Cinemark Holdings, Inc. Q2 FY2022 Earnings Call

Greetings. Welcome to Cinemark Inc. Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host Chanda Brashears. You may begin.

Good morning, everyone. At this time, I would like to welcome you to Cinemark Holdings, Inc.’s second quarter 2022 earnings release conference call, hosted by Sean Gamble, President and CEO; and Melissa Thomas, CFO. Before we begin, I would like to remind everyone that statements or comments made on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company’s plans, objectives, expectations, or intentions. These matters involve certain risks and uncertainties. The company's actual results may materially differ from forward-looking projections due to a variety of factors. Information concerning the factors that would cause results to differ materially is contained in the company's most recently filed 10-K. Also, today’s call may include non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company's most recently filed earnings release, 10-Q, and on the company's website at ir.cinemark.com. In today's prepared commentary regarding comparisons, we will be referring back to the second quarter of 2019 unless otherwise indicated as the second quarter of 2021 was severely impacted by COVID closures, government restrictions, and limited new film releases. I would now like to turn the call over to Sean Gamble.

Thank you, Chanda, and good morning, everyone. We appreciate you joining us to discuss our second quarter 2022 results. Following numerous examples of strong individual film performances in the first quarter that delivered results in line or better than pre-pandemic expectations, the second quarter marked another significant step forward in the resurgence of the theatrical exhibition industry's recovery from COVID-19. North American industry box office exceeded $2.3 billion during the quarter, which was nearly triple that of 2Q 2021. Continued improvement in consumer sentiment regarding the pandemic and moviegoing as well as a more consistent release cadence of compelling new films with broad consumer appeal and an exclusive theatrical window culminated in the highest quarterly box office yet since the onset of the pandemic. According to ongoing weekly surveys conducted by NRG, between 85% to 90% of moviegoers continue to indicate they are now comfortable returning to movie theaters. We have certainly witnessed that improving sentiment over the past few months as June and July delivered gross domestic box office receipts that were approximately 90% of 2019's results. Furthermore, as we've indicated in the past, moviegoing begets moviegoing, and a growing volume and diversity of new releases with a steadier week-to-week release pattern continues to bring a wider range of audiences back to theaters. Meaningful advances have been made in the return of older, female, and family moviegoers, which are audience segments that have been slightly lagging, and those advances have helped produce multiple performance records across numerous categories of films. During the second quarter, action and superhero fans were captivated by films like Dr. Strange in the Multiverse of Madness, which delivered 75% more domestic box office than the first Doctor Strange, and Jurassic World Dominion, which opened in line with its predecessor, Fallen Kingdom, from 2018. Families came out in droves for films like Sonic the Hedgehog 2, generating almost 30% more box office than its first installment and more recently, Minions: The Rise of Gru, which became the 4th of July weekend's biggest opening film in history. Horror and suspense audiences have been thrilled by titles like The Black Phone and Nope; specialty film fans were enthralled by Everything Everywhere All at Once, so much so, it is now A24's highest grossing film of all time. Older audiences couldn't help falling in love with the release of Elvis, which continues to hold exceptionally well with minimal week-to-week drops and already has grossed more than $130 million of domestic box office. And then, of course, there is the phenomenon Top Gun: Maverick, which has already surpassed Titanic’s original run to become Paramount's biggest movie ever with more than $650 million of domestic box office, and it is still going. These remarkable results across a wide range of films clearly demonstrate that consumer enthusiasm for theatrical moviegoing is as strong as ever across all categories of audiences. And not only are consumers clearly demonstrating their strong sustained interest in theatrical moviegoing, but we continue to see significant growth in upgrades to premium amenities and food and beverage, even in the midst of a high inflationary environment. Almost 15% of our second quarter box office at Cinemark was derived from our premium large format auditoriums, XD and IMAX, even though they only account for 5% of our screens. That mix represents a 400 basis point increase relative to the second quarter of 2019. Similarly, our box office mix from D-BOX motion seats is up 100 basis points over this same timeframe. And food and beverage consumption remains highly elevated, with worldwide per caps up over 25% versus 2019. This over-indexing of premium offerings, along with the box office results realized during the second quarter, provide further validation that our industry is most closely tied to the strength and volume of film content and not necessarily ebbs and flows in the economy. As concerns are growing about a potential US recession, it's important to remember that theatrical moviegoing provides a reasonably priced premium out-of-home entertainment experience, and domestic box office actually grew in three of the past four recessions. The theatrical exhibition industry's continued recovery during the second quarter certainly played through to Cinemark in both our top-line and bottom-line results. Domestically, our box office performance surpassed North American industry results by over 300 basis points, comparing 2Q 2022 against 2Q 2019, and we had the largest share gain of all the major exhibitors over this period. Likewise, our second quarter Latin America attendance outpaced its corresponding industry benchmark by approximately 400 basis points compared to 2Q 2019. Our Latin American business continues to benefit from being one of the first modern circuits to open across the region more than 25 years ago, and I'm thrilled to report that Cinemark was recently voted among the top 10 overall brands in Latin America. The combination of improvements in the second quarter film slate and associated overall resurgence in moviegoing, along with our sustained