Cinemark Holdings Inc (CNK) 2005 Q2 法說會逐字稿

Good morning. My name is Chanelle, and I will be your conference facilitator. At this time, I would like to welcome everyone to Cinemark's second-quarter 2005 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

Thank you. Mr. Copple, you may begin your conference.

Good morning and thank you for participating in our 2005 second-quarter earnings call. Before we begin, I would like to remind you that this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical fact communicated during this conference call may constitute forward-looking statements.

Today, I will discuss with you our results. Afterwards, our President, Alan Stock, will join me to answer any questions you may have.

The operating data we will discuss today is attributable to Cinemark USA, Inc. and subsidiaries. The results reported for Cinemark, Inc. separately are substantially the same other than the inclusion of our Holdco notes, minor holding company costs, and the interest on the notes. Our second-quarter Form 10-Q for both companies are now available on the EDGAR website.

For those of you who have not visited our website, it is located at Cinemark.com under the Corporate Employment tab. You will find an Investor Relations section, which contains worldwide attendance, data, theater and screen count summaries by quarter and adjusted EBITDA reconciliations as well as a link to EDGAR.

The comparative operating data we will be discussing excludes income from discontinued operations attributable to 13 theaters sold during 2004. As presented in our 10-Q, revenues associated with these theaters for the three and six months ended June 30, 2004, were 2.7 million and 6.1 million, respectively. It also excludes the impact of 32 million in recapitalization costs incurred during the second quarter of 2004 as a result of Madison's acquisition of Cinemark.

As a result of the reduction in the quantity and reduced appeal of film product released during the second quarter, Cinemark recorded total revenues of 253 million for the three months ended June 30, 2005, a decrease of 7.9% compared to the three months ended June 30, 2004. The decrease was primarily the result of a reduction in attendance, which was partially offset by increases in pricing. We experienced a 9% decline in box office revenue to 157.7 million and an 8.8% decrease in concession revenue to 80.3 million for the quarter.

Average ticket price increased from $3.61 in 2004 to $3.91 in 2005. Average concession revenue per patron increased from $1.83 to $1.99 per patron.

Despite the industry underperformance compared to our earlier expectations, we were able to perform well on a relative basis to publish industry projections, which reflect a decrease ranging from 8 to 13% for box office revenues for the quarter.

Our domestic total revenues per screen were down approximately 10.8%, and international revenues per screen decreased 8.1%. In total, revenue per screen decreased 10.3%. We feel this is slightly better than overall industry performance.

Film rentals and advertising costs were 88.3 million or 56% of admission revenues for the second quarter of 2005 compared to 94.5 million, or 54.5% of admission revenues for the second quarter of 2004. Despite generating lower revenues, our film costs increased as a result of the averaging of a lower quantity of films during the quarter, coupled with the film rental costs associated with the release of a few tent-pole films such as Star Wars and Madagascar.

Our theater managers have performed extremely well during the quarter in holding our variable costs in check. Within the quarter, we were also able to reduce our general and administrative costs from 13.2 million in 2004 to 12.2 million in 2005, a 7.4% decrease. This percentage decrease matched the relative percentage change in our total revenues for the period. As a result of both of these initiatives, we achieved an adjusted EBITDA margin of 20.7% for the quarter, generating adjusted EBITDA of 52.4 million.

During the quarter, we opened eight new theaters with 58 screens, bringing our total to 10 new theaters with a total of 78 screens for the six months ended June 30, 2005. In the U.S., we opened four theaters, 37 screens during the quarter, bringing our domestic screen count to 2344 screens.

Domestically, we have also signed commitments to open seven new theaters with 91 screens by the end of 2005, and open nine theaters with 136 screens subsequent to 2005.

In our international markets, we have opened four new theaters with 21 screens during the quarter, bringing our total international screen count to 895 screens. We have signed commitments to open two new theaters with 14 screens in international markets by the end of 2005 and open eight new theaters with 69 screens in international markets subsequent to 2005.

We estimate total capital expenditures for the development of these screens will be approximately 109 million.

