Q2 2023 Cinemark Holdings Inc Earnings Call
Okay.
Greetings and welcome to the Cinemark Holdings second quarter 2023 earnings call.
Time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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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.
Everyone I would like to welcome you to Cinemark Holdings, Inc. Second quarter 2023 earnings release Conference call hosted by Sean Gamble, President and Chief Executive Officer, and Melissa Thomas Chief Financial Officer before.
Before we begin I would like to remind everyone that statements or comments made on this conference call may be forward looking statements forward. Looking statements may include but are not necessarily limited to financial projections or other statements of the company's plans objectives expectations or intentions. These matters involve certain risks and uncertainties the company's at.
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.
And in the company's most recently filed 10-K also today's call May include non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company's most recently filed earnings release 10-Q and on the company's website at IR Cinemark Dot com with.
I would now like to turn the call over to Sean Gamble. Thank.
Thank you Chanda and good morning, everyone. We appreciate you joining us today for our second quarter 2023 earnings call.
We believe box office performance during the second quarter combined with movie going results witnessed year to date and over the past two years provide conclusive evidence that consumer enthusiasm to view compelling films and a shared larger than life cinematic environment is as strong as ever the.
Theatrical movie going enthusiasm has been largely undeterred by the impact of the pandemic and the evolution of in home streaming offerings and it continues to demonstrate resilience against macroeconomic inflationary and recessionary dynamics.
Year to date through July North American industry box office results are up 20% over 2022 and have improved two within approximately 85% of 2019, driven by further recovery in wide release volume and sustained consumer demand for and in theater viewing experience.
On par with box office results wide release volume has also reached almost 85% of 2019, which represents a meaningful uptick from last year when volume had recovered to approximately 65% of pre pandemic levels over the same timeframe.
It improved cadence of new diverse content. This year has helped accelerate movie going momentum across all categories of audiences, leading to a continued extension of impressive and in many cases record breaking results throughout the year.
In the first quarter, a series of strong releases exceeded expectations, including franchise tapping successes for Creek III screen, six and John Wick chapter for 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 second quarter kicked off with a bang as the Super Mario Brothers movie quickly became the industry's second biggest animated film of all time, and our top performing animated title ever at Cinemark.
During the quarter Amazon also expanded further into theatrical exhibition with air under its Amazon film label, which delivered solid results.
Did rise a movie initially made for streaming further reinforced the positive impact of the theatrical release, just as smile did last year grossing nearly $70 million in domestic box office.
Marvel's Guardians of the Galaxy volume three generated $845 million worldwide, which was comparable to its second installment and Spider man into the Spider verse doubled but the domestic results of its widely acclaimed first release accumulating over $680 million worldwide.
Franchise fans were further delighted by fast X and Transformers rise of the Beast, while families enjoyed elemental and the little Mermaid, the latter of which reached nearly $300 million in domestic box office and over $560 million globally.
And if there was any question about the strength of theatrical viewing habits coming out of the second quarter take a look at what just happened in July .
The month got started with the faith based sensation sound of freedom, which is already eclipsed $150 million in domestic box office and is still growing.
The highly successful launch of that film was followed by the action packed mission impossible dead Reckoning part, one which has now generated more than half a billion dollars worldwide.
And then on July 21, the Barb and hymer phenomenon swept the world.
The list of records for Barbie and Oppenheimer is already staggering and includes the first time ever two films open to over $80 million of domestic box office simultaneously. In addition to driving the fourth biggest box office weekend on record for our industry.
For Cinemark as a result of Barbie's and Oppenheimer 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.
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These aggregate box office results to date and the many discrete and varied examples of titles just described which cut across all genres of films all types and ages of audiences and all times of the year demonstrate that consumer interest in theatrical moviegoing is strong and vibrant and remain.
As a meaningful and preferential way of allocating discretionary time.
The strength of the second quarter as film lineup supplemented with the ongoing benefits we are achieving from our strategic initiatives translated into exceptional <unk> 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.
And while our worldwide attendance trailed 2019 by 20% we delivered the second highest quarterly adjusted EBITDA in our company's history bested only by the second quarter of 2019, which included Avengers Endgame Aladdin Toy story four <unk>.