focus on our strategic initiatives, drove our second quarter global revenue to $744 million, which was up more than 150% year-over-year. Adjusted EBITDA also grew to $138 million, which is a $150 million improvement from 2Q 2021. I'd like to commend our studio partners for delivering such compelling films in the second quarter and our entire Cinemark team for their dedication and execution in delivering such strong results. As I indicated last quarter, Cinemark continues to benefit from the investments we've made and continue to make in technology, premium amenities, food and beverage, marketing, loyalty programs, and guest service. These investments clearly had a positive impact on our second quarter results, and we remain focused on our five key strategic priorities: continuously enhancing the experience we provide our guests, building audiences, growing new sources of revenue, streamlining processes, and optimizing our footprint. I already described how we're benefiting from a significant uptick in premium amenities, thanks to the investments we've made in enhanced formats like our XD auditoriums, D-BOX seats, and expanded food and beverage offerings. Likewise, the investments we've made to recline over 65% of our domestic circuit continue to pay off, as those theaters have experienced the fastest recovery coming out of the pandemic. Meanwhile, our recently rolled out Snacks in a Tap online food and beverage ordering platform continues to gain traction, and we're already seeing it produce basket sizes that are 3% larger than in-theater purchases, while helping to reduce lines and wait times for other patrons. The workforce management program we initiated prior to the pandemic is delivering material productivity savings that are helping to offset inflationary wage pressures without adversely impacting our guest satisfaction scores that continue to exceed 90%. We also continue to derive meaningful benefits from Movie Club, our industry-leading subscription program, which is still growing in popularity and reached a significant milestone in the second quarter, exceeding 1 million members. Our Movie Club membership now surpasses pre-pandemic levels by more than 10%. And during the quarter, Movie Club drove over 20% of our domestic box office, which is up over 600 basis points from 2019. The ongoing success of this program is not only a testament to the exceptional value Movie Club provides our guests, but is also one more indicator of the sustained enthusiasm consumers have regarding moviegoing. As we work on comprehensive advances in our overall guest experience, we felt it was the right moment to update the look and feel of our brand to provide a more modern, engaging, and cohesive aesthetic. We recently began introducing our new brand concepts into our marketing materials, website, and app. For instance, you may have noticed our new Cinemark logo at the top of this quarter's earnings release. We are excited to continue rolling out these concepts in our concession vessels, theater uniforms, and new theater designs over the coming months. As a result of our sustained investments over the years, the operating enhancements we've made throughout the pandemic, and the further advancements we are achieving through our strategic initiatives, we believe Cinemark remains exceptionally well positioned to navigate our industry's ongoing recovery and fully capitalize on a continued resurgence in moviegoing. The full timing and extent of that resurgence remain dependent on a further rebound in consumer sentiment regarding the pandemic, the sustained quality and diversity of new films, and the volume of future releases. While we are optimistic about continued improvements in all of these areas over time, the next two months will be challenged by another temporary dip in new release volume that is predominantly due to seasonality, pandemic-related production delays, and film release date shifts. That said, we look forward to a strong close to 2022 and the many promising films that are lined up as we round out the year, including the action-packed release of Bullet Train this weekend, the anime film Dragon Ball Super: Super Hero, the thrilling conclusion of the Halloween franchise with Halloween Ends, DC Comics’ Black Adam, starring Dwayne Johnson, romantic comedy Ticket to Paradise with George Clooney and Julia Roberts, David O. Russell's Amsterdam, the highly anticipated Black Panther: Wakanda Forever, which just yielded one of Marvel's top trailer launches of all time with an astonishing 172 million views in its first 24 hours, and family films like Strange World, Puss In Boots: The Last Wish, sequel Shazam! Fury of the Gods, the Whitney Houston biopic, I Want To Dance With Somebody, and of course, Avatar: The Way of Water. We also remain highly encouraged as we look beyond 2022 to next year's lineup of films. While it's still a bit early in the process to evaluate the entirety of 2023's slate, the volume and array of next year's tent poles already looks compelling, with releases in the first half of the year that include Ant-Man and the Wasp: Quantumania, Aquaman and the Lost Kingdom, John Wick: Chapter 4, Super Mario Brothers, Guardians of the Galaxy Volume 3, Fast and Furious 10, The Little Mermaid, Spider-Man: Across the Spider-Verse, The Flash, and a new installment of Indiana Jones. The second half of the year is no less exciting with films such as Mission Impossible: Dead Reckoning Part 1, Barbie, Oppenheimer, The Marvels, Madame Web, a prequel to Hunger Games, Trolls 3, Dune: Part 2, Blade, and a new Star Trek movie. And while we have less visibility into the smaller and mid-tier titles for 2023 at this point in time, which is typical this far out, we expect to see the volume of these films continue to improve as their individual film performance remains favorable and content production cycles return to normal. So in summary, we believe the second quarter's results and recent film performance clearly demonstrate that consumer interest in going to the cinema remains strong and vibrant. As the adverse impact of the pandemic has significantly improved and a growing number of diverse films have been released, theatrical attendance has materially rebounded across all categories of genres and audiences. Furthermore, the sustained progress we are making at Cinemark, advancing our consumer growth and productivity initiatives, continues to yield outsized performance results. We believe all of these factors are indicative of positive long-term prospects for our industry and Cinemark. Melissa will now provide further information about our second quarter financial results.