Looking briefly at our balance sheet, our cash position increased to 139 million at the end of Q2 from 100 million at year-end. The majority of our cash resides in our restricting group. The gross face amount of our long-term debt at Cinemark USA, the operating company, decreased to 611 million at quarter end. For Cinemark, Inc., the consolidated holding company, our gross face amount of debt after interest accretion on our whole co-bonds was approximately 1.2 billion.

Subsequent to quarter end in July 2005, Cinemark acquired approximately a 21% interest in National CineMedia LLC, a venture between Cinemark, Regal Entertaining Group, and AMC Entertainment Inc. Cinemark will account for this investment under the equity method of accounting. Simultaneously, Cinemark entered into an exhibitor service agreement with NCM to provide services to Cinemark through its digital content network. Revenues received by Cinemark pursuant to the ESA will be reported in other income.

National CineMedia focuses on the marketing, sale and distribution of cinema advertising and promotion products, business communications and training services, and alternative entertainment content across its digital content network to its theater owners and other network affiliate circuits. After the deployment of NCM's digital distribution technology in Cinemark theaters, NCM will operate the world's largest digital distribution network with over 10,500 screens throughout the U.S. in approximately 150 markets, including 49 of the top 50 markets. Cinemark expects to spend approximately 25 million for digital projectors and related systems necessary to deliver the services provided by NCM.

We will begin to digitize our circuit during the third quarter of this year. The rollout should be substantially complete by the end of the first quarter of 2006. We feel the opportunity to be part of a group that is directed by theater owners will allow us to maximize our revenue opportunities while maintaining our focus of providing an entertainment experience to our patrons.

Kurt Hall and his team have a great track record of success in NCM, and his predecessors, and they have done an incredible job of bringing three circuits together to provide a national platform. We have already started our NCM integration process, which includes lobby advertising and special events. In the first quarter of 2006, we will begin exhibition preshow, exhibiting preshow entertainment at NCM digital distribution network.

Before we move to questions, I want to apologize for my inaccessibility over the last few months. Our negotiations with NCM, travel, and focus on preserving our margins were time-consuming, and made it difficult to address questions from bondholders. Over the next week, I will try to return the various calls we have received and accommodate anyone who may want to visit our office.

This concludes our prepared comments, and I would like to open up to questions for Alan and myself.

(OPERATOR INSTRUCTIONS) Grant Jordan, Wachovia Securities.

Just a couple of questions. It looks like on the pricing side ticket and concession prices went up at a pretty good rate, especially compared to historical levels. What do you think you expect for the rest of the year, and how much of that was due to international versus domestic mix, and second, what do you expect for CapEx for the remainder of the year?

And then finally, just -- you keep building cash. Are you seeing anything interesting in the M&A front, or do you have any other plans for your balance sheet? Thanks.

Sure. With respect to the first question, you are right; our overall price was a little higher than what we have historically experience. It was up, I think, in general a little over 8% between concession and box office.

It was higher internationally than domestically as a result of a few things, some multiple price increases internationally that we chose to do, while some benefits of exchange rates. I think on a go-forward basis, we tend to say we move with kind of historic industry standards that are probably in the 3 to 4% range. In future years I don't know that you will see any other price increases this year. It is something we review on market by market basis throughout the year, and we will evaluate that if we feel that there is any specific opportunities.

With respect to CapEx, we would estimate that theater builds for the rest of this year would use approximately 25 million of additional cash. And then on your question on usage of our cash, that we have built up, we will continue to look at the best way to utilize that in both paying down debt, as well as other opportunities to expand our circuit. We don't ever comment on any specific acquisitions. We always compare an acquisition opportunity to alternative uses such as building new theaters, which we have been very successful at.

Okay. And so just to follow-up on the pricing, you said -- a kind of historical norms going forward -- is that after this year? Should we continue to see this 8% pickup through the remainder of 2005, or is that just a Q2 event?

I don't know if it is Q2 event. Most of our price increases occurred at the end of last year -- Q4 of 2004, as well as there were some -- especially on the international side that occurred early in the year. And so I think we can see some additional benefit in Q3, and then that will probably tailoff a little bit in Q4.

Bes Gardetta (ph).

This was a fairly satisfactory quarter in a pretty difficult environment.

