Cinemark Holdings Inc (CNK) 2005 Q3 法說會逐字稿

At this time, I would like welcome everyone to the Cinemark Third Quarter 2005 Results Conference Call. [Operator Instructions] Mr. Copple, you may begin your conference.

Thank you. Good morning, and I want to thank everybody for participating in our 2005 Third Quarter Earnings Call. I apologize for having to change the time on it; we missed the fact that many people would be out tomorrow, so we wanted to try to give you the opportunity to participate today.

Before we begin, I would like to remind that this call may contain forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, 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'm going to provide you with a brief overview of our third quarter results, after which 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 and its subsidiaries. The results reported in the 10-Q for the parent company, Cinemark, Inc., are substantially the same, other than the inclusion of our Holdco notes, minor holding company costs, and the interest on the notes. 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 www.Cinemark.com. On the website, there's a corporate tab with an IR sub-tab. Under the sub tab, you will find GAAP reconciliations and other operating data which contains worldwide attendance data, data on screen count summaries by quarter, and the adjusted EBITDA reconciliation, as well as a link to EDGAR.

The comparative operating data for the quarter we will be discussing excludes income from discontinued operations attributable to 11 theaters sold during 2004. For the year-to-date data it excludes operations for 13 theaters. As presented in our 10-Q, revenues associated with these theaters for the three and nine months ended September 30th, 2004, were $3.3 million, and $9.3 million, respectively. That 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.

Despite some tent pole films in Q3, such as "War of the Worlds" and the surprising hit "Wedding Crashers," attendance for the industry was still down compared to 2004. The published information I've seen suggests a reduction of 4% to 5% in box office receipts for the quarter, as a result of an 8% to 10% decrease in attendance.

Cinemark reported total revenues of $256.3 million for the three months ended September 30th, 2005, compared to $260 million in Q3 of 2004, a decrease of 1.4%. The decrease was primarily the result of a reduction in attendance of approximately 9.4%, which was partially offset by an increase in pricing. Average ticket price was up $3.75, up 8.7%, and concession per cap was $1.87, an increase of 8.3% for the quarter.

Our revenues per screen decreased approximately 4.3% quarter over quarter. Domestic revenues per screen were down approximately 7%, while international revenues per screen were up approximately 4.1%, primarily as a result of exchange rate benefits.

With the reduction in box office, film rental and advertising costs decreased to 53.4% of admission revenue for the third quarter of 2005, compared to 53.8% of admission revenues for the third quarter of 2004. Our operations group worked hard, managing our variable cost in light of the reduced attendance. Salaries and wages decreased from $26.7 million in Q3 of 2004 to $25.5 million in Q3 of 2005, including the addition of new theaters.

Our adjusted EBITDA for the quarter decreased to $51 million from $57.4 million in 2004. Included in our adjusted EBITDA calculation was an increase in G&A of $13.4 million for the third quarter of 2005, from $12.1 million for the third quarter of 2004. The increase was primarily due to increases in legal, accounting, and consulting expenses, related to the review of potential acquisitions. Without incurring these review costs, the decrease in EBITDA would have been approximately 9.7%.

During the quarter, we opened two new theaters with 25 screens in the U.S. The additions bring our domestic new build total for the nine months ended September 30th, 2005, to seven new theaters with a total of 76 screens. As of September 30th, 2005, the company had signed domestic commitments to open four new theaters with 50 new screens by the end of 2005, signed commitments to open 12 new theaters with 174 screens subsequent to 2005. We opened three additional screens in existing theaters in our international markets, to bring our total to five new theaters with 30 screens during the nine months ended September 30th, 2005.

At September 30th, 2005, we had 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 2005.

We estimate the remaining capital expenditures for the development of these 309 screens will be approximately $101 million.

Looking briefly at our balance sheet, our cash position increased to $133.7 million at the end of Q3 from $100.2 million at year-end. The majority of our cash resides in our restricted group. Our gross face amount of our long-term debt at Sunmark USA, the operating company, decreased slightly to $610.4 million at quarter end. For Cinemark, Inc., the consolidated holding company, our gross face amount debt after interest accretion on our Holdco bonds was approximately $1.024 billion.

As mentioned on our last conference call, Cinemark acquired approximately a 21% interest in National Cinemedia LLC, a joint venture between Cinemark, Regal Entertainment Group, and AMC Entertainment, Inc., during the quarter. Cinemark will account for this investment under the equity method of accounting.

Simultaneously, Cinemark entered into an exhibitor's service agreement with NCM to provide services to Cinemark through its digital content network. Revenues received by Cinemark pursuant to [DSA] will be reported in Other Income. National Cinemedia focuses on the marketing, sale, and distribution of cinema advertising and promotion products, business communications, training services and alternative entertainment content, and [process] digital content network, to its theater owners and other network affiliates.