Thank you, Sean. Good morning, everyone, and thank you for joining the call today. We are highly encouraged by the box office momentum we saw in the second quarter. The North American industry box office exceeded $2.3 billion during the second quarter, representing a 73% recovery relative to 2019 levels. That momentum carried through to our results, with Cinemark achieving 76% box office recovery in the quarter. Starting with our worldwide results, we welcomed 52 million guests during the second quarter. We were pleased to generate $744.1 million of total revenue and $138.3 million of adjusted EBITDA, resulting in an 18.6% adjusted EBITDA margin. Our ability to deliver a strong adjusted EBITDA margin in the quarter is reflective of our team's ability to adapt quickly to a dynamic environment, effectively capitalizing on the box office recovery, managing through inflationary pressures, and tightly controlling costs. Turning to our domestic operations, our second quarter attendance was 34 million, the most guests we've served since the onset of the pandemic. To accommodate the steady stream of films and strong consumer demand, we expanded our operating hours throughout the second quarter, though our operating hours still trailed 2019 levels. We delivered $309.7 million of domestic admissions revenue in the second quarter, with an average ticket price of $9.11. Our average ticket price remained elevated compared with pre-pandemic levels and continues to benefit from strategic pricing actions, a favorable ticket type mix, and a higher mix of premium large format box office. Our domestic concession revenue was $234.6 million, with our per cap reaching another all-time high of $6.90 in the quarter. Our concession per cap was up 26% compared with the second quarter of 2019, driven primarily by higher incidence rates for our core concession products and alcohol. Our per cap results also reflect strategic pricing actions instituted during the quarter to mitigate some of the inflationary cost pressures we are experiencing. Other revenue was $56.5 million during the quarter. Altogether, our domestic operations generated total revenue of $600.8 million and adjusted EBITDA of $111.1 million in the quarter, resulting in an adjusted EBITDA margin of 18.5%. Moving to international, we served 18 million patrons in the second quarter. Our Latin American operations generated $72.2 million of admissions revenue, $51.4 million of concession revenue, and $19.7 million in other revenue. International delivered its highest post-pandemic results in the second quarter with total revenue of $143.3 million, adjusted EBITDA of $27.2 million, and a 19% adjusted EBITDA margin, underscoring our international segment's ongoing recovery. Now shifting to global expenses, film rental and advertising expense was 58.3% of admissions revenue, up 170 basis points compared with the second quarter of 2019. This rate reflects a high concentration of blockbuster films during the quarter, which skew higher on our revenue share agreements with our studio partners, as well as our stepped-up investment in marketing to reignite theatrical moviegoing, increase loyalty to Cinemark, and build our audiences. Concession costs were 18.4% of concession revenue and increased 20 basis points compared with the second quarter of 2019, driven by supply chain challenges and rising costs across several categories, including key commodities such as canola oil. We continue to work diligently to offset these impacts, whether it be by considering product alternatives, broadening our supplier base, or otherwise. Our global salaries and wages were $100.2 million in the second quarter and decreased 8% versus the second quarter of 2019, primarily driven by lower attendance and labor management efficiencies, and partially offset by higher average hourly wage rates associated with the tighter labor market. We were really pleased with our ability to move quickly to expand and contract our operating hours and labor hours throughout the quarter based on fluctuating attendance levels. Facility lease expense during the quarter was $80.3 million and declined 10.3%, driven by a reduction in percentage rent and common area maintenance expense, due to lower attendance levels. Worldwide Utilities and other expense was $106.5 million and decreased 13.2% from the pre-pandemic period, driven by variable costs such as credit card fees that declined with attendance. G&A for the second quarter was $48.2 million and increased 8.8% from the second quarter of 2019, due primarily to higher share-based compensation, legal fees, and cloud-based software expenses. Globally, we generated a net loss attributable to Cinemark Holdings, Inc. of $73.4 million, resulting in a loss per share of $0.61. Capital expenditures for the second quarter were $21.9 million, including $9.2 million for new builds and $12.7 million to maintain or enhance our existing circuit. We continue to target $125 million in capital expenditures for the full year 2022, albeit supply chain constraints may impact our ability to spend at this level. As a reminder, the company's peak CapEx years were in 2015 through 2019, as we utilized the strength of our balance sheet to recline a substantial portion of our circuit, pursue new builds, and expand our food and beverage offerings, among other things. That said, while we expect our capital expenditures to step up from this year's levels going forward, we do not anticipate returning to those peak CapEx cycles. Shifting to the balance sheet, we ended the quarter with $695 million of cash. We generated $143 million of free cash flow in the second quarter, due to our adjusted EBITDA performance and working capital benefits, partially offset by interest payments and capital expenditures. Looking forward, our third-quarter results will be impacted by a lighter film slate in August and September, as well as the timing of our semiannual interest payments, which may lead to negative free cash flow during the quarter. Based on our current industry recovery expectations, we continue to anticipate positive free cash flow generation for the full year, even with the ongoing inflationary pressures around wage rates and concession costs. From a capital allocation standpoint, our priorities continue to be centered around strengthening our balance sheet, which includes deleveraging over time and making the right investments to position the company well for success over the long term. In closing, we are highly encouraged by the box office recovery in the quarter, as well as the team's ability to capitalize on the industry's resurgence, while operating efficiently to deliver strong second quarter results. As we look forward, we remain optimistic regarding theatrical moviegoing and maintain our focus on delivering shareholder value over the long term. Operator, that concludes our prepared remarks. And we would now like to open up the line for questions.