Furthermore, our second quarter adjusted EBITDA margin of 24, 6% was within 100 basis points of 2019, and amongst our highest margin results of all time.
Okay.
In addition to second quarter content mix that resonated, especially well across our global circuit. Our strong results are a direct byproduct of the focused efforts are sensational team has pursued to enhance the top notch experienced and service we provide our guests to drive increased movie going frequency while.
Our audience base through more sophisticated marketing techniques loyalty programs and Showtime planning to.
To grow concession consumption through expanded offerings enhanced sales channels and category management optimization and to gain incremental operating efficiencies through labor and cost management initiatives.
A few examples include our continued expansion of premium offerings with Recliners that now span almost 70% of our domestic circuit premium large format auditoriums, which represent approximately 5% of our worldwide screens and drove over 14% of our box office in the quarter and D box motion seats, which delivered a 65% increase.
<unk> in revenue year over year.
We also continued to strengthen our ability to increase awareness of upcoming events drive interest in seeing them and improve conversion into ticket sales in the second quarter alone. We generated over 2 billion marketing impressions through our actions to further enhance and leverage our omnichannel digital communication platforms.
Likewise, the persevering appeal of our global loyalty programs, including our industry, leading subscription program movie club continued to drive meaningful box office upside.
<unk> club now exceeds $1 2 million members and accounted for 24% of our domestic box office in the quarter importantly, customer satisfaction with movie club remains in excess of 95% and we continue to find the program drives increased movie going frequency and food and beverage consumption.
We're also benefiting from a wide range of additional food and beverage initiatives that we've been pursuing to increase purchase incidents and overall concessions revenues.
Such initiatives include strategic pricing actions growing and optimizing the portfolio of products, we offer and simplifying the purchase process through streamlined lobby designs self service capabilities and our online mobile ordering platforms.
Through the successful execution of these initiatives, we have grown our worldwide per cap, 35% compared to the second quarter of 2019.
Finally, we continue to make significant advances in our operating hours and workforce management practices.
These advancements have yielded meaningful labor efficiencies as a result of actions that include enhancing theater level demand forecasting capabilities, introducing more sophisticated staffing tools and techniques simplifying and automating varied administrative routines and improving our ability to actively scale operating hours and labor.
<unk> based on attendance dynamics.
I would like to thank our entire global Cinemark team for all the tremendous impact they have made strengthening our company over the past few years, which enabled us to fully capitalize on the second quarter's rebound in film product.
I'd also like to commend our studio and creative partners for continuing to produce such diverse and compelling content that provides something for everyone to enjoy in our theaters.
While the second quarter and this past month of July provide additional positive steps and movie going recovery. As we look ahead, we are cognizant that the potential impact on product flow from Hollywood's ongoing Sag Astra and WGN strikes are top of mind for our investment community.
The evolution of these strikes is something we are watching closely and their degree of impact on near term film volume in 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 is important to recognize that there has been nothing to suggest that they will affect key fundamentals associated with consumer interest in movie going.
Or studio intentions to rebuild overall theatrical film output over the coming years.
I've already commented on the strength and resilience of theatrical moviegoing based on box office results generated over the past two 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.
No.
We have also received no indications from our traditional studio partners that they intend to alter their plans for scaling theatrical film volume back to pre pandemic levels.
Furthermore, as we've 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 <unk>, three and air This year and Apple were released to epic films in the fourth quarter with Martin Scorsese's killers of the flower Moon and really Scott's Napoleon.
I'll also recently announced plans to release its third major theatrical title early next year with the spy thriller Argyle.
Emerging genres of content in the form of faith based multi cultural and anime and concerts are also scaling up there.
These types of films contributed 7% of our box office in the first half of 2023, and we remain optimistic about their potential for further growth ahead.
The reason why our traditional studio partners streamers and alternative content providers are fully leaning into theaters is their data and analysis continue to show that the best way to maximize value for these types of filmed entertainment assets is within exclusive theatrical release.
Furthermore, a theatrical release also drives material upside for subsequent distribution channels, including streaming platforms comp.
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 event <unk> movies and increasing their perceived quality.
Doing so heightened awareness of and interest to see films and all forms of content strengthening long term recall value.
Furthermore, experiencing content in a shared larger than life cinematic environment produces an elevated degree of energy and engagement that form a stronger emotional connections with stories and characters. These.
