Cinemark Holdings Inc (CNK) 2007 Q2 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to Cinemark's second-quarter 2007 earnings 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 session. (OPERATOR INSTRUCTIONS). Thank you.

Ms. Nikki Sacks, you may begin your conference.

Thank you and welcome to Cinemark's fiscal second-quarter 2007 earnings call. Before we begin, let me remind you that in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, the Company notes that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Such statements are subject to risk, uncertainties and other factors that may cause the actual performance of Cinemark to be materially different from the performance indicated or implied by such statements. Such risk factors are set forth in the Company's SEC filings.

Today, Cinemark's CEO, Alan Stock, and CFO, Robert Copple will be discussing the second quarter results. I'd now like to turn the call over to Alan.

Thank you, Nikki. On today's call, I will comment on the industry and Cinemark's second-quarter results, the outlook for the upcoming film slate, and provide an overview of Cinemark's strategy.

During the second quarter, Cinemark's revenues increased 49.1% quarter over quarter and adjusted EBITDA grew 38.9%. Our solid performance was driven by the strength of a few blockbuster films, the performance of our international theaters and the integration of the Century circuit. The revenue increase was primarily related to a 24.1% increase in attendance, a 25.1% increase in average ticket prices, and a 21.5% increase in concession revenues per patron, all of which were favorably impacted by the acquisition of Century Theatres that occurred on October 5, 2006.

According to industry sources, domestic box office revenues were up approximately 1% over last year due to the strength of a few blockbuster films partially offset by the limited number of alternative film offerings. The quarter started slow with the top movies, Blades of Glory, Disturbia, and Meet the Robinsons following behind last year's Ice Age 2. The strength of the quarter was concentrated in May with an industry domestic box office of more than 900 million when three strong franchises Spider-Man, Shrek, and Pirates of the Caribbean each released their third installments. The box office results were driven by the success of these [10 pole] films.

While the blockbusters each had very strong opening weekends, they were all released in a relatively condensed timeframe resulting in a quicker than expected trail-off. In addition, there was a relative lack of mid-tier films being released during this time to complement the blockbusters. June was also weaker than last year as Ocean's 13, the Fantastic Four 2 and [Abinal Marty] weren't enough to offset the strength of last year's Cars.

For the third quarter, the industry box office has started to pick up again; up approximately 14.5% to date through August 9, 2007. July admissions were driven by the strength of Transformers and Harry Potter. August has started well with the Simpsons and the Bourne Ultimatum. Some of the anticipated film product for the fall and holiday season include Beowulf, the next 3-D film, Fred Claus, starring Vince Vaughn, and New Line's Golden Compass, and another installment of National Treasure -- The Book of Secrets.

The integration of the Century Theatres continues to go well. We have realized a number of synergies such as the closure of their headquarters. We recently started a roll out of a new POS system, circuit-wide, which will provide us additional management tools to improve our efficiency at the theaters.

We are very pleased with the Century acquisition. If we were to find other assets that would also be a great complement to what Cinemark has built with respect to geographic fit, quality of circuit and operating philosophy, we would consider another acquisition. However, our growth strategy has been and will continue to be primarily through organic expansion focusing on high growth, attractive markets. Year-to-date we have opened 107 new screens in the US, all in the second quarter, with most falling toward the latter half of the quarter. We have sold 34 screens and closed three screens. We anticipate opening an additional 94 screens by year-end. We believe there is an opportunity to continue to realize strong returns on our invested capital by continuing to expand both on our existing markets and into new ones.

I'm also pleased with the performance of Cinemark's International theaters, where quarter over quarter revenues grew 15.3% and adjusted EBITDA was up 17%. Our international strategy is focused on growth in fast-growing, heavily populated Pan-Latin metropolitan areas. This makes Cinemark's international assets unique in the industry and is a strategic differentiator for us. Year-to-date, we have opened 20 new screens in our international markets all during Q2, and closed 10 screens. We anticipate opening 27 screens for the remainder of the year.

Turning to our digital strategy, I am excited for our first fully digital theater which we opened in Chicago in late June. This theater will be our testing ground as we prepare for a more widespread digital deployment, making sure that development will be smooth from a technological perspective as well as from an operational and scheduling perspective in order to achieve the most efficiency and optimize the digital opportunity.

Our goal for the full system digital conversion remains unchanged. We intend to begin the installations in 2008 with our entire circuit converted in approximately three to four years. DCIP, the group that was established to assist in the implementation of the digital rollout and negotiate the virtual [print-C] agreements with the distributors is progressing timely in its negotiations.