At this time, we will be conducting a question-and-answer session. Our first question is from Eric Handler with MKM Partners. Please proceed with your question.

Yes, good morning and thanks for the question. Just trying to get a handle on your expenses and margin potential, as far as I look at your expenses in 2Q, salaries and wages and utilities were up pretty meaningfully sequentially. How much of that was expanded hours versus inflation? And then maybe you could provide some perspective in terms of relative to 2Q 2019, those expenses were down high single, low double-digits? And how do we think that extrapolates into the third and fourth quarters?

Sure. Thanks for the question, Eric. I'll begin with salaries and wages. In Q2, we noticed a couple of trends. First, compared to Q2 of 2019, our attendance is lower, but we are benefiting from labor efficiencies we've implemented. However, like much of the service industry, we are experiencing upward pressure on wage rates due to inflation, which is evident in our comparisons to Q2 of 2019. Although we extended our operating hours, the increase in wage rates is the more significant factor. We have observed some easing in wage pressure as we increased staffing for the summer season, and while there were some minor wage rate increases, they were not as severe as before. It is still uncertain how this will settle moving forward, especially as we prepare for the hiring season in Q4 for the upcoming film schedule. There are various factors to consider, including operating hours, labor efficiencies, and wage rate dynamics. Quarter-over-quarter, attendance has increased, particularly after a slow film slate in Q1, which led us to hire more staff in Q2 to manage the influx. On the utility front, we are also seeing factors at play. Compared to Q2 of 2019, attendance definitely affects our utility costs. There are variable expenses like credit card fees and commissions to third-party ticket sellers that fluctuate with volume. However, some expenses in this category, such as utilities, maintenance, and janitorial services, have both fixed and variable components. Core utility pricing accounts for about 20% of the total utility costs, and we are witnessing rising utility expenses, particularly from an extremely hot summer. This trend will be reflected in our financials, with more people visiting our theaters and an increased demand for air conditioning impacting our costs. These are the primary factors influencing us. On both the labor and utility sides, we are actively seeking offsets and efficiencies, but inflationary pressures remain significant.

That's very helpful. And then just as a follow-up and continuing on that question. I mean so when you have a month like July, which was essentially flat, with 2019 levels. Can your profitability or your EBITDA be at a similar level?

You're asking about overall EBITDA?

Yeah, I'm just looking at your profitability or your margin, if you have…

Yes. Yeah. So Eric, the way that I would think about that is, there are several puts and takes there. But key driver is going to be attendance in box office that gives us the leverage in the model, and that's largely going to be a function of volume and quality of films released with broad consumer appeal. We've seen through Q2 that consumer enthusiasm for moviegoing remains strong. Beyond that, we have average ticket prices and concession per caps; those remain elevated relative to 2019. So that is a tailwind to our margins. Now on the flip side, we do have pressure that we've talked about on the labor and supply chain side. Now we are benefiting more on the concession per caps and average ticket prices from a margin perspective more so than some of those inflationary impacts that we're seeing. That said, we need to see how that plays out, and attendance and box is really the single biggest driver that comes into play. The other stuff, there are positives and some headwinds that are certainly offsetting, but it's attendance that comes into play.