These connections helped 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 two to three years. We continue to believe there is a high potential for overall volume to return to if not exceed pre pandemic levels.
In the meantime, cinemark is well situated to confront any ongoing fluctuations in content flow on account of our solid financial and operating foundation. The disciplined way, we approach capital allocation, including the prudent steps we've already taken three fortify our balance sheet. The varied enhancements we've made to.
Our operating practices that have improved our agility and ability to scale and flex in a dynamic landscape and the many ongoing initiatives and opportunities we continue to pursue to drive further revenue and productivity benefits.
The actions we've taken to strengthen our company have enabled us to generate positive adjusted EBITDA every quarter throughout all of the ups and downs over the past two years and they were a key driver of our robust <unk> 'twenty three results.
Furthermore, we believe the benefits of these actions along with our ongoing strategic initiatives will continue to enable us to effectively navigate periods of variability while positioning cinemark to capture an outsized portion of our industry's ongoing recovery and deliver long term growth and shareholder value.
Melissa will now provide further information on our second quarter results Melissa.
Thank you Sean.
Good morning, everyone and thank you for joining the call today we.
We were pleased to deliver such solid results in the second quarter, which demonstrate the strength of cinemark as well as the industry's ongoing recovery potential.
Mr by steadfast consumer enthusiasm for the in theater experience and a compelling film slate that resonated across our global footprint.
Globally, we entertained $64 4 million guests during the second quarter, an increase of 24% year over year and the highest attendance level, we've achieved post pandemic.
With our worldwide revenue increasing 27%.
$942 $3 million, we drove significant operating leverage over our fixed cost.
Growing adjusted EBITDA, 67% to 231 5 million and achieving a robust adjusted EBITDA margin of 24, 6%.
This quarter's margins were a function of the heightened attendance levels, coupled with ongoing operational and strategic execution by our team that is second to none.
Domestically, we served $38 8 million moviegoers during the second quarter, an increase of 14% year over here <unk>.
Admissions revenue grew 21% to $373 4 million on an average ticket price of $9 62 for the quarter.
Our average ticket price was up 6% versus the second quarter of last year, driven by strategic pricing initiatives and premium format penetration.
Somewhat offset by ticket type mix, given the increase in family content during the quarter.
The strength of the box office also flowed through to our concessions with domestic concession revenue, increasing 26% year over year to $296 3 million.
Our concession per cap reached a new all time high of $7 64.
Driven by strategic pricing initiatives and higher incidence rates fueled by the content mix in the quarter.
Notably our domestic concession revenue in the second quarter exceeded that of Q2 of 2019 by 8%, despite 23% lower attendance levels due predominantly to higher purchase incidence.
Other revenue was $65 2 million, an increase of 15% and relatively in line with our attendance growth in the quarter.
Altogether, our domestic segment generated total revenue of $734 9 million, an increase of 22% year over year, and adjusted EBITDA of $188 million up 63%.
Our resulting domestic adjusted EBITDA margin was 24, 6% an expansion of over 600 basis points compared with the second quarter of last year.
Yeah.
Turning to our international segment, we serve $25 6 million patrons in the quarter, a sizable increase of 42% year over year.
Attendance recovery in international outpaced that of the U S, reaching 85% of 2019 levels in the quarter with a film slate that translated extraordinarily well across the Latin region, including Super Mario Brothers Fast X and spiderman across the Spider verse to name a few.
We delivered $105 million of admissions revenue $77 1 million of concession revenue and $25 3 million of other revenue.
In total our international revenue increased 45% to $274 million.
Adjusted EBITDA grew 86% to $50 7 million, resulting in a 24, 4% adjusted EBITDA margin are 540 basis points of margin expansion year over year.
Shifting to global expensive film rental and advertising expense was 58, 1% of admissions revenue down 20 basis points compared with the second quarter of 2022, primarily due to marketing expense leverage and a higher mix of international box office.
Somewhat offset by the content mix in the quarter.
Concession costs as a percent of concession revenue were 18, 1% in the second quarter down 30 basis points year over year, as we successfully offset inflationary pressures with strategic pricing initiatives.
