Cinemark Holdings, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Moviegoing Momentum: The second quarter saw strong moviegoing momentum with films like Minecraft generating over $950 million in global box office, North American industry box office reaching $2.7 billion (+35% YOY), and various films like How to Train Your Dragon, Thunderbolts, Lilo & Stitch, and others driving strong results.
• Cinemark's Execution: Capitalized on moviegoing strength, sustained core structural market share gains, and benefited from a mix of family titles (3 of the quarter's top 4 films, over 40% of 2Q box office). Achieved record high quarterly domestic admissions revenues and third highest quarterly adjusted EBITDA. Focused on premium guest experiences through training teams, curating food and beverage, maintaining theaters (e.g., expanding reclining seats to 70% of domestic footprint, maintaining Xenon projection technology), and advancing Barco laser projector conversion.
• Loyalty Programs: Free Cinemark Rewards members accounted for over 55% of domestic box office proceeds, and Movie Club had 1.45 million members, up 12% YOY. These programs drove increased moviegoing frequency, food and beverage consumption, and loyalty.
• Marketing: Reached over 32 million addressable consumers globally, leveraged network in studio collaborations, promotions, and partnerships to amplify studio campaigns.
• Productivity: Increased domestic labor hours by only 13% YOY despite 3% expansion in operating hours and 27% growth in domestic attendance, while sustaining high guest satisfaction.

Segment Performance

• Domestic Segment: In the second quarter, domestic attendance grew 27% year-over-year to 36.9 million guests. Domestic admissions revenue was $383.4 million with an average ticket price of $10.39, up 5% year-over-year. Concession revenue grew 33% year-over-year to $307.6 million, with per cap reaching an all-time high of $8.34. Other revenue was $68.3 million, up 28% year-over-year. Total domestic segment revenue was $759.3 million, up 33% year-over-year. Adjusted EBITDA grew 73% to $188.1 million, with an adjusted EBITDA margin of 24.8%, expanding 580 basis points versus the prior year period.
• International Segment: Hosted 21 million guests in the second quarter, in line with the same period last year. International revenue was $181.2 million, up 12% year-over-year. Admission revenue was $83.7 million, concessions revenue was $70.1 million, and other revenue was $27.4 million. Adjusted EBITDA increased 32% to $44.1 million, with an adjusted EBITDA margin of 24.3%, expanding 380 basis points year-over-year.

Guidance

• Average Ticket Prices: Expect modest year-over-year growth for full year 2025 in the U.S., driven by strategic pricing opportunities and expected increase in premium format mix.
• Capital Allocation: Strategy focuses on strengthening balance sheet, investing for long-term success, and returning excess capital to shareholders. Noticed to settle $460 million principal amount of convertible notes in cash, successfully repriced term loan to reduce interest expense by 50 basis points, expecting $24 million reduction in annual cash interest expense. Ended quarter with net leverage ratio of 2.2x, within target range of 2 to 3x. Generated $246 million of free cash flow in the quarter.
• Full Year Outlook: Expect capital expenditures of approximately $225 million for the full year, with back-half weighted spend; free cash flow generation influenced by cash flow timing, working capital dynamics, and potential cash tax benefits from new legislation.

Risks

• No specific detailed discussion of risks in the transcript, but potential risks could include movie market uncertainty, box office performance below expectations, cost inflation (e.g., wages, concessions), and exchange rate fluctuations.

Q: And thanks for all the commentary on the convert. I want to -- I want to ask you about the convert and kind of capital allocation, Sean and Melissa. So -- it sounds like you're still planning to address the premium with shares. So I want to see if there's any thought about maybe using cash. But assuming you're sticking with the stock approach, is there any potential to accelerate that kind of 180 per day settlement through March 12, and I guess I'm asking because I'm wondering in terms of your goal of increasing return of capital, which you guys laid out in your deck, do you need to wait for that warrant premium to completely close out to revisit the dividend, raise the buyback, that kind of thing or maybe not.

A: All right. Thanks for the question, Ben. So starting with the warrants, so our current intent is to settle the warrants and shares. Now we don't have to make that election until shortly before settlement. Ultimately, our decision will be contingent upon the extent to which the stock price exceeds $22, our cash and liquidity and potential dilution considerations, among other factors. So just in terms of how we settle that. As you think about -- you had a question on acceleration. We do continue to evaluate opportunities to mitigate potential exposure on the warrants. The decision as to whether or not we unwind the warrants early or let them expire over that contractual settlement period is a function of the cost to unwind early our stock price at that time as well as future stock price expectations among other factors. And then as far as your question goes, in terms of will that hinder returning additional capital to shareholders, in the near term, certainly addressing the maturity of the convertible notes later this month as well as the warrants is a key consideration for us from a capital allocation standpoint. But the potential for additional capital returns to shareholders prior to settlement of the warrants. That will depend upon a range of factors, including where our cash position is at overall liquidity as well as our net leverage ratio, among other factors. But the Board and us as a management team, we continue to assess our capital allocation strategy and the framework, and that includes size of the dividend as well as potential for share buybacks as we look to deliver long-term value for shareholders.

Q: And then, yes, I guess, let say can you quantify cash flow benefits at Cinemark from the 100% bonus depreciation and the shifts into the leverage interest coverage limitations. I don't know if you guys have figured that out yet?