Thank you. I appreciate. That's fair.

Our next question is from Ben Swinburne with Morgan Stanley. Please proceed with your question.

Thank you. Good morning. I wanted to ask two questions. One on the concession per caps which are up really nicely from 2019 levels, how are you guys thinking about continuing to drive that as we head into 2023 and beyond? What are your sort of strategic goals and operational strategies to keep that growing? And particularly if the consumer becomes under a little more pressure, just given how much that's up from a couple of years ago. Are you feeling good about the ability to grow that going forward? And then on Movie Club, the same kind of question, how are you thinking about innovating and evolving that product over time? I mean, it's a pretty meaningful part of your overall box office as a differentiator for the company. What do you have plans that you're really willing to talk about to continue to drive that business and make it a bigger driver for the company? Thank you.

I will begin with the discussion on per capita revenue. We are pleased to see our domestic per capita figures reaching 90% this quarter, which is an increase of 26% compared to the second quarter of 2019. The majority of this growth is driven by increased purchase frequency, notably from core concessions and alcohol sales. We have implemented strategic pricing measures to address the inflationary pressures affecting per capita revenue. Although we are achieving record-high per capita figures, we anticipate some normalization, though the timing and extent are hard to predict. Moving forward, we are focusing on maintaining these elevated per capita levels. One strategy is enhancing our mobile ordering platform to promote greater adoption, which will create a smoother customer experience. This not only increases average basket sizes, as Sean mentioned, but also helps reduce wait times, allowing more customers to make purchases. Additionally, we are emphasizing proactive category management to ensure we have the optimal product mix tailored to each theater, using planograms to enhance purchase frequency. Finally, while we have taken steps to pass on some inflation costs as part of our pricing strategy, we continually analyze data to identify further pricing opportunities.

And I would add Ben on Movie Club. Look, we're just thrilled with the continued success of the program. As I mentioned in the prepared remarks, obviously, we hit a major milestone with one million members in the second quarter. And we continue to see our program grow at a weekly rate that is comparable to what we saw pre-pandemic. So we still think there's quite a bit of growth just in acquiring consumers into the existing program. That said, to your question on where do we go from here? We're constantly adding little tweaks here and there. One of the biggest things we did more recently was the introduction of a new elevated tier in Movie Club Platinum. We put that in place just at the end of last year. We have over 100,000 members that qualified for that level of program. It's still very early phase into that. It looks like it is working well, and there are things we're doing for surprise and delights and looking at other iterations or slight tweaks to that. So I think we're just going to continue to work on our consumer acquisition strategies, and there are a whole host of different things we're doing to continue to attract people into the program, and then just figure out ways to provide meaningful value. But again, our guest satisfaction rates with Movie Club exceed 95% overall. So we just consistently are receiving exceptional feedback about the program as is. And a big part of that is these special things that we bring up now and then and just the overall value that exists with the core aspects of the program.

Can I follow up, Melissa, on your comment about the normalization of per capita? Does that mean growth slows from 20% to 26%, which seems expected, or do you believe it decreases because it has been somewhat inflated by reopening and consumer enthusiasm?

Yeah. I mean, you certainly have the macro trend, right, of folks shifting into experiences and indulging as they go back out from the pandemic period. So we certainly think there could be an element of that. But frankly, we just haven't seen it, and it's something we would have thought would have happened by now. So for us, the thought is potentially some of that could come down. But again, we're trying to offset that with different strategies.

And I would just add to that, Ben, our historic growth rate was around 5% to 6% annually from a per cap standpoint, and we have a whole series of initiatives and Melissa spoke to several of them that we're working on that. We think we'll have the ability to sustain that. What Melissa is saying too is just you see it in just general experiential spending behavior, where there seems to be a continued over-indexing of consumer behavior. You see it in restaurants of people going out. So we're just watchful for is there ever just a step change back to a certain level. We don't think it's going to come all the way back to pre-pandemic, but a bit of a step change as that levels down as we get a little bit further distance from the pandemic. And then you're building off of that new baseline in a 5% to 6% range. So it's still a little bit unclear what that is broadly in terms of consumer behavior. But so far, we haven't had any hints of that.

Great. Thank you so much.

Our next question is from Steve Cahall with Wells Fargo. Please proceed with your question.

Good morning, guys. This is actually Omar on for Steve.

Hi, Omar.

Hi, Omar.