Global salaries and wages were $112 1 million up 12% year over year as a percent of revenue salaries and wages declined 160 basis points driven by operating leverage due to the strength in attendance and benefits derived from our ongoing focus on labor efficiencies, which were partially offset.
By ongoing wage rate pressure.
Facility lease expense was $87 million up 8% year over year as a percent of total revenue facility lease expense decreased 160 basis points compared with Q2 of last year as we gained leverage over our lease costs, particularly in our domestic segment, where lease costs are predominantly fixed in nature.
Utilities and other expense was $120 2 million, an increase of 13% compared with the second quarter of 2022, primarily driven by variable costs, such as credit card fees utilities, and repairs and maintenance that grow with attendance.
G&A was $50 million in the quarter, an increase of 4% from the second quarter of last year, driven by incremental head count to support business recovery and our strategic initiatives.
Wage and benefit inflation and higher stock based compensation.
That said, our head count levels remain below 2019 levels and we remain highly focused on controlling our discretionary spending.
As a percent of revenue G&A declined 120 basis points compared with Q2 of last year.
Globally, we generated net income attributable to Cinemark Holdings, Inc of $119 1 million in the second quarter.
<unk> and diluted earnings per share of <unk> 87.
Turning to the balance sheet we.
We generated $215 million of free cash flow and increased our cash balance by $108 million to end the quarter was $758 million of cash.
We remain balanced in our approach to capital allocation with a near term focus on continuing to strengthen our balance sheet and invest in the long term health of our company.
We took steps to proactively address our 2025 debt maturities in the second quarter with the redemption of $100 million of our 875% senior secured notes and the successful refinancing of our credit agreement, where we secured a $650 million term loan maturing in 2030 and an upsized.
Revolver of $125 million maturing in 2028.
We maintain our two to three times net leverage ratio target and expect to achieve that over time through adjusted EBITDA growth and free cash flow generation.
Of which are contingent upon the timing and extent of overall box office recovery.
We continue to make prudent investments in our global circuit with 28 million of capital expenditures in the second quarter and our full year target of $150 million we.
We expect roughly half of our capital investment this year to be allocated to maintaining a high quality circuit and the remainder to ROI generating opportunities.
Mainly premium amenities.
Newbuild theaters and laser projector installations.
As we look forward, we will continue to align our capital expenditures with our box office recovery and free cash flow expectations.
In closing.
I would like to Echo John's commentary regarding the long term prospects associated with the theatrical exhibition industry and our company.
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.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Please while we poll for your questions.
Our first questions come from the line of Ben Swinburne with Morgan Stanley . Please proceed with your question.
Thank you good morning.
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Sean I know, it's impossible to predict how the labor strengths 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 on production if you will.
I would love to hear your insights based on what you're hearing and what you think.
Really two things the impact on the production shutdown may have on 24 volumes. If you still think carefully as we can get this wrapped up by September that next year is higher than this year on supply.
And then Caroline availability is the other thing that is causing some uncertainty more near term and I'm wondering if you think that at this point you have any line of sight on kind of.
The fourth quarter holiday impact from movies being moved around so I know, it's 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 I think capex year to date is about $50 million $50 million to $55 million.
I still think you can spend $1 50, or so this year or are there some of the supply chain stuff, maybe that makes the number coming lower wanted to get an update there. Thank you so 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 and 2020 for film slates.
What we do know just from conversations with our studio partners as they're obviously doing everything they can to minimize the disruption of product flow and their aim is certainly to avoid further shifts to the extent possible.
A lot of that is going to really just depend on on how long the ongoing negotiations take place obviously, there's been some reports that.
Certain conversations with WGNA are going to be recommencing today.
So hopefully that that can see some progress I know I know, sometimes these types of discussions have a way of coming together quickly when they appear far apart and other times they can take a little bit longer. So at this stage I would say even even your end is a little tough to predict.
Typical cycle at this point even for next year when we consider that we've been we've been optimistic about continued recovery in volume year. After year like we saw this year versus last and last year versus the year before.
But typically as is normal we don't have full line of sight to what next year will be this far out a lot of the slate is still coming together and obviously.
Some of that May ultimately be affected by by the duration of the strikes budget, but again, what we know is that 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 how long. These conversations continue.
Well Joe this.
This is <unk>.
Sorry, just a quick follow up just your comment on Amazon and sorry Melissa.