I have two questions. Number one is the international attendance per screen was down about 8.1%. Would you say it is the same factors that affected the attendance per screen domestically, were in play internationally, or do you think there are some other factors such as currency rate or political environment or anything that were in play there?

One, I appreciate your recommendations on our performance that it was good comparatively. We tried very hard to do that, and we do feel like we performed well despite the product that was out there.

Having said that, what we saw overall is international and domestic perform reasonably the same. We -- I think it was actually more difficult in our international environment, not because of any political issues or anything such as that. We found that moves do extremely well in markets, no matter what the environment might be. Although in the Latin American countries we are in, they have all performed very well throughout the year. And there are specific political issues out there.

We did see some tailoff internationally on a pure attendance basis compared to the U.S. We think that probably had more to do with lack of comparable product that was released on a local basis, not just a U.S. movie product, but some of the foreign films that are typically produced having been quite as strong this year as what they were last year. on the international front. But overall, international is performing extremely well. We did benefit also as a result of some very strong FX rates.

I was under the impression that the overall movie attendance in primarily Latin American countries such as Brazil and Mexico were increasing because there are more and more megaplexes there, which they didn't have before. So there is a destination appeal for those movie theaters compared to what they had. It's pretty much the same cycle that we went through here, probably like 15 or 20 years ago. Do you still see that being in effect -- overall movie market increasing in terms of attendance?

You know, what I would say -- we have been in Mexico for over ten years now. And so I don't want to say it is an overdeveloped market by any means, but it is -- it is not where it was obviously 10 years. Brazil probably is more of an open frontier compared to I would say a Mexico. But they are both developing well, and they both improved. But no matter where you are at in the world, you are always subject to film product. And we have -- as well as being in Brazil or Mexico over 10 years, we have been in Brazil probably a good eight years. And it is one that -- people are used to the quality of the -- our services that we provide to our theaters. And while we do see growth, very good growth in good years, whenever you have a down period, just like we have had this quarter, they will ride with that down period just like the U.S.

Okay. My last question has to do with the NCM -- I didn't know whether or not if you had paid any cash consideration for the 21% -- if you can make any comments on that?

We did make a contribution to it to buy in our percentage, which was to purchase our share of all the capital costs that had been incurred by the companies in their development of their own systems that we bought into. I think that is actually in our Q, if I recall, and it was about $7.3 million for our contribution.

Andrew Finkelstein.

Just a couple of questions. Going back to the CapEx, I think you just told us it was another 25 million for theater builds for the rest of the year, and it looks like it has been about 28 so far. I think we are looking for a number closer to 80. And I don't know if that number originally had the 25 million or so for the National CineMedia, I don't know if you could give us some more guidance on that?

Yes -- I think when we started the year, we were thinking that we would be more in the 80 range. Now also, keeping in mind -- the numbers I am throwing out on CapEx for new builds would not include maintenance CapEx. And so some of the differential is just going to be maintenance CapEx itself.

The other part is some of the projects that we have built having been as -- one, haven't been as expensive, and while you look at the total numbers kind of staying the same throughout this year, I think each quarter we are maybe picking up another new theater or so here or there.

Some of it has shifted, and so it kind of depends which project has moved to next year versus maybe what moved into this year. So some of it has been a little bit of shift. But you are right, Andrew -- I think the guidance we have given in the past -- we are coming in a little bit lower. It is not necessarily due to screen count. It is probably more to do with our cost involved in the particular deals. Some of that has to do with when we projected out at the start of the year, as you know, Cinemark tends to do a number of fee-owned properties. And as it has worked out this year, there is really not much in the way of fee-owned. In tends to move that price up. And that so that has brought a down a little lower than our original expectations. But the pure number of screens in theaters is pretty much running in line with our original expectations.

But some of that spend is probably also getting pushed out. Some of it is fewer fee properties it sounds like, and then you are saying some -- (multiple speakers)

Yes, although that is being pushed. Some of it fees, some of it being pushed out. And while we didn't wholly contemplate going digital this year on what is kind of called little D (ph) in the industry to be able to do the advertising, we did feel we would be doing some of that. It has been accelerated more than what we had originally expected. And so that will all fall in now to this year. And kind of end up -- as the numbers work out, kind of making up the difference.

Okay. So it is 25 million basically --?