Hi. Maybe first, Sean, as you mentioned in your prepared remarks, the supply of films coming to market has been below pre-pandemic levels. Could you maybe unpack how much of that is due to production delays and scheduling shifts versus small and mid-sized films going direct to streaming? And also, do you expect production delays to continue into 2023? And how do you see though the environment improving from here? Thanks.

I don't have a specific breakdown, but it's challenging to determine the exact details. The majority of the volume impact is linked to production delays caused by the pandemic. Several films that were originally scheduled for 2022 were pushed into 2023 due to ongoing COVID incidents. This significant delay is clearly the main factor. While there may still be some impact from early stages of new streaming platforms using smaller films as marketing tools to attract subscribers, there have also been extensions of production delays, particularly when serialized TV content was unavailable, necessitating the use of films to fill those gaps. However, this trend appears to be lessening, and some studios have publicly indicated a shift towards emphasizing theatrical releases for their major films. Overall, things seem to be heading in a positive direction, especially as the industry rebounds and theatrical releases once again contribute significantly to studio revenues. Looking ahead, while we may still experience lingering effects in 2023, production slowdowns often take two to three years to fully recover. Some residual impact could still be felt this year as we work towards returning to full capacity. Nonetheless, we see numerous examples of films performing well in theaters, and theatrical releases enhance the overall value of those films, as well as their promotional value for home release. We believe this will continue to drive more content back into theaters over time. Additionally, there's growing optimism that traditional streaming services, seeking new revenue opportunities in a competitive market, will benefit from partnerships on larger theatrical releases, which can also help fill any volume gaps.

That's very helpful. And I have a follow-up, if I may. Maybe Sean and Melissa, with Canada reopening and the box office is normalizing. How should we think about Cinemark's share of the North American box office going forward? I noticed, there was a bit of a downtick here in Q2. Would you be able to hold on to some of the gains, or will your market share reverse back to pre-COVID levels around 12%, 13%? Thanks.

Obviously, in the first half of last year, there were more parts of Canada that were closed. So that does have an effect. But we've indicated we expect that we should be able to retain approximately 100 or so basis points of improvement versus our pre-pandemic share, which remains the case. We're working aggressively to continue to secure that going forward. And I’d say, we continue to have one of the largest share gains relative to the other major exhibitors in the market.

Thank you very much.

Hey, good morning. I got one for Sean and one for Melissa, please. Sean, can you remind us the average length of deals, the term with your studio partners? I'm asking because now that Hollywood streaming pendulum has shifted back, as you just alluded to. How aligned are your mutual interests going forward compared to when you struck the deals in May last year? And then maybe what impact that could have for film splits or other parts of the agreement as the deals are set to be renewed in the years ahead?

Sure. Historically, the length of our deals has generally ranged from about two to three years. That was usually the cadence of circling back and revisiting terms and things of that sort. Obviously, with some of the dynamics going through the pandemic, we were working on some shorter-term arrangements. And I would say, we're kind of still operating in that realm to a certain degree. So we have, if anything, a bit of shorter terms on some of those deals, and I would say still where there tend to be one-offs here or there, we're having individual discussions about those particular situations. So I would say, at least for this current period over the next couple of years, let's say, even though it all are aspiring to get back to a situation where we're probably back in that two to three year time frame, I think it will be a little bit more active just as things fully settle out.

And do you see any opportunity to realign the deals as some of the pendulum has shifted back?

We have had productive discussions and have reached a positive consensus with all our studios regarding appropriate economic considerations in light of recent changes over the past couple of years, particularly concerning release windows. While the standard window for significant films tends to be around 45 days, there remains some variation. Moving forward, we will seek better economic terms for films with shorter release durations, while films with longer windows will likely align more closely with pre-pandemic arrangements.

As you evaluate film rental rates in the US, we have successfully received economic consideration that reflects the shortened theatrical window. However, this has been countered by a higher number of larger tentpole films, which tend to generate more at the upper end of the sliding scale. The real test will be the timing of the return of smaller to mid-tier content at a more consistent rate. Until then, it's reasonable to expect film rentals to align more closely with pre-pandemic levels, especially if we maintain a strong mix of blockbusters. Additionally, it's important to note that marketing costs are part of the film rental and advertising figure, and we have significantly increased our spending compared to the pre-pandemic period to take advantage of the industry's recovery. This increase in marketing spend is driven by expected returns. Regarding the differences between the US and international markets, the terms are structurally different and cannot be directly compared; still, I cannot identify any major changes at this time.

Okay. Thank you, both.

Thanks, Robert.

Our next question is from Jim Goss with Barrington Research. Please proceed with your question.