After the deployment of NCM's digital distribution technology in Cinemark's 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. We expect to spend approximately $25 million for the digital projectors and related systems necessary to deliver the services provided by NCM. We have started the process of equipping our theaters with digital equipment and the rollout should be substantially complete by the second quarter of 2006, with the majority of our [inaudible] theaters coming online by the end of Q1 in 2006. In the third quarter, we spent approximately $1.3 million on rollout.

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

(OPERATOR INSTRUCTIONS) Your first question comes from Neil Jordan with Wachovia.

Yes, good morning. I wanted to see if you could tell me what the restricted payments basket on your Holdco note says, and also if you have any plans to pay a one-time dividend to your equity sponsors?

Neil, I appreciate you participating. The basket I don't have in front of me. With respect to your question, I'll take it a little broader. We actually don't have the ability to pay dividends up through the Holdco as a result of some covenants in our senior facility. So we'd have to change a few things to be able to do that. Today has never been the intent of Cinemark to pay a dividend out. I can't always talk to where the future will go, but our accumulation of cash so far, I think it's just more of a conservative approach that we're taking and looking at the best way to utilize that, be it on repurchasing bonds, on looking at acquisitions, or on new builds, as we always have. We're fortunate in that we're at a point where the cash flow is substantial and we're able to build up cash accumulations.

With respect to the basket, as I said, I don't have a number off the top of my head, but I think if you went back and looked through the covenants and did the addition that you do in there, my gut is probably north of 70 million.

Okay, thanks.

Your next question comes from the line of Andrew Finkelstein with Lehman Brothers.

Hi, this is actually Charrise Ahmed (ph) for Andrew. I just wanted to ask a quick question with respect to the impact of currency translation on the results during the quarter. Given that 25% of revenue is international particularly Mexico and Brazil, I just wanted to get a sense for just an order of magnitude on the impact. Thanks, guys.

Sure, Charrise. Glad you joined us after having, -- I guess Brad's been off, and we're excited to have you as apart of the team over there.

Thank you very much.

With respect to what happened during the quarter on FX rates, clearly, they're a great benefit, and we have substantial operations in both Brazil and in Mexico. In both cases, the peso [inaudible] very well. I don't have bottom line numbers with respect to EBITDA. I think on a top line basis, they benefited us with our call-in revenue of somewhere around $8 million. So, as I said in my prepared comments, when I went through and you look at international and revenues per screen, they're up about 4%, but that was obviously due to the benefit of FX rates, and that our attendance was down, so I think when you take in around that number off of it, if I recall, you'll end up being down in revenues somewhere around $2 or $3 million on a quarter-over-quarter basis.

Okay, great. Thanks, guys.

Your next question comes from Brian Klug with Waddel & Reed.

Hi, guys. I was seeing if you could talk to me about one thing -- two things, actually. First, I was wondering if you could talk to me about what you guys are thinking for the box office for Q4?

We are hopeful at the moment and believe that the quarter will end up comparable to what the quarter was last year. So I guess if you translate that, that's going to tell you that we believe November and December can end up a little better than last year. Everyone was obviously down a little bit for the month of October. There is obviously some good film coming up with "Harry Potter" and "King Kong" and the "Chronicles of Narnia." So that's where our Film Department and everyone believes we'll end up.

Okay, great. And then, can you talk to me -- it looks like you guys purchased a small amount of bonds back in the quarter.

We did. We purchased on a current value basis 1.3 million in bonds.

Could you kind of talk to me about what restrictions -- do you have to buy more back and I guess why, if you're going to do it, you only bought back $1.3 million in bonds?

With respect to restrictions, we're limited first by our restricted payment basket. Probably even more so within our senior agreement we're restricted on how much in bonds we can buy back. There is currently -- and, again, it's public information if you went back through it -- we have a carve-out that we added about a year ago to be able to buy up to 100 million in bonds. The basket is a limiting factor, but it's not obviously compared 1.3 doesn't do a lot in limiting us. The real factors we look at are what are the price of the bonds; does it make sense in today's environment to buy them back? Do we make other changes to make it more beneficial later? As far as the amount, if you go back and look at what our bonds trade, how much in real dollar value they trade, at least from the various traders I've talked to, it's very, very small. There are different times that you'll have a lot of activity, but, in general, even accumulating 1.3 was a very difficult task, much more than I thought it would be. There had been times when we could have probably gone out and bought 10 to 20 million -- well, let's say maybe 10 million, but they are usually very unusual times. I think there are some questions in the market about whether we were going to do an acquisition, and that brought on more activity. But once that was kind of out of the way, I think activities moved back to historic amounts, which are generally very small.

Okay.

As far as -- as I said earlier, it's something we look at. We look at opportunity and relative price. We have really no ongoing commitment to buy more bonds, although we'll continuously look at the market.