Dump it on Amazon and Apple.
Is your comment about their ramping up of production and increase in enthusiasm or clarity from last quarter I Couldnt tell I know you've been expecting them to ramp up but it sounded like you were making it maybe more of a emphatic point today.
I would say, it's just more of a restatement of last quarter, I mean, where we're highly enthused by what we're seeing.
Even even the line of sight, we had last quarter in terms of public comments made by by Amazon and Apple I guess since then we've seen applegate another significant film at the beginning of next year with Argyle. So.
Nothing I would say incremental to last quarter just sustained.
Louisiana has them about the direction that they are moving in.
Thanks.
Okay, and then with respect to Capex spend.
To your point, we did spend only about $55 million of Capex in the first half of the year. However, we do expect to still hit 150 million of Capex for full year 2023. So it's really timing of the spend is expected to be back half weighted.
Got it thanks, so much alright, thanks for the questions.
Thank you our next questions come from the line of Robert Fishman with Moffat Nathanson. Please proceed with your questions.
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 tough couple of years navigating through the pandemic.
Can you just share more about the entire company's confidence level in achieving record levels of success and the likelihood of profit surpassing pre pandemic levels.
Look I'd say I'll, let I'll tag team that one with Melissa I'd say.
As I mentioned in the prepared remarks, we've been been.
Im 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 would operate coming out of it and when we look at moviegoing activity since.
It's certainly.
<unk> 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 incur.
<unk> levels of production back to where they were pre pandemic. So we see all of that is very positive 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.
Yeah, and just to follow on to that to give you a little bit more context on our second quarter. Adjusted EBITDA margin. What you saw was our team's ability to really capitalize on the strength of the box office in a film slate that as we stated resonated, particularly well with our circuit and that led to especially strong market share.
<unk> concession per cap as well as average ticket prices in the quarter and as we think about our long term margin potential. We certainly have many initiatives that were 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 and as well as our ability to offset.
Other inflationary pressures that may materialize, and then the pull through that we get on the strategic 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.
Okay, Great and just a question about the competitive landscape if I can.
You've highlighted how cinemark has had the sustainable market share you just mentioned it.
Can you talk about where that has come from and maybe the opportunity to grow market share.
Further and house sent.
The worlds emerging out of bankruptcy could impact any of that if at all.
Sure.
I think.
We mentioned in the past I mean, we obviously got a bump in share.
As we were exiting our Ics as we reopening during the course of the pandemic by being one of the first circuits to open.
What we've seen is that exposed a lot of audiences, perhaps to our circuit, who was EMEA had been coming as frequently and they got a taste for the type of experience, we are providing and they've stayed.
Large part of it is not really one single thing, but we had spent a lot of them at a large amount of time strengthening our marketing capabilities, which we think are industry, leading right now in terms of the type of awareness, we build in and reach.
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 showtime's in operating hours, which we think play into that and then of course. There is just the overall experience that guests have when they come to us. So we spent a lot of time.
This is even predates me joining the company. It's I'd say, it's in the DNA of Cinemark really delivering a fantastic guest service to our customers win when they're here.
As we look forward. Our aim obviously is to continue to sustain that 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 us.
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 second quarter was the film content play, particularly well in our markets with the level of family and her in 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 titles skewed a bit lower for our audiences compared to other markets around the company. So we expect we might see third quarter ticked down a little bit for us overall, so it'll ebb and flow a bit but.
Our focus certainly is on continuing to drive those initiatives to sustain our advances.
To comment on your other question on on Cineworld in Regal.
We certainly suspect them having a.
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 as a positive thing for all of US. So you know our hope coming out of that is that they will continue to deliver a a heightened experience and a positive experience and that will be a good thing for everybody.
Great. Thank you so much thanks Robert.
Thank you our next questions come from the line of Eric Handler with <unk>.
Please proceed with your questions.
Good morning, and thanks for the question.
Granted I know Cinemark has a long history of being conservative with the balance sheet, but you are at the point now you're at three four times net leverage you've got a pretty good war chest of cash available to you here I mean, how.
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.
Just your thoughts there sure.
Sure I'll, let again I will tag team on Louis I'll, let her hit a chunk of that is we will say, it's a topic, we talk quite a bit about we.