Good morning. Melissa just touched on this a little bit, but I had a question about the prior concern over the viability of a return of mid-sized films. And I wonder if you could talk a little bit more about how you're seeing that develop and what you're expecting from your discussions with studios and think in terms of the aspects like the length of run and windows and room on the screens for a number of those when you're making room for the larger blockbusters. I think it is important to have the mid-sized films representative to bring in the bigger audiences, but I'm wondering how you see that develop?

Sure, thanks for the question, Jim. Good morning. We agree that we prefer a wide variety of movies that appeal to a broad audience. This diversity enhances our reach and attracts a wider range of moviegoers. We saw examples of this in the second quarter; with more diverse content, we noticed a greater variety of audiences returning. The ongoing evidence and successful mid-tier films indicate that there’s a significant opportunity for studios to re-release these movies. Some of this situation arose from the pandemic and the production cycle, with strategies possibly affected early on by the streaming platforms. However, the intent to release more films seems to have shifted positively. The success of films like Elvis, Lost City, Where The Crawdads Sing, and Black Phone in the second quarter illustrates this trend. Even with 10% to 15% of moviegoers still cautious due to health concerns, it highlights a great opportunity for all types of films, not just blockbusters. Data shows these films perform better when they're available for home viewing on streaming platforms and other channels, which suggests more of this content will be released. I believe that over the next one to two years, we will see a return to previous levels, possibly even an increase. I've mentioned in past calls that a meaningful window is essential for maximizing the value of a theatrical release. However, there’s now more flexibility for films that don’t perform as expected initially. This gives studios increased confidence to take risks on projects that might be uncertain because they know they have options to respond to various outcomes, whether the film becomes a hit or not.

Just following up on that a little bit. If you do have a 10 or 12 screen auditorium and you have 1 or 2 or recently, we've had I think five blockbusters that were new or lingering, do you…

Yes.

Is it a platform usage question, where you might have a couple on a given screen and do it different dayparts or something like that? How do you make sure you leave room for that and get the greatest profitability for the overall circuit?

Yes, that's a challenge we face due to the nature of our business. This has always been the case, especially before the pandemic when we often had to make tough choices. The key question was how to maintain a variety of films when many are released simultaneously, and some are major blockbusters. It's definitely easier to balance this with a larger 20-screen complex, but it becomes more difficult with fewer than 10 screens, as not every film can get the necessary screen time. We strive to ensure good diversity in our offerings. Typically, we address this by having multiple theaters in the same market; if one theater features certain films, we try to complement that selection with others in a different theater.

Okay. Thank you. And the one other thing I'd like you to address with the past with the physical attendance trends, the premium preference has created a widened gap between trends in box office revenues and physical attendance. And physical attendance is important for selling concessions, for example. How are you looking at that trending, or are there any things you've noticed that might sort of adjust that potential return?

Well, are you considering any strategies to increase the number of attendees in the theaters?

Yes, more attendees, yes more bodies in the theater.

Our primary focus is on increasing attendance, not only from the food and beverage perspective, but because it significantly impacts our box office revenue and overall profitability. We are concentrating on how to attract a wider variety of attendees to our theaters and ensure they have a great experience that encourages them to return frequently. The entire industry is still recovering from the pandemic, and this process has been slow. Part of the challenge has been health concerns, and part has been the ongoing discussion about attendance volume. As these issues improve and more films are released, we believe attendance will continue to recover and grow. Our goal is to build audiences by offering a diverse range of content and employing advanced marketing strategies, ensuring that when we attract them, we provide an exceptional experience that keeps them coming back.

All right. Thanks very much.

Thank you.

Our next question is from David Karnovsky with JPMorgan. Please proceed with your question.

Hi, good morning. This is actually John on for David. I guess I just wanted to refocus in on the Latin America sector for a second. Can you give us some color or highlight as to what content did well there during the quarter, or maybe what didn't do well relative to the US? And I guess just more broadly, what you're seeing from an attendance momentum or trends perspective in the market? And then I have a follow-up. Thanks.

Sure. Generally speaking, most films performed better than we anticipated across the board in Latin America, similar to the US. However, there are variations, as different types of films tend to perform differently in the region compared to the US. For example, Top Gun: Maverick was the fourth largest film in Latin America, accounting for about 10% of the attendance, while it was the top film in the US, making up about 23% of the box office. Although it exceeded our expectations, it didn’t reach the same level of success as in the US. Dr. Strange was the highest-grossing film in Latin America during the quarter, performing exceptionally well. Jurassic World and Sonic 2 also exceeded expectations, with performance levels similar to the US. Dr. Strange likely had a slightly higher impact in Latin America compared to the US, unlike Top Gun: Maverick. Moving forward, Latin America had been lagging behind the US during the pandemic, but it has more or less caught up now. However, as we look ahead, we should expect some fluctuations each quarter based on the types of films released. Certain genres, like horror and family films, tend to perform better in the region, while fantasy and sci-fi films usually don’t. There are also unique cases, like Top Gun: Maverick, which may be a global hit but performed better in the US than in the region.