A: So it's still premature to provide quantification there. We're still analyzing the full impact but we do expect our cash taxes to meaningfully benefit from the new legislation, particularly as it relates to the 100% bonus depreciation and the loosening of the interest expense limitation from a capital expenditure standpoint, many of our capital expenditures to qualify for that accelerated depreciation on the bonus side. I think just the one thing I would call out there Ben, as you guys are looking at modeling, it's just we do for 2025, we had 40% bonus depreciation such that the benefit isn't all incremental, but we do expect it to be significant. And then on the loosening of the business interest expense limitation essentially the - the denominator or the measure that before essentially our interest expense limitation was determined based on EBIT. Now that will be determined based on EBITDA. And since EBITDA is that bigger number, we'll be able to take a greater deduction for interest expense. So the combination of those, like I said, still not at a position where we'll quantify it. We think it's a bit premature to do so, but we do expect meaningful benefits to come from the new legislation.

Q: Sean, I want to see if you could just expand a bit on your PLF strategy. For instance, what kind of drives your decision to roll out more D-BOX and ScreenX as opposed to XDs. And then you wanted to just get your view on some reports that surfaced a couple of weeks ago that you and others were looking at co-branding some of your own PLF formats. And if you can't comment on that directly, maybe you could just speak more generally to what you can do with the XD brand in terms of maybe driving more share or pricing or even integrating it with studio marketing?

A: Sure. Well, first, let me start just by emphasizing at Cinemark, we -- while we hold our IMAXs and our XDs and all our other enhanced screens in very high regard, as mentioned during the prepared remarks. Our focus is on making sure that the entirety of coming to our theaters feels like a premium moviegoing experience regardless of which auditorium our guests ultimately choose. That focus again applies to our service levels, our reclined seats, our cleanliness, our maintenance, our food and beverage offerings, et cetera. In our experience, these types of broad attributes and amenities that reach all audiences and drive high -- they tend to drive higher overall perception of value, which ultimately leads to increased moviegoing frequency and loyalty across all categories of films, big and small. Regarding PLF specifically, they provide a fantastic opportunity for select moviegoers who want an added enhancement to what's already a premium experience of going to the movies. But keep in mind, PLF still only account for about 15% of domestic box office. So while that figure is up somewhat from prepandemic levels, PLFs do benefit from being programmed with the biggest new opening releases each week at a corresponding price point, which tends to boost their performance and has made their recovery versus 2019 appear more outsized. So the bulk of domestic box office, 85% of it continues to be driven by all other cinematic auditoriums in the industry. So while a fantastic amenity, which has been one of several sources of growth for the industry, the PLS are still a relatively small percentage of overall box office sales. So the right contextual balance needs to be maintained overall. And I would also say this, overarchingly, there are numerous fantastic PLF experiences that are available to moviegoers across the U.S. and around the world, including IMAX, which is a tremendous experience, clearly. When the industry conversations about PLS have taken place, which aren't new, by the way, they've largely been focused on how to most effectively market all large screen formats to grow the pie and unlock incremental upside, not as a challenge to IMAX. In general, increasing consumer awareness about the myriad of PLS options that are out there as well as all the other heightened amenities that are available to movie fans, that's a positive for the entire industry, exhibition, studios, creative community and moviegoers. So the relative difference of kind of how we're looking at one thing versus another. I mean, obviously, back to -- there has been a nice uptick in select consumers seeking these types of amenities. So we're looking at opportunities across all those categories. You mentioned a range of them, like I'd say they're all on the table in terms of where we might lean and look for incremental growth opportunities. It really boils down to the particular theater, the size of the screen, the market, kind of what's in the market, the demographics, all those types of things in terms of what's the optimal path to choose one versus another.

Q: And then just for Melissa, just given the down G&A in the quarter, I want to see how to think about the growth on that line item for the balance of the year. We recognize, obviously, there's a variable component around box and your stock price? And then just any view you can give on concession costs from here and just managing inflation around certain items.

A: Yes. So from general administrative expense standpoint, so we did have lower stock-based compensation in the quarter that and associated payroll taxes that did result in lower G&A, kind of outside of that, we do continue to make targeted investments in headcount and capabilities to further advance our strategic initiatives. And we do have some merit increases and rising cost of benefits. So as you think forward from a G&A perspective. I would just keep in mind that ex stock-based comp, we still do expect to see wages and benefits increased as a result of the factors I mentioned. And then always timing of professional fees and then incentive compensation. Those can -- timing and amount of incentive compensation can impact our G&A from quarter-to-quarter. But we continue to remain disciplined, but I would say the year-over-year comp was impacted by stock-based compensation pretty meaningfully this quarter. And then I think your other...

Q: . Anything on concession. Yes.

A: Yes. So on our concession rate, so we continue to expect our COGS rate for the full year to be higher year-on-year given ongoing inflationary pressures as well as a shift in product mix. And that's mainly driven by higher sales of merchandise, and you saw that happen in the first half of the year. Now we do continue to pursue strategies to mitigate inflationary and tariff impacts that may arise and we'll continue to look to do that. And then with respect to product mix, that is an area that we think could continue to drive, especially as we look at the film slate for the second half of the year, particularly in Q4, does lend itself to merch. So it's really going to depend on that mix of merchandise and what transpires there. But we'll continue to look to offset wherever we can. I think the other thing I would just call out is that's a tough comp in the third quarter. So just keep that in mind, we had a challenging comparison year-over-year given the timing of rebates in Q3 of last year. So you'll want to look at that when you're modeling.