We do have a focus in terms of the balance.
In terms of where we're aiming for <unk>.
Strengthening our balance sheet as well as pursuing different kinds of initiatives, but Melissa I'll, let you dive deeper.
In terms of capital allocation priorities those remain centered around two 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 remark.
We're targeting a net leverage ratio in the two to three times range as Sean mentioned, we are in regular conversations around our capital allocation priorities, but one thing to keep in mind is we will 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 cause some potential shifts in film slate you can expect us in the near term to be conservative with that that cash on hand.
The only other thing that I would that would kind of supplement that way, obviously, we view that we view that as a good position.
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 NCR. 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.
Great. That's helpful and then just as a follow up.
With National Cinema media is bankruptcy reemergence of restructuring what's different if anything at all in your agreements.
Well for the time being.
Is largely business as usual.
We have a plan a bankruptcy plan that's been approved.
As I understand it are expecting to emerge sometime this month or next.
They have accepted our preexisting contracts. So we continue to operate according to that so for now there havent been modifications to that contract any future. Conversely, any future modifications will be something that would be mutually agreed upon and that's to be determined.
The other thing that I would just mention there is based on the terms of their restructuring.
<unk>. 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 and C&I.
Based on the terms of their restructuring we do expect their outstanding debt will be converted into equity in 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.
Okay.
As you probably will see in our financials that investment.
Reduce debt considerably over the year. So I would say the degree of exposure on that is minimal at this point.
Thank you thanks.
Thanks, Eric.
Thank you our next questions come from the line of Omar <unk> with Wells Fargo. Please proceed with your questions.
Hey, guys. Thank you for taking my question.
Sean maybe first we've seen a few films should.
Away from the back half of the year to 24.
So the writers.
Strike do you expect any additional films do move out other Duane Duane to reschedule.
No.
Maybe.
The strength of your <unk> you guys had previously talked about modest growth for the back half of the year, but that remains elevated with Kurt.
<unk> average ticket pricing and Burke apps running around mid single digits and low double digit range can you just got too low maybe what's driving that and how should we think about.
So.
Thank you and for you. Thanks.
Sure. Thanks Omar.
Yes.
<unk>.
It's still hard to say for the end of the year with regard to any further shifts there is theres a lot of work and a lot of planning underway to try to limit the amount of impact.
There'll be on that.
A lot of that is going to ultimately just depend on.
Are you on how long the conversations negotiations continue and the availability.
Writers different resources that may be required in the form of writing <unk> just.
Just promotional support so we're going to we're going to have to see.
And then with respect to average ticket prices and perhaps I'll start with the average ticket prices. We do continue to believe we can modestly grow our ATP is for full year of 2023 relative to 2022 levels, but our average ticket prices will fluctuate quarter to quarter do you think about the <unk>.
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 will be lapping the significant lift from the <unk> penetration on avatar from last year or 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 2023, however per cab similarity average ticket prices does 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 a film slate that not only drove an audience mix that skewed younger intends to purchase more on the concession side, but it also provided more opportunities for us to sell film themed merchandise.
<unk> and <unk>.
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 next that's just typically less inclined to indulge on the concession side.
Great. Thank you very much thanks Omar.
Thank you our next questions come from the line of David Karnofsky with J P. Morgan. Please proceed with your question.
Alright, Thanks, maybe to follow up on the pricing most of them maybe in Q2 can you unpack a bit.
What strategic pricing versus Pls, what the offset was from the mix.
And then try I don't know if there's any detail you can provide with the strategic pricing you've noted it for a few quarters now.
What sort of resonating there any incremental color on that would be great.
Yeah. So on the average ticket pricing if we look at domestic ATP is we're up about 6% in the quarter and about five points of that strategic pricing at a point of that is format mix, though premium format mix and then offset by tickets.
Mix.
Sure.
And just in terms of.
Reference to strategic pricing I think it.
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.
For a long long while had varied pricing throughout the day throughout the week, that's tailored to to high level of demand patterns that we've seen over time and we just continue to drive that down further to more discreet levels on a by theater basis, but with the use of data. So it ranges in terms of just <unk>.
<unk> levels of price.
On a more active basis, two very levels of demand both for for.