Great. That's really helpful. And then, switching gears a little bit to follow up on one of Eric's earlier questions. Understanding that there is some seasonal hiring built in there. But, I guess, more broadly, can you remind us kind of where we are in regards to staffing levels and progress, I guess, towards what would be a new normal? Thank you.

Yes. So I can start on that one. So from a staffing standpoint, as you may know, just given the seasonality of our business, we hire up for the summer season, then typically, August and September is going to be slower and will ramp back up in Q4. When you think about staffing levels, I mean, we were able, as I mentioned, to hit the staffing levels that we needed for that summer season. But as we mentioned, August and September, not only are we seeing a light film slate due to seasonality, but also given film shifts that have occurred. So we do expect that to be a lighter slate than normal. So we'll essentially ramp down our operating hours and our labor hours and then ramp that back up in Q4. So we're going to flex as needed, guided by the film slate.

And I would just add to that, that, as Melissa said earlier, year-end was tough, just in terms of being significantly understaffed, given people calling in sick because of coming down with COVID, as well as just what was happening in the marketplace with the demand on resources and not being able to hire as many people as we like. That has improved significantly. I think for the most part now, we've been able to get back to the levels we need; and it's just a matter of flexing based on demand. Melissa also mentioned, what happened as a result of some of that, and it goes beyond just our industry and retail. I mean, it was really across the board. We obviously have seen some wage rate pressures that have been somewhat significant over the last few quarters, that seems to be improving considerably, as Melissa touched on. So as we look forward, we think things are certainly stabilizing. They're in a much, much better position than they were. And our focus now is, all right, how do we continue to extract greater value out of the workforce management initiatives that we've been pursuing to find incremental productivity to help offset some of that and work it back, and then look for opportunities to try to perhaps recapture some of the distortion that took place over the last few quarters.

Got it. That's really, really helpful. Thanks guys.

Thanks.

Thank you.

Our next question is from Eric Wold with B. Riley. Please proceed with your question.

Thanks. Good morning. A couple of questions. I guess, one, given kind of following up on the wage question, given the wage pressure that you're seeing right now, would you say that you’re being a little more cautious on taking price with tickets and concessions to offset that kind of inflation environment we're in, potential pressures on households' budgets, and we'll look to catch up later or do you still feel you have the power to push those prices now as needed and consumers are absorbing as much as would be expected?

Yes. We are using pricing as a partial offset to the inflationary pressures we've encountered, but we're being cautious in our approach, consistent with our historical pricing strategies. Our priority is attracting attendance, which allows us to create additional revenue opportunities. Therefore, we are being careful about how we implement price changes. While we see potential for further opportunities and are testing our approach, we are still proceeding with caution.

Got it. And for my last question, could you share your current perspective on new build opportunities in the US as cash flows improve? Considering your previous spending programs, how many opportunities do you believe still exist? Are you looking to be more or less connected to malls or shopping areas compared to the past, or are you leaning towards stand-alone locations? Additionally, what are your thoughts regarding opportunities in Latin America?

I would say that there are still opportunities for new builds in various underserved markets. However, I believe we, and the industry as a whole, will remain somewhat cautious in the near term as we fully emerge from the recovery cycle. Recently, we opened a couple of new builds that were planned before the pandemic, one in Texas and another in Utah, and they are performing exceptionally well. This underscores that placing a quality new theater in an underserved market can lead to better than expected results. I anticipate we will continue to see this trend, both for us and many in the industry. It's important to navigate the full recovery of the industry while balancing investments, as well as making smart capital allocation decisions considering our balance sheet and identifying where we can generate the best near-term returns. Although new builds contribute to long-term growth, there are also other investments that might offer quicker payback.

And Latin America, same?

Latin America is definitely in a similar situation as our LatAm circuit; it is self-sustaining and does not require additional cash from us. The countries there generate their own revenue and maintain their own cash reserves, and they are in a recovery phase. We remain optimistic about the long-term prospects in the industry, as there are more underserved markets in that region compared to the US. However, the pace of mall development is crucial, and while standalone buildings are more feasible in the US depending on the marketplace, it is much more challenging in LatAm due to logistical issues and higher costs. Therefore, we are still reliant on mall development, which is progressing slowly. This will likely take more time to rebound, affecting our opportunities for new builds in the region moving forward.

Perfect. Thank you both.

All right. Thanks, Eric. Appreciate it.

We have reached the end of the question-and-answer session. And I'll now turn the call over to Sean Gamble for closing remarks.

All right. Thank you all for joining us this morning. We appreciate your time and we look forward to speaking with you again following our third quarter results. Have a great day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.