, we had an anticipation that alternative content Had a lot of promise and it was frustrating that it only had taken off to a limited degree.

Speaker 2

So it's taken some time for this Category in some of these different areas to catch on. But I would say we're now finally starting to see a bit more momentum. The appetite For a wider audience base to go view these types of multicultural films is picking up. The scale of those films is also been to a higher degree, which we think certainly helps the quality of those movies and the Scale those movies, so they're starting to translate more across cultures. We're certainly seeing slowly starting to see more in the like we've had The Met for a while, but in the concert space, in the gaming space, these different types of events.

Speaker 2

And then clearly, we're seeing more scaled faith based results On some of these films like we saw with Jesus Revolution and Sound of Freedom, that are delivering some pretty solid box office figures. So, all in, We continue to think there's opportunity there. We've said historically, we think probably 5% or so of Office might be a reasonable expectation. Certainly as more of the Hollywood content comes in that will just create a bigger Overall number, but we think there's a lot of ongoing potential here. And if anything, we think there's a bit more growth than where we're currently at based on

Speaker 10

One other thing I'd like to ask about is film rent margin trends. I might have expected more favorable trends given that there have been blockbusters that not Perhaps as many films getting to the higher levels. And I thought you might also get some concession in terms of how you've played with Windows over the past several years. But they're Not quite where I thought they'd be and I wonder if you might maybe they are where you think they should be. If you have any comments on the film rep margin Progression.

Speaker 4

Sure. So in what we saw in the quarter, our film rental, the dynamic that's Playing out in our film rental rate is that as the overall box office grows, we're seeing more higher grossing titles and those Fall higher on the film rental scale. So that's the dynamic that we're seeing in or we saw in the quarter play out. As you look forward, we do continue to expect our film rental rate to be impacted by higher concentration of tentpole films, but that's going to our film rental rates are going to vary quarter by quarter Based on the volume and content in any given quarter, we still are receiving Economic consideration for window the reductions in windows, but again that also varies quarter to quarter based on release patterns.

Speaker 2

Yes. And I would just add, Jim, just a quick data point. When we look at the top 5 films in Q2, of this year, They were about 62% or so of our box office when you consider what they were in 2019, it was about 53%. So we're still seeing More of the remaining gap of film volume in some of those smaller titles. So those have made a big advance this year versus last year, But that's an area that's still to fill in and it just puts a little bit of a mix drag on that overall metric.

Speaker 2

That Coupled with some of the incremental spend that we're doing, which also hits that line item from an advertising and promotion standpoint, which we think has Been net net compared to 2019, valuable in sustaining our market share, another piece to one of the questions that was asked before.

Speaker 10

Okay. Thanks very much. Appreciate it.

Operator

Thanks, Jim. Thank you. Our next questions come from the line of Eric Wold with B. Riley. Please proceed with your questions.

Speaker 3

Thanks. Good morning. A couple of questions. I guess, first, can you update us on kind of what you're seeing with labor wage rates domestically and in Latin America? And how would you characterize Just asking if the theater is relative to where you'd want to be at this point in terms of still looking to You manage costs and margins, but not impacting the guest experience?

Speaker 4

Yes. I'll take that one. So in terms of wage rates, We are still seeing some wage rate pressure. Our wage rates are up about 5% year over year. That is, as You know from the past couple of years, it's come down from where we were trending.

Speaker 4

While we see Wage rate pressure in pockets. We are not seeing that market driven pressure nearly to the extent that we were previously. What we're seeing now Year to date continues to be more related to state government mandated increases versus that labor market dynamic. Now we do and then in terms of Pure, our ability to actually staff up the theaters, we were able to as we ramped up For the summer season, we were able to staff the theaters to the levels that we intended to staff them to. So that was Definitely a positive as you think about the last two years and the staffing challenges that We had seen.

Speaker 4

So I would say better dynamics at play there.

Speaker 2

Yes. And I would just add for Latin America, Similar dynamics to what Melissa said, albeit I think in many of those markets, some of the Increased inflationary challenges that we've seen here in the U. S. Are more commonplace in those markets. So there's That's more of the norm and our teams there are very adept at dealing with those types of dynamics.

Speaker 2

So it's been More of a newer phenomenon in the U. S, but we've got a lot of experience in that market and staffing levels are where we need them to be there and we're continuing to Do what we can to offset and manage the costs of normal market inflation.