Movie going in terms of our tickets as well as our food and beverage prices. So with that we found success in capturing upside both from from price in certain circumstances, but importantly, just in terms of frequency and consumption and really getting that equation right to maximize box office Maxim.
<unk> attendance and maximize overall concession revenues.
Okay, and then Sean you noted the three films macro earlier.
Just wondering do you have a sense, yet for Apple or Amazon what run rate sleeps might look like.
Not in the next six months over the next couple of years right.
Maybe contribute.
So overall box office in terms of <unk>.
Volume or revenue.
Sure.
Amazon has publicly expressed an intention to release up to about eight to 12 films per year. So when you look at the volume of that.
And it clearly we.
Having said that our expectation is those would probably range in size from small to mid tier two more significant films more blockbuster tent pole type films, so that level of volume is commensurate with our major studio and.
And Apple has <unk>.
Kind of given indications of a similar amount maybe not quite that number but.
There have been indications out there of each spending somewhere around a $1 billion annually.
So to the extent that flows through again those are those are sizable level. So there is the potential for us to see almost two incremental major studios entering the marketplace, which would obviously provide a huge tailwind in terms of overall volume over time.
Thank you.
Thanks.
Thank you. Our next question is coming from the line of Stephen <unk> with Goldman Sachs. Please proceed with your questions.
Hey, great. Thank you maybe for Sean with the actors and other Influencers and unable to promote movies like it typically would given the strikes I was curious if you see the need or maybe the opportunity for studios and perhaps a theater.
Operators in partnership to invest more in advertising in the back half of the year. Just curious if you think that Theres added return opportunities on this type of spend.
Stephen I'll take this one regarding our marketing spend.
Do not expect.
Any meaningful changes in our spend on account of the strikes.
Our spend does vary quarter to quarter based on our expected attendance and ROI back for the full year, we're still expecting marketing expense as a percent of revenue to remain largely in line with 2022 level.
Got it.
And then maybe just a higher level question on merchandising you saw.
Series of merchandising initiatives around the Barbie movie last month, I think cinemark.
It took and that was some collectible items I'm just curious how you think about the merchandising opportunity going forward. Thank.
Thank you might want to get bigger into maybe as it seems like content becomes more linked it to consume right.
That's something to bring to them.
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. So in terms of getting boost here and there. So obviously the I think Melissa commented the first half was particularly strong with with regard to the types of films in the number of opportunities. They provided for merch sales, while the second half might be a little bit.
Later, but on the whole we see there there is opportunity and it's a and when we look at just what consumers are doing we see the level of consumption. There has been really strong if 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 ecommerce standpoint, so now through our app through our online web site you can you can.
<unk> that Merck as well, which is a great thing 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 and people flowing through to online purchases.
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 on a perpetual basis to drive incremental sales in that category. So.
We definitely view it as a as a positive opportunity as we look ahead something that can continue to contribute to future per cap growth.
Great. Thank you.
Thank you our next questions come from the line of Jim Goss with Barrington Research. Please proceed with your questions.
Thanks, Good morning.
Yes.
I wanted to ask about the emerging genres, you mentioned you.
I think you indicated there was about 7% of your revenue base was coming from a combination of perhaps.
And as films or cultural.
They play a role and in Japanese Hispanic or maybe some other areas.
To sum accenture identifying some new audiences that took advantage of the hole that was available.
How sustainable is that.
Clearly thats, providing some of the increment, that's helping you reclaim higher ground.
Well look we think it's a great question, Jim and Youre 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.
<unk>.
For a long long while.
We had.
We had.
In anticipation that alternative content had a lot of promise and it was frustrating that it only had taken off to a limited degree so it's.
<unk> taken some time for this category and some of these different areas to catch on but I would say were now finally, starting to see a bit more momentum.
The appetite for a wider audience space too.
Go view these types of multicultural films is picking up.
The scale of those films is also.
Ben to a higher degree, which we think is certainly helps the quality of those movies in the scale of those movies, so theyre 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.
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 is opportunity there.
Historically, we think probably 5% or so of box office might be a reasonable expectation is certainly as more of the Hollywood content comes in that will.
<unk> just create a bigger overall number but we think theres a lot of ongoing potential here and if anything we think there is there is a bit more growth than where we're currently at based on some of the trends we're seeing in this categories.