Yes, that's a good ballpark estimate. It is -- hopefully, it won't not be that much. But is always costs something. The benefit is that there is a pretty high return on that investment.

Yes, that was actually going to be my next question. You said you are starting to show the preshow --?

It will actually begin in 2006. First, we need to digitize. We have an existing contract that runs through the end of this year, and so we will end up being fully integrated with NCM beginning January of 2006. We still will be rolling some out some of our digitization during that time, because it does take awhile to hit all of our theaters.

Having said that, we do feel like even next year, there will be a very strong return on investment. I don't know -- it is not easy to give you a specific number yet. The one thing I would point out that I think was very compelling to us, and I don't know the makeup of all of Regal Entertainment's other income, but if you look at their other income per patron compared to our other income per patron, they are nearly double ours. And so I am not going to say we are going to double our other income, but we definitely feel like there is a lot of room to grow.

John Jensen.

Just a macro question then, and I don't want to panic over one quarter of poor results, but are you seeing any deterioration in your business from the cable company rollouts of VOD, SVOD, and any marketing surveys where you think this is more of a secular decline in the industry, or is it just basically a bad quarter, and you guys are going to go back to doing what you do?

I guess this is Alan Stock. I think we would answer that it is just a bad quarter. You can kind of sit back and analyze on what we believe on what causes people to go to the movies and not. And it always boils down to what type of product is out there and if it appeals to them and if they want to go. We believe last quarter just hasn't had as much product that -- as compared to the previous year that has drawn people into the theaters. So we believe it totally is driven by product.

And a question -- and I apologize if you already answered this question. I have been in and out on the call. In terms of the terms you are paying the studios, as you have gone to multiscreen -- bigger and bigger theaters with more screens and -- you know, for example, Star Wars being on multiple screens, my understanding is that -- at least in the Carmike call, I got the impression that the terms are a little bit more onerous. Have you guys offset the fact that if you have to pay a sliding scale for as long as the film is being run, that you have these things on multiple screens, and a lot of people are seeing these early on when you pay more in film expense?

The trend in the industry has been to negotiate film rental on an aggregate basis, meaning we try to settle on some type of a an equitable term that is not a sliding scale. And so it does not matter how many screens it is on or how long -- what the length of the run is.

Okay, I got to be honest. I get different answers answers when I ask different theater operators on how this actually works. Are you saying that most of your deals basically -- you guys come up with a number, 54, 55%, and it is what it is as opposed to like a 70/30, 60/40, 50/50 sliding scale?

It is. Yes, it is actually done both ways. But it is headed in a direction where it is that aggregate number. There are still some films and still some companies, and occasionally you will settle on this sliding scale. But the direction for most everyone in the industry is to head in the other direction. And by far, that is the way we prefer to settle film -- exactly for the reasons you described, that we want to play it on multiple screens, and it is beneficial for both of us to come up to an equitable term. So that is the direction that the industry is headed in, yes.

Okay and last question. Is the price of gas having any impact on attendance at all? Are you seeing people who just say, hey, look, I can't swing a movie twice a week now or something like that? I mean, twice a month or something like that?

We have not specifically had people say or can we attribute to that. I mean, certainly, to the aspect that if people feel squeezed in their pocketbooks, you're going to back off on their spending. But also, recognize that we still are one of the cheapest forms of entertainment. So to the extent that you want to go out and be entertained or you have the money to do anything, theaters still become a very attractive choice to do so. So I don't think we have any surveys or understanding that specifically the price of gas has had anything to do with our attendance.

Alexis Gold.

Good morning. Sorry about that. I was on mute for a minute. You talked a little bit just about exhibition costs being higher due to Star Wars during the quarter. Can we assume that exhibition costs as a percentage of admissions revenue will return to more normalized levels during Q3 or are they still going to be higher with War of the Worlds?

I think we would assume -- and again, our history as a company and as an industry is that those levels are pretty consistent over time. You will always have ups and downs depending on the type product. So we would answer that they would continue to be on a more normalized basis.

And just it looks like your working capital was a pretty big source of cash during the quarter. Was there any reason -- was there something just something that abnormal during the quarter or something different?