I am excited to welcome Carlos Sepulveda, CEO of Interstate Battery Systems International; Roger Staubach, the founder and Executive Chairman of the Staubach Company; and Don Soderquist, the former Senior Vice Chairman of Wal-Mart stores onto our Board of Directors. We are certain that they will be strong additions to the Board and that their impressive backgrounds and broad experiences will be real assets to Cinemark.

I want to thank Rob Selati, Jim Perry and Joe Syufy, who have resigned from our Board, for their service and their valuable contribution. The change to our Board was part of a natural evolution in our transition to a public company. Our new Board members join our remaining members -- Lee Roy Mitchell, Ray Syufy, Ben Chereskin, Peter Ezersky, Enrique Senior and Vahe Dombalagian.

Finally, I am pleased to announce that our Board has initiated a quarterly dividend policy. The dividend for the second quarter of 2007 is based on a quarterly dividend rate of $0.18 per common share prorated based on the April 27 closing date of the initial public offering and consistent with the disclosures in our prospectus. Based on the above [pro ratio], the Company's Board of Directors has declared a cash dividend of $0.13 per common share payable on September 18, 2007 to stockholders of record on September 4, 2007. While future payments will be subject to Board approval, we are committed to returning value to shareholders. We are certain that by adhering to our philosophy of establishing leading market positions and focusing on operational excellence, we will continue to drive cash flow and deliver attractive returns over the long term.

And with that, I'll turn the call over to Robert to discuss the quarter in more detail.

Thanks, Alan. I will review our second quarter and year-to-date financial performance in more detail and discuss our balance sheet. As Alan mentioned, we acquired Century Theatres in October of 2006. Century added 1,017 screens in 77 theaters to our existing domestic theater base. Century had a higher average ticket price and higher average concession per cap than Cinemark, as a result of the mix of markets in which the Century theaters are located. Additional screens and higher prices are a primary reason for the increase in our year-over-year numbers that I will be discussing.

During Q2, we increased our admissions revenues 54.8% to $283.1 million and our concession revenues 50.6% to $138.4 million. As a result, our total revenues increased $144.9 million to $440 million. This increase was driven by attendance growth of 24.1% in 2007 over 2006, an increase in the average ticket price to $5.09 in 2007 from $4.07 in 2006, and an increase in concession revenues per patron to $2.49 in 2007 from $2.05 in 2006.

On a segment basis for the quarter, our US operations generated revenues of $348.2 million, a 61.6% increase over 2006, and our international operations increased revenues 15.3% to $91.8 million. Our domestic attendance increased for the quarter 37.5% and our international attendance increased 1.2%. Film rentals and advertising cost were $159.1 million for the second quarter of 2007. Our film rental and advertising costs as a percentage of box office revenues increased 140 basis points to 56.2%. The increase as a percentage of admissions revenues was due to higher film rental rates on blockbuster films released during the second quarter of 2007 along with fewer mid-tier films available to offset these higher rates. Concessions supplies cost were $22.7 million for the second quarter of 2007 compared to $14.8 million for the second quarter of 2006. Our concessions supply cost as a percentage of concession revenues increased 30 basis points to 16.4%.

For the quarter, salaries and wages increased as a percentage of revenues to 10.3% from 9.1% in 2006. This increase is in our US segment and partially attributable to the increase in the minimum wage and various states in which we operate. As a result of the increase in revenues, the Company's adjusted EBITDA increased to $95.7 million in Q2 of 2007 from $68.9 million in Q2 of 2006. Our domestic adjusted EBITDA increased 46.5% during the second quarter. Included in Q2 EBITDA was the impact of the [NTM] change to the exhibitor service agreement which resulted in a reduction in advertising revenues of $7.6 million from Q2 of last year.

International adjusted EBITDA increased 17%. Our total adjusted EBITDA margin in 2007 was 21.7% for the three months ended June 30, 2007. Information regarding our domestic and international performance is reflected in the segment information in our 10-Q, which was filed today after the market closed. International information is comparable quarter over quarter. The domestic information is now pro forma per Century. In general, our domestic operations on a quarter over quarter basis adjusted for Century was in line with the industry performance both on pricing and attendance.

Included in Cinemark's results for the second quarter of 2007 were two items I'd like to point out. First is the Fandango transaction. Cinemark sold its investment in the stock of Fandango, generating a net gain of $9.2 million. We have two ticketing agreements and distribution agreements with the new owners of Fandango and will continue to use their online ticketing services as well as Cinemark.com to sell tickets online.

The second item is the termination of a profit participation agreement. As part of the Company's IPO, Cinemark exercised its option to terminate a profit participation agreement that existed with its CEO. For the terms of the agreement, the termination payment was $6.9 million as reflected in cost of operations. This amount has been added back in our calculation of adjusted EBITDA.