One thing, as rates are going up, short rates are going up, are you more inclined to pay more of your senior credit facility?

Again, we look at all three main pieces of debt. We look at the Holdco bonds, the Opco bonds, and we look at the senior facility to kind of determine what the optimal answer is for us. Within that, we look at how it might affect covenants and everything else. So there is no really great absolute answer at any time, but clearly as rates go up, the senior becomes more inviting to us.

Okay. Thanks so much.

(OPERATOR INSTRUCTIONS) Your next question comes from Dennis Oelki (ph) with Regiment Capital.

Yes. Hi, Robert. Just quickly on the legal fees for the quarter. So, can you kind of frame what's going on in the acquisition front? Are any deals behind you and you've walked away, or do you still see things on the horizon? Thanks.

We had looked at some deals and costs were incurred in the second and third quarters, and I imagine a little bit in the first quarter of 2005. The particular deals we looked at at that time -- we're always open to opportunities, but we quit incurring costs with respect to those opportunities. There are -- at least with respect to the primary costs we're incurring. There are always, with this size of a company and being an international company, opportunities that are available to us, both domestically and internationally, and we look at all of them. Our decisions then come down to the value that it can add to the Company, and we tend to put in very simple terms looking at the multiple of EBITDA that we can buy the company for, and then how that nets down to us after synergies.

In today's market, I think people generally are still looking back to 2004, if I'm a seller, and thinking that you had a great box office and maybe not wanting to sell your company based on current performance in 2005. You're also looking at very high multiples that had been out in the industry. As a buyer, I'm on the other end, and I'm obviously looking at where we're at in 2005 now and arguing that maybe multiples, if I'm going to be a buy, need to be lower to make it valuable to me to take into account what risk I'm taking. So I think there's a fairly decent spread at the moment between most buyers and sellers in the market. But we try to play like everyone else does and look at them. We're very, very disciplined, though, on what we think the bottom line has to be in order for us to execute a transaction and we haven't been able to do one at this point.

Another theater operator this morning on their call said that they expect some of those, I guess the smaller regional guys to look to sell as the box office has been soft. So they expect to see some sort of supply come on as far as assets for sale. Are you guys in the same camp, or do you see that spread continuing to be wide?

You know, it's hard to say at what point it narrows. I mean, if I'm a seller and I have the ability to sit on the sidelines a while, I think I'd sit on the sidelines and see where things are going. I mean, it's kind of hard when you're off in EBITDA at the levels some people are, to turn around and say it's time to sell right now. So I kind of think there's still a bit of a spread in the market, but how quickly that goes away, I couldn't tell you. I mean, clearly, we're looking at people to come up that might be interested, but most of the ones at least I've talked to over the last six months have decided to sit on the sidelines and kind of wait to see where things are going. But if the market continues where it is, everybody gets comfortable that these are the right EBITDAs in prices, then everyone has to make new decisions.

Okay, then last question. Of the CapEx, I guess you said what, it's 101 million over the next year and a half, two years?

Yes.

Does that include any potential digital role? Does that include, first of all, the 25 million for NCM?

No, it does not.

And what about retrofitting theaters for digital projection for what was required for the "Chicken Little" 3D?

It would not include any costs that would be attributable to big digital rolling out. Obviously, it's our thought that the costs will not be substantial, that that will be primarily borne through the BPFEs that people talk about [inaudible].

When do you see that picking up, '07, '08?

It's going to take some period of time. I think, obviously, that's getting a lot of push right now from the studios and different equipment manufacturers, but they all agree that the way that thing rolls out is through a beta plan, so we don't think there is a lot of significant movement in the digital arena probably until '07.

Okay, great. Oh, sorry, one last question. What about the noise, as far as studios releasing film directly to -- you know, bypassing theaters. What do you guys think of that? Do you think it's a possibility or not, given the investment that studios would probably be making on the digital rollout in the next couple of years?

Well, obviously, we would believe and hope that it's not something that comes to fruition. I don't think -- our honest belief is that because the box office has been a little soft, we hear all kinds of things about everything. You know, all kinds of reasons as to why the box office is soft, and all kinds of conclusions made as to how we deal with it in the future. We believe that the studios still have a good plan and their desire from the talks we've had with them is to continue the structure as it exists today, to keep the windows in place. It's a model that works for them and it works for us, and it works for our industry. But as a whole, we don't believe that to be a major threat moving forward. Now, granted, people have talked about it and not really sure at the end of the day where they'll end up with that, but we cannot figure out how a model would work any other way than the way it works right now.

Okay, great. Thanks, guys.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions.

We appreciate everybody participating today. Over the last three months, I've had a number of people call me. We've tried to get back with everybody we can, and I appreciate that people have kept it on a pretty top level when they've asked me questions. Again, if you have other things you'd like to talk to us about, we'll try to address them if you'll give us a call. Thanks again for your participation.

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