No, not really. The third quarter tends to be -- excuse me, the second quarter tends to be one of our high cash generation months. We do not have -- our interest payments on our bonds occur in February and August. And so that by its nature in the second quarter just has more opportunity to build up cash. And it fit on a working capital basis.

Should we assume that it should be slight use of cash for the year? Is that right?

I'm sorry. I'm not sure on the question -- a use of cash on working capital?

Right. Should we assume that working capital is going to a source of a cash for the year or a use of cash. I mean, historically it's been a use. Given that this was a weaker quarter and I mean I think it was in line with the industry, so I don't think it was a surprise. I'm just trying to get a sense for cash flow for the year.

Yes, I don't know anything that would be that different this year from historical years. You know we tend to have benefit on working capital as we open new theaters because of the natural kind of negative flow that you're able to achieve by paying your payables later and receiving your cash early. And so we tend to grow -- that normally happens. But there is nothing really unusual this year per se that should change with respect to how our working capital flows.

Okay fair enough. And just as we do look out to the next quarter and just look at the box office results we have for July and at least the beginning of August, do you think you're trending at least similarly to box office for the third quarter?

I would say historically we have performed as well as the industry and we would like to think that we outperformed a little bit. Although, it's interesting and somebody had mentioned conference calls before -- you listen to a bunch, I think everybody somehow outperforms the industry. So, I don't know how that works. But looking at what I have seen to date, I would looked at something right before we came on that I think showed the industry year-to-date was down about -- year-to-date on this quarter, was somewhere around 8 to 9% and box office -- you know, I would tend to say we could easily -- tend to perform at least at that level if not better as we have historically.

And just finally, what have you accumulated under your restricted payments basket at the operating company? Do you have any ability to buy back bonds?

We normally don't disclose the baskets themselves. We do have in our indenture, under our credit agreement, we do have the ability to acquire our bonds at the both Holdco and Opco basis. And we have had the bonds out there a while. They have natural baskets in them and so we definitely do have basket availability.

Brian Kroog.

Could you guys give me the number of widescreen releases in Q2 and how it compared year-over-year and any sense on how Q3, Q4 are going to be -- start shaping up?

I don't know if I can give you -- I don't have in front of me the ability to tell you widescreen -- I guess we can answer it in general terms that each year is pretty similar. I mean we have probably coming up a pretty similar slate of product as we had last year for widescreen releases. I think you have noticed if you have read and followed a lot of it, some of the reasons we're off for this particular year right now is the independent film has actually been some of the product that is been down a little bit. Typically we have 10 to 12 widescreen big releases that are open during the quarter. So I think in general terms that is kind of where we are headed right now. So again I think as we look into the rest of this year we have got some good product coming out. We are excited about Harry Potter and the Chronicles of Narnia and King Kong and there's some good titles out there, which would match up pretty favorably to last year. So I think in general that is how we feel about the rest of the year.

Okay in September I mean it seems like it should be a relatively easy comp that whole month. Do you guys agree with that? Or is that -- you feel -- you know how the box office really trailed off last year?

The only thing I would tell you about September -- and I do -- everyone's I think feeling like that that's one of the good comps out there. The flipside is keep in mind September typically is one of the slowest months of the year.

No, I know.

So on a relative basis it could be good. I don't know that changes a lot for everybody. But we hope it does.

Okay. What about cash taxes? Are you guys -- what would you think in terms of cash taxes for the year?

You know, we are a taxpayer and the cash taxes will catch up. We do planning like anybody else. We generally provide guidance that if you want to be safe, you just take the normal tax rates and apply them. If you look at our numbers you will see that we had a refund at the beginning of the year and then we are now on a payable basis right now. And off the top of my head I would probably say, if you wanted to look at on a cash tax basis, probably put it in around 25 to 30%.

Okay, of the statutory rate? Or --?

Just of net income before tax.

Pretax income 25 to 30%.

That is probably somewhere reasonable.

Mike McGonigal.

I guess if you don't mind, can I follow up on Brian's question about -- and I apologize, I don't really know the comps or what the box office is doing -- but I get the sense then Alan that you guys think that the fourth quarter is -- has a reasonable shot of at least being a flat comp to the prior year? In terms box office?

