AMC and Cinemark’s first quarter update and outlooks for 2023 point to ongoing recovery at the box office. AMC’s attendance improved +500 basis points quarter-over-quarter and now stands at 59% of 2019’s level. Cinemark improved even more, increasing +700 basis points and now sits at 65% of 2019's level. U.S. revenue compared to 2019 improved by 1,100 basis points for both companies, and now sit at 81% of 2019 revenue for AMC and 86% for Cinemark. (ticket prices and concession spending are up substantially from the 2019 period). In addition to many great films (for example, Avatar at $684M in domestic box), revenue is being driven by premium format (IMAX and Dolby) theaters. AMC shared that its premium large format (PLF) screens often bring in 5-6X more revenue than non-PLF screens. For its domestic business, PLF-screen revenue was 29.2% of admission revenue and it is up +9% versus Q1 2019; in contrast, non-PBL-screen admission revenue was down -34%.
The strong release schedule for Q2 2023 is likely to bring the quarter to a mid-teens gap shy of 2019’s level. The slate includes Super Mario Brothers, Guardians of the Galaxy Vol. 3, Fast X, The Little Mermaid, Spiderman: Across the Spiderverse, Transformers 7, Elemental, and The Flash. Q2 2019 itself was a strong quarter, driven by the Avengers: Endgame, Aladdin, Toy Story 4, and John Wick: Chapter 3.
As it relates to the exhibitors, as we wrote in an industry update, Cinemark is ahead of the market because it benefited from migration into its markets and because it has done a better job in enhancing and maintaining its theaters. (Cinemark’s depreciation expense/capex per screen is $37K /$31K compared to AMC at $30K/$17K.) The better enhancements/maintenance can be seen in its better attendance gains in states like Texas. Additionally, attendance per screen (in the quarter) was 4,300 for AMC and 5,700 for Cinemark, 63% and 68% of 2019’s levels respectively. The higher average for Cinemark and its higher profitability also demonstrate that Cinemark’s theaters are in better markets and more attractive to visit (on a relative basis.) The different recovery paths for the two also reflects their urban/suburban theater mix differences. Dense urban markets in the Midwest and Northeast are more predominant for AMC and these markets were hit harder by the pandemic.
In terms of rebuilding profitability, both companies increased domestic EBITDA by $50M YoY, with AMC now being positive ($11M). Based upon a very strong box office release slate for the remainder of the year (up over +20% YoY for the remainder of the year), AMC should generate a substantial lift in profits and cash generation, with EBITDA expected to reach $300M.
Source: Cinemark Q1 2023 Investor Presentation
In terms of rebuilding profitability, both companies increased domestic EBITDA by $50M YoY, with AMC now being positive ($11M). Based upon a very strong box office release slate for the remainder of the year (up over +20% YoY for the remainder of the year), AMC should generate a substantial lift in profits and cash generation, with EBITDA expected to reach $300M.
We see no evidence in its financial release and disclosure that AMC’s differentiated seat pricing trial which began in February (called Sightline) is driving incremental revenue, yet; however, when looked at through Placer.ai, we see that AMC in Chicago and Kansas City (two pilot markets), outperformed both the chainwide average and Minneapolis on a YoY basis during Q1. We previously wrote for AMC to have sustained cash-generative business, they need to fill more seats; the Sightline initiative may be the ticket based upon this data point.
As it relates to the box office beyond 2023, industry analysts expect continued audience and box office recovery in 2024 and 2025 on the continuation of strong releases which are finally coming to fruition after the epic backlog of the production comes unstuck (shutdowns and complex working conditions during the pandemic). But it isn’t just more releases that will drive the box office recovery in those years, as more marketing dollars will be spent to celebrate and promote those releases. On Disney’s 1Q 2023 earnings call, Bob Iger stated, “One thing we also know is that our films, those that are released theatrically, big tentpole movies, in particular, are great subscription drivers [for Disney+], but we were spreading our marketing costs so thin that we were not allocating enough money to even market them." And so more marketing of the film for its theatrical release and more marketing when it hits the SVOD window, combined will help create bigger franchises.
From the recent earnings results from the major legacy media companies, we had the chance to see where they are at from a business perspective and consider how readily they will be able to fund and produce big tentpole releases. Our conclusion is that there is significant risk to these legacy companies given the sizable profits that come from a quickly melting ice cube (linear TV) and the sizable cash consumption of their over-the-top (OTT) businesses. In terms of paying TV subscribers in the U.S., Q1 2023 ended with approximately only 61.8M traditional subs, down from 68.2M in the prior year and 95M at peak. For context, the film studio business doesn’t produce a high level of profits and cash, being only a high-single-digit EBITDA margin business in general. Warner Bros Studios, which has been through the wringer of AT&T and now Discovery, will generate around $4.3B in revenue for 2023, down from $6.5B in 2019. Paramount Studios will generate only around $200M of EBITDA in 2023, a gangbuster year for the company. Coincidentally, this point of view on the movie business was also repeated by Warren Buffet and Charlie Munger at last weekend’s Berkshire Hathaway shareholder event when they were asked about their investment in Paramount. Ahead of that event, Paramount cut its dividend by 80% after its third consecutive quarter of negative free cash flow (averaging -$460M per quarter). As it relates to its melting ice cube, linear TV for Paramount Global generated about $6B in EBITDA in 2019; that will be down to $4B in 2023.
As to the recent writers’ strike, this is suboptimal and the longer it lasts, the risk rises of pushing late 2023 planned releases into 2024 and 2024’s releases into 2025. And while there is always the opportunity for “rushed work,’ in most cases, “rushed” isn’t the best work.