Speaker 3

Thank you. And then just a follow-up, Maybe taking the EBITDA margin question from earlier on a different route. I guess, I I know there's a lot of uncertainty in terms of what inflation may do in the coming year and how the film slate may continue to ramp and box office recover. But Given what you saw in the Q2 in terms of margins, do you feel that the current operating structure and cost structure and kind of per cap Spend levels can allow margins to get back to pre pandemic or above pre pandemic levels if the box office fully recovers in the coming years, but Attendance continues to lag revenues at the same level it is now.

Speaker 4

So, I mean, there's a lot still in flux, So it's hard to say, but I think maybe said another way, we don't necessarily believe that we need Attendance to fully recover in order for margins to recover. So that's going to depend on The factors that we talked about like market share per cap, all that that you highlighted, but as you saw in the quarter, attendance Doesn't necessarily need to get back to those pre pandemic levels.

Speaker 3

Perfect. Thank you both.

Speaker 2

Thanks, Eric.

Operator

Thank you. Our next question comes from the line of Chad Beynon with Macquarie. Please proceed with your question.

Speaker 11

Hi, good morning. This is Aaron on for Chad. With regard to your premium format screens, is there a level of penetration you'd like to get to over the medium term? And how does that rank among your priorities versus some of the other ROI generating opportunities you mentioned?

Speaker 2

Hi, Thanks for joining. Look, we've been very pleased with what we're seeing with premium consumption Across the board, not just our screens, but our D BOX motion seats, our food and beverage, our responsiveness of audiences to our recliner seats. I mean, it really cuts across All the different premium offerings. As far as priorities, it's an area that certainly is ranking high on our ROI priorities because The returns have been really strong. I'd say target wise, specific to the screens and auditoriums, One of the governors on that is just the size of the auditoriums across our existing fleet.

Speaker 2

So if we're adding new theaters, That provides a lot of flexibility. When we're talking about existing theaters, we want to make sure it's the right Scale of experience, right? You need to have a large enough auditorium for the overall experience To be appropriate, so we don't undermine that product. So, we do see, a sustained opportunity there to a certain degree for Certain second XD's in marketplaces here and there, but I would say it's a piece of The overall prioritization effort we're doing with regard to our CapEx, like there's a number of other things that are really positive. So It's high on the list.

Speaker 2

The degree of which we're doing that really is balanced with a range of other things. And then like I mentioned, just The types of auditoriums and the size of auditoriums that we have available to us at this point.

Speaker 11

Okay, great. That's helpful. And then can you help us just understand the inflation picture in Latin America and how that's affecting the consumer? It's good to see the international recovery continuing, but just wondering how that's trending currently.

Speaker 2

Sure. It's interesting. As I kind of was alluding to before, the high inflation is something that Most of these markets are very accustomed to, because it's not unique to retail. It's not unique to our Industry really cuts across everything in these markets. And, what they've become more accustomed to there than here Is pricing growing at a comparable level to inflation?

Speaker 2

So typically what happens is Wage rates goes up, cost of utilities goes up, costs of groceries go up, and people just take the pricing of goods and services up at a similar level and that's how things go. So, and the consumers accept that. They expect it, because it's like I said, it's Almost just the way many of these markets operate. Here in the U. S, it's a little bit of a different dynamic because it's We're not accustomed to higher levels of inflation.

Speaker 2

So we've got to be a little bit more careful on the aggressiveness of pricing just To try to match some of the cost escalation that's been there because there can be a sticker shock that happens here That doesn't happen there. So I would say, again, LATAM, it's more of the norm and it's something that really It hasn't been a near term or newer issue that they're contending with.

Operator

Thank you. There are no further questions at this time. I would now like to hand the floor back over to Sean Gammel for any closing comments.

Speaker 2

Thank you, and thanks everyone for joining us again this morning. In closing, I'd just like to reiterate our optimism about the future of Theatrical Exhibition and our company. Long term indicators regarding consumer interest in theatrical moviegoing and film volume remain positive And Cinemark maintains a highly advantaged position to capitalize on our industry's continued recovery through our ongoing strategic initiatives and the many actions That we've already taken to enhance the experiences we provide our guests, advance our operating capabilities and strengthen our financial position. So thank you and we look forward to speaking with you again following our Q3 results.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy your

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Earnings Conference Call
Cinemark Q2 2023
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