Yes, I think we believe that to be true.

Okay and just an ignorant question here, in terms of the CineMedia. When you guys are spending the 25 million CapEx for the digitization, is that -- how much would it cost and how does that compare to full exhibition digitization? Is that something that is three years down the road because they just agreed to a standard and would cost a multiple of that CapEx? Or is this something that can be -- once you have some form of digital projection in there, can it be easily adjusted to film exhibition?

The difference between those two is obviously the projector. The cost of the projector that we put in for this advertising venue, as compared to what it would take for the theater are significantly different. As of yet we obviously don't have a real good firm price. We don't know exactly what those projectors are for Big D or for the cinema side. Is that something that's still being worked on to roll out? So there is a significant cost difference between the two. Now some of the architecture and the way you receive data or movies, I mean those are still things as the industry and as our NATO organization has finalized what those specs will be. That is kind of the key and we cannot really fully answer of how we can integrate. But everybody is working on some different plans and ideas of how to roll out the Big D cinema into all the theaters. So our tact on it was that we were excited. We wanted to be involved with the NCM Group and so we're rolling out the ability to show the advertising venue and we will just have to see how the rest of that rolls out as well.

And then can I ask one other question. With Loews getting together with AMC and with Regal, is the domestic market getting more rational in terms of new builds? Or is it pretty much the same as it was? Or conversely, is it getting more competitive?

We have found that it's been very reasonable and very rational. We have not run into any problems at all over the last little while, and I think we all have to approach it on opportunity and what is out there and we have not run into any significant irrationalization at all. So it has been rolling out very well.

Justine Ho.

Can you guys give the percentage of your films or a percentage of your revenues that is on the -- that is negotiated on the aggregate basis, versus the sliding scale?

We don't really -- we don't publish nor do I have the data to give you that way. I can just again I would answer it to tell you that it is headed more in a direction that films get settled that way. But again remember that it depends on the film company. It actually depends on the very title. So that can vary from year-to-year. It just depends on how you can go forward and what the film is and how you want to approach it so (multiple speakers)

I was going to ask, do you have maybe a ballpark figure and maybe not particularly for the company, but in general for the industry then?

I do not. I would not be even be able to venture a guess as to how -- what those percentages or what those -- how that breaks out.

I mean I think the key (technical difficulty) with those that if you look -- this has been occurring for some period of time. And the concern I think the gentleman brought up earlier about the burn off of a film being quicker than what it used to be an how does that effect your ultimate rate and does aggregate change that? The reality is no matter how a film is settled, if you look at the last three years that this has been occurring, and you have had megaplexes widely dispersed out there. You have had this issue out there for some time. Our film rental is staying relatively constant. And so if you look at the total film product for the year and all the different settlements you enter into, no matter what type of settlement it is, you are still pretty much coming out to the same spot. And we feel that that will continue to occur and the history would show it -- Star Wars and a few others for the quarter make it -- get everybody concerned. But then you turn around and you look at where the year's at. The year's in good shape, and by the time you get to year-end, it will be very comparable to what we have had in the prior years.

So when you mentioned that your film gross margin is a little bit lower this past quarter, is it mainly due to the Star Wars then?

I think if you've looked back at the history of Star Wars films, you will find that those in particular help move up your film rental for those periods. The other part, though, that I would say is just as important if you like, there were less films distributed on a wide release basis. And so you have a few things happening. You have the higher expenses generally associated with tent pole type films. And they were not offset quite as well this quarter -- and for that matter year-to-date, by films that tend to be more widely dispersed that aren't as quite as expensive and that's were your average always works out. For the year though, that will occur. And we feel like ultimately we will be back in the range. We think this -- I know -- you can call it an anomaly, whatever you want. It has much more to do with the specific film product. I think if you went back to prior years and prior quarters, you would find that any one quarter might have this occur. Again, if you look at it on a 12-month basis, you will still come out to the same answer that it stays very steady over that longer period of time.

There no further questions at this time.

We greatly appreciate everybody's participation. This was probably one of the more active calls we have had. And, again, I do apologize that I did not get back with some of the people who called me. And I will try to do that over the next week. You all have a good weekend. Take care.

This concludes today's conference call. You may now disconnect.