Net income for the three months ended June 30, 2007 was $47.9 million or $0.45 per diluted share compared to net income of $13.1 million for the three months ended June 30, 2006. Earnings per share substantially increased as a result of an income tax benefit recorded end of quarter. Cinemark's cash pay rate is approximately 40% including state taxes. We do not have a US net operating loss that is affecting the rate. The tax expense recorded for GAAP during the quarter and year-to-date are unusually low as a result of the combination of the special onetime MCM and Fandango gains and non-deductible impairment charges. We anticipate this benefit turning around in Q3 and Q4, resulting in a more normalized rate by year-end.

Looking briefly at our balance sheet, our cash position increased to $386.5 million at the end of Q2 from $147.1 million at year-end. The majority of the increase in cash was from the net proceeds of $246 million from our IPO. Our net debt at quarter end was approximately $1.2 billion compared to $1.8 billion at year-end.

At June 30, 2007, our total domestic screen was 3,593 screens, 12 of which are in Canada. As of June 30, 2007, the Company had signed commitments to open six new theaters with 94 screens in domestic markets by the end of 2007, and opened 10 new theaters with 148 screens subsequent to 2007.

Our total international screen count at June 30, 2007 was 975 screens. As of June 30, 2007, the Company had signed commitments to open three new theaters with 27 screens in international markets by the end of 2007, and opened two new theaters with 12 screens subsequent to 2007.

Year-to-date, we have invested approximately $73.1 million in capital expenditures with $52.2 million on new construction and [$20.9 million] in CapEx maintenance. Included in the CapEx maintenance was $2.8 million related to the rollout of MCM's digital distribution technology and Century Theatres. Additionally, we have received approximately $12.5 in gross proceeds from the sale of existing theaters. We expect our gross total CapEx for the full year to be between 150 to $160 million, which includes approximately 35 to $40 million of CapEx payments.

Finally, I would like to comment on the use of proceeds from our IPO. During July and August 2007, as part of six open market purchases, we repurchased 47 million aggregate principal amount at maturity of our [9 3/4] senior discount notes for approximately $42.8 million. As a result of those transactions we will record a loss on early retirement of debt during Q3 of approximately $3.5 million, which includes premiums paid in the write-off of unamortized debt issue cost related to the repurchased notes.

While we intend to continue to use the proceeds to pay down our long-term debt, given the current state of the debt markets, we may proceed at a slower pace than originally anticipated, utilizing the proceeds. We intend to opportunistically utilize the funds to reduce our debt by also optimizing our debt structure.

In closing, I would like to say that we look forward to the continued strength of the industry box office which combined with Cinemark's operational quality should continue to produce attractive returns and drive cash flow. We will now be glad to answer your questions.

(OPERATOR INSTRUCTIONS) Joel Sutherland, Merrill Lynch.

Just on the debt. I was wondering if you could give us some additional color on why only $47 million as opposed to more or less? That would be helpful.

Sure. Thanks, Joel. As I mentioned, after we received the proceeds we had planned on pursuing the [9 3/4] debt. At that time it was still fairly expensive to go after it. We were going to pay premiums over what it was trading at, at the market. As the markets have moved into a -- I'd say, different position than at the time we originally received the proceeds, I'd say we are cautiously proceeding, trying to take advantage of the market somewhat in terms of buying our debt at better rates. It doesn't trade -- there's not a lot of trades that happen.

And the other thing that we obviously are watching is with the markets being more tight that we have more flexibility let's say in the debt that we're going to pay down, be it 9 3/4 our senior. I mean still as we originally intended, like to do the 9 3/4 but we'd like to do it at reasonable rates. We feel like doing it more slowly gives us more flexibility, let's us be able to make sure that we don't put ourselves in a difficult position with our senior debt if we're not able to acquire the 9 3/4 as quickly and possibly go back into the senior debt and optimize how we utilize our funds in paying any debt down if we should need to.

Is it fair to say that as yield -- I'm trying to think of a delicate way to put this. As a lot of debt issues have had trouble in the markets recently that the amount of money that you would have to pay, say, a month ago, it would have been higher than you might pay today but for the I guess game theory around people or in current holders trying to figure out whether you are the buyer or not?

Yes, I probably didn't say that well earlier. But because the bonds are non-callable, it's difficult to just go in the market and make mass purchases. Definitely at the time that we originally received the IPO proceeds the market was more robust, pricing was higher than what it is today. It was more difficult at that time to acquire bonds. I think you are right as we have gone into the market and bought some bonds, definitely buyers are aware that we might be doing that. And it's probably held the price up a little more than they would otherwise been. But the price has definitely come down meaningfully from where they were at the time we originally received the proceeds.