Yes.
Okay. Thanks, and one other thing I would like to ask about is film rent margin trends in light of expected more favorable trends given that there have been blockbusters.
Perhaps as many films getting to the higher levels.
Hi, its actually might also get some concessions.
In terms of how you've played with windows over the past several years.
But.
Not quite where I thought they would be and I wonder if you might.
Maybe there where you think they should be but do you have any comments on the film rent margin progression.
Sure. So in what we saw in the quarter our film rental 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 our Vita 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 tent pole 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 pattern.
Yeah, I would just add Jim just a quick data point when we look at the top five films in second quarter.
This year, they were about 62% or so of our box office. When you consider what they were in 2019 was about 53%. So we're still seeing.
More of the the.
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 mixed.
Drag on that overall metric 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 is has been.
Then net net compared to 2019.
Valuable in sustaining our market share another piece to one of the questions that was asked before.
Okay. Thanks, very much appreciate it thanks Jim.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Eric Wold with B Riley. Please proceed with your questions.
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 in the theaters 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.
Yeah, 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.
You know from the past couple of years.
It's come down from where we were trending we while we see.
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 <unk>.
Our ability to actually staff up to the theaters and 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 too. So that was definitely a positive as you think about the last two years.
The staffing challenges that we.
We had seen so I would say better better dynamics at play there.
Yeah, 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 chat.
Challenges that we've seen here in the U S are more commonplace in those markets. So there's a.
That's more of the norm and our teams there are very adept at dealing with those types of dynamics. So it's been more of a newer phenomenon in the U S. But we've got a lot of experience in that market.
Staffing levels are where we need them to be there and we're continuing to do what we can to offset and manage the cost of normal market inflation.
Thank you and then just a follow up.
It may be taken.
Good.
EBITA margin question from earlier on on a different route I guess.
I mean, there was a lot of uncertainty in terms of what inflation you may do in the coming years and to have a film slate.
Continue to ramp.
Box zones recover, but given what you saw in the second quarter.
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 are above pre pandemic levels. If the box office is fully recovered in the coming years, but.
<unk> continues to lag revenues at the same level. It is now.
Yeah.
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 to 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 of that that you highlighted but.
As you saw in the quarter attendance doesn't necessarily need to get back to those pre pandemic levels.
Perfect. Thank you both.
Eric.
Thank you our next questions come from the line of Chad Beynon with Macquarie. Please proceed with your question.
Okay.
Hi, Good morning. This is Aaron on for Chad with regard to your premium format screens is there a level of penetration do you 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.
Hi, Erinn, thanks for thanks for joining us.
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 are rich.
Our responsiveness of audiences to a recliner seats I mean, it really cuts across all the different premium offerings as.
As far as priorities, it's an area that certainly is ranking high on our ROI priorities because the returns have been really strong.
Say target wise specific to the screens and auditoriums.
One of the governors on that is just the the size of the auditoriums across our existing fleet. 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 you need to have a large enough auditorium for the.
The overall experience to be appropriate so we don't undermine that product. So we.
We do see a.
A sustained opportunity there to a certain degree for certain second XD and marketplaces here and there.
But I would say in fact, it's a piece of the overall.
Overall prioritization effort, we are doing with regard to our capex like Theres a number of other things that are really positive. So.
It's high on the list the.
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 in the size of the terms that.
That we have available to us at this point.
Okay, Great that's helpful and.
And then can you help us just understand the inflation picture in Latin America, and how thats affecting the consumer.
It's good to see the international recovery, continuing but just wondering how that's trending currently.
Sure.
Yes.
It's interesting as I kind of was alluding to before.
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 their then here is pricing growing at a comparable level to inflation. So typically what happens is wage rates goes up cost of utilities goes up cost of groceries go up and people just take take the pricing of goods and services up at <unk>.
Similar level and Thats, 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.
So you'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 a norm and it's something that really hasnt been.
It hasn't it hasn't been a near term or newer issue that they're contending with.
Got it I appreciate the color and congrats on the quarter.
Thanks I appreciate it.
Thank you there are no further questions at this time I would now like to hand, the floor back over to Sean Gamble for any closing comments.
Thank you and thanks to 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 movie going in film volume remained 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 third quarter.
<unk>.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy your weekend.