So I think investors should read the debt reduction as smart buybacks of the debt as opposed to it not being a priority [fit]?

Absolutely. I mean we're just trying to do it on an efficient basis and we found that doing it over time has definitely benefited us.

Okay, thank you very much.

Thanks, Joel. Very good way to say it.

Michael Savner, Banc of America Securities.

Robert, can you give us a little more granularity on your pro forma performance in the quarter? I think you said at a very high level that your performance was generally in line with box office. But as you know it's difficult to model off that. And I think in this industry with a couple of other public comps, we really need to get a better sense of how you did on an apples to apples basis. So can you give us a lot more granularity on what the Q2 '06 pro forma looked like? And to the extent you can, maybe give us some help as well on how to think about the third quarter pro forma, at least what the -- at a very minimum level maybe what your ticket price, pro forma ticket prices, were last year and your attendance per screen last year? And then one follow-up.

Sure. Well, go ahead, what -- with respect to pro forma as I mentioned in my comments, you can go segment reporting and definitely see what international has done so the pro forma would be for the debt, for the domestic segment. The majority -- and I'll give a little background -- the majority of our theaters that we opened this year have been -- were opened, actually all of them were opened in Q2 and they were opened late in the quarter so we didn't quite see some of the pop that we had expected or hoped to in the second quarter from theaters. And that had a number of reasons why they opened the timing they did. So those will be more productive as we move forward. There are -- rest of our circuit was in line with expectations, realizing where we were. I can't give a lot of detailed granularity as I am sure you would like but I can maybe give you some reference points --

Can ask why not? Can I ask why we can't get a pro forma revenue and EBITDA number from last year?

Again, let me kind of walk through it, Michael, and I think maybe I can give you some insight. On a pro forma basis, our domestic average ticket price increased 6.4%. Pro forma basis our concession for patron increased 9.4%. Our total attendance decreased 6%. You know if you need to obviously I guess you can take those numbers and go backwards which would give you everything you just asked for. We discussed earlier the decrease in revenue from MCM which is contained in other. So I think that kind of gives it to you.

Going beyond that becomes difficult because it's not pro forma from a financial basis in our Q which is consistent with the way we presented it. Felt like if I can give you some guidance with respect to ticket and concession price and attendance it ought to give you comparability. With respect to your question where would we expect to be in Q3? Again, we're not really providing guidance but I don't know that these numbers will be that different. They're consistent with what we've seen this year.

Q3 -- any quarter will vary a little bit based on the relative film product, whether it's kids fare or R related, that's going to push your price one way or the other. But I'd say in general these should be pretty reasonable going forward.

Okay, moving to a different topic, one follow-up. Can you just give us a little bit more granularity -- I'm sorry if I missed this, if it was in your prepared comments -- the international attendance? It looks like international attendance per screen was down about 3%. Could you go over those numbers on how the box office was in international markets? And then maybe expand on how it's tracking so far quarter to date? That would be helpful. Thank you.

You know, I think international has tracked well. I mean, overall attendance is up. The pricing on attendance is definitely up. With respect to the per screen, it's a mixture by countries of what's happened in those countries. I mean it -- obviously, what we're trying to do is push the overall revenues and EBITDA up which formed extremely well, especially when you compare those numbers to what the industry has done.

Nothing unusual going on internationally. Still very strong in Brazil and Mexico. So everything is from our point of view operating pretty much as expected. I think it's reasonably in line with what you're seeing nationally actually generally outperforming what you have seen in the domestic market.

Eric Handler, Lehman Brothers.

Thanks a lot. A couple of quick questions. First, given the state of the credit market and the soft real estate market, how is that impacting your organic development strategy right now? And also can you give a little bit of granularity on what your revenue and below the line contributions were for MCMI? And then I got one other quick follow-up.

In drafting our new bills and our -- as we continue to look forward, I think that the market continues to be there for finding good real estate locations. Remember our focus and what we're generally after is the high growth type markets that continue; as population grows, we continue to find good locations to build theaters. So even though there may be some changes in the debt markets or wherever else, we are still finding and seeing good locations come available for us on a real estate basis.

Eric, with respect to MCM, the numbers for that as I said we dropped a little over $7 million this year between what (inaudible) ESA contract said and the new ESA above the line. I mean that's all in other income. And then below the line we do have the dividend that we received.

Okay. And then also, just one quick follow-up. What were the number of 3-D screens you had for Meet the Robinsons? And what do you expect by the time Beowulf comes out?

The key for 3-D really lies in the rollout of the big digital cinema. We currently have 38 3-D screens. We don't anticipate that that's going to change much at all by the time Beowulf comes around. Because again, in order to get that 3-D thing out there, you have to have the digital projectors. So, I think the timeliness and the structure behind all of 3-D is going to coincide with what happens with the big digital cinema rollout.

Hunter Dubose, Morgan Stanley.

Thanks for taking the question, guys. Two questions for you, actually. The first of which is, with Regal having increased its concessions per cap about 11% sequentially in the second quarter, is there any sense in which there's untapped pricing power for Cinemark as we go into the second half?

And then the second question is, when you referred in your prepared remarks to converting your entire circuit in three to four years to digital cinema, are you including your international circuit in that?

Hunter, with respect to your first question, as I said on a pro forma basis we were able to increase our CPC by about 9.4%, slightly less than what you're mentioning with Regal. As a [rule] I think we're always looking for ways to optimize our bottomline which includes both speed of service, the product mix that you're providing. Could be more room on those sides. I mean selectively we do look at concession pricing. As we've always told people, we think with our general policy we always have some room to continue to increase prices similar to what we have in the past. I don't know that you'd see come Q3 or Q4 any meaningful change, though, from what I discussed earlier on the pro [forma].

Our digital rollouts, Hunter, we again anticipate as that process occurs, not fully known yet all the details and how it's going to occur, we do plan on and part of our plans are absolutely to roll it out on an international basis. We think once the whole digital phenomena starts rolling and starts going, that it absolutely will take hold, not just for Cinemark but for everybody on a global basis. Because that's what's in the best interest for the studios. The hard piece we don't know at the moment is obviously as this thing is being put together, as financing sources are being put together, how does that relate and fit into and tie into our international markets. But our goal is to bring those right along in the fray and hopefully within those same timeframes.

(OPERATOR INSTRUCTIONS) Scott Barry, Credit Suisse.

Good afternoon, just one question. Given the box office pickup that we're seeing over the last 18 months, maybe you could comment on what the current M&A landscape looks like and just remind us of your thoughts regarding external growth. Thanks.

I think on an M&A perspective, I mean, certainly there's been a number of people that have been out there talking and exploring the ideas of selling their companies. We continue to be a company as large as we are that looks at those. And as I stated previously, our desire any time we look at those is making sure that they're of a quality that fits in with what we currently have, that the price is adequate and that it just really meets the hurdles that Cinemark has established. So we're certainly looking at those. I don't have anything definitive or definite that could be told at this point. But our strategies will continue to be primarily again focused on new construction and looking at our Company that way. But we'll certainly look at all those things that come available to us.

(OPERATOR INSTRUCTIONS) Hunter DuBose, Morgan Stanley.

Thanks, guys. I just wanted to follow-up on some of the tax issues that you discussed earlier in your prepared remarks. The first question is, can you clarify when you said that you should be returning to more of a normalized tax rate by the fourth quarter. Did you mean by the end of the fourth quarter or the beginning or somewhere in between? And then my next question is, could you clarify what the tax treatment is for all of your different sources of distribution from MCM? Thanks.

Sure. I'll do the simple one. With respect to MCM, basically whatever receipts we receive generally are going to be subject to tax. If it's the exhibitor service agreement, it's above the line that we're receiving obviously before tax there subject to our regular tax rate. If we're receiving dividends, still picking up as income and that will be subject to tax. The MCM [sell itself] a little different but again, it's also subject to tax. So, basically our normal tax rate applied to all of that.

Timing wise, it's a very unusual tax answer we have and has to do with some complex tax rules that move into what's called discrete items, which are onetime items being the gains on Fandango and MCM. And then your normal tax rate which was significantly impacted by the impairment we had in Q1. And it just produces a very unusual answer.

In trying to respond when will it roll out, I think you'll see in Q3 that you'll move towards a more normal average rate for the year to date. I think in Q3 -- and again, this probably happens also in Q4 -- so the right answer to your question is by the end of Q4 it's probably all done. I doubt it will be done at the beginning of Q4 because with these -- with the unusual events we had this year and the way GAAP has applied the tax and it probably won't take to the end of Q4 to work out to a normal rate. You should be seeing rates offsetting what you're seeing the benefit right now. So that again, by year-end it would look like what you kind of would have expected for an even four quarters.

Okay, thanks.

There are no further questions at this time. You have any closing remarks?

No, I guess we -- again, we'd like to thank everyone for participating today and we'll look forward to talking to you next time.

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