Cinemark Holdings Inc (CNK) 2007 Q4 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time I would like to welcome everyone to the Cinemark fourth quarter 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. I would now like to turn the call over to Ms. Nikki Sacks. Please go ahead, Madam.

Thank you and welcome to Cinemark's fiscal fourth quarter and full year 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 knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Such statements are subject to risks, uncertainties, and other factors that may cause 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 CEO Alan Stock; and CFO Robert Copple will be discussing the fourth quarter and full-year results. I will now turn the call over to Alan.

Thank you, Nikki. On today's call I will comment on the industry and Cinemark's fourth quarter and full year 2007 results, the outlook for the upcoming film slate and provide an update on Cinemark's strategy. During the fourth quarter Cinemark's admission revenues increased from $246 million for 2006 to $252 million in 2007 leading to an increase in total revenues. The Company's increase in revenues were primarily the result of a 7.5% increase in average ticket prices and a 7.3% increase in concession revenues per patron for the quarter. We generated adjusted EBITDA for the quarter of $83.8 million.

With the anniversary of our Century acquisition occurring in October, the data for the 2006 and 2007 quarter reflect comparable full circuit performance. The quarter started with a soft October but finished very strong in December with products such as I Am legend, Alvin and the Chipmunks, and National Treasure 2 driving an industry increase in box office for December of approximately 6.2% as reported by various industry sources. During a time when most retailers were beginning to experience the impact of an economic slowdown, our industry generated increases reflecting the defensive nature of our industry. Historically the theater industry has fared well during difficult economic times as going to the movies is a relatively inexpensive form of entertainment, as well as an escape for many people. Industry wide box office revenues have increased in four of the last six recessions.

A differentiating factor for Cinemark is a diversity provided by our international operations. During the fourth quarter our international operations posted an increase in revenues of 20% and adjusted EBITDA was up 36% propelled by product and new theater openings.

Turning to our full-year results, the industry continued to register year-over-year growth with box office up approximately 5.4% based on industry information. For Cinemark it was a busy year. In addition to successfully completing our IPO in April, Cinemark was able to deliver consistent revenue growth and industry-leading financial performance in 2007 due to our continued focus on organic expansion in domestic and international markets, the integration of our Century Theatre acquisition and the efficient operation of our theaters. We also introduced a regular quarterly dividend policy in 2007 equivalent to $0.72 per share annually for a yield of over 5% based on yesterday's closing stock price.

In 2007 we also participated in the IPO of National CineMedia. We currently own approximately 14% of NCM, and will thus benefit from the growth in NCM's revenue and EBITDA as it expands its national digital network and as advertising spending continues to shift to cinema and other emerging digital advertising platforms. Our revenue for the year were up 38% to $1.68 billion adjusted EBITDA increased 38.8% to $376.9 million. We continued our organic growth strategy during the year opening 13 theaters with 201 screens in our domestic markets and 7 theaters with 56 screens internationally.

In 2008 the first quarter industry box office got office to a stronger than expected start, up approximately 21% for the first seven weeks through February 11, driven by films such as 27 Dresses, the Bucket List, Cloverfield, Juno, and the Hannah Montana concert. The box office for the last part of the quarter is more challenging with comparisons against Wild Hogs, 300, and Ghost Rider. However, the start of the quarter has been more favorable than many people anticipated last year. The remainder of the 2008 slate features a steady flow of solid films including the next installment of the Chronicles of Narnia and Indiana Jones in May, DreamWorks Kung Fu Panda, Universal's Incredible Hulk, and Disney Pixar film Wally in June. The next installment of Batman called the Dark Knight in July and in November the sequel to Madagascar, the next James Bond film called Quantum Solace, and the second to the last Harry Potter film, Harry and the Half-Blood Prince. Overall we expect industry box office to be flat with 2007 as we face particularly difficult comps in the third quarter. However, we are approaching the remainder of the lineup for 2008 with a positive bias.

In terms of our organic expansion strategy, we believe there is opportunity to realize strong returns in our invested capital by continuing our expansion both in our existing markets and into new ones. We currently have signed commitments to open 13 new theaters with 147 screens during 2008 and open 5 new theaters with 78 screens there after. We will continue to seek select high quality additions and will evaluate acquisition opportunities. This growth is focused on both international and domestic markets.

Turning to our digital cinema initiative or DCIP, the joint venture between Cinemark, AMC and Regal, negotiations are currently under way with financing sources and the studios. We anticipate that these negotiations will be concluded in order for to us begin the rollout phase by the second half of 2008. As with any financing these days, the markets may make it more difficult. However, we remain optimistic regarding the timing. We are excited about the potential for digital cinema and we're continuing to test and prepare for this rollout to ensure smooth and efficient deployment and implementation from a technological and operational perspective once the agreements are finalized. We are optimistic about the future growth opportunity of 3D films and other 3D content. We have recently seen increasing support of 3D films by the major studios. DreamWorks recently announced that it will will produce all future animated films in the 3D format. In 2009 we expect 3D films such as Monsters versus Aliens, and Ice Age 3, and Avatar. In addition Disney plans to rerelease the first Toy Story movie in 3D in October of 2009. Toy Story 2 in 3D in February of 2010, and premier Toy Story 3 in 3D in June of 2010.

The recent success of the Hannah Montana concert is another great example of the potential for 3D content setting a record opening for a film release on less than 1,000 screens and a record overall gross on Super Bowl weekend. 3D films are attractive for exhibitors because we can generally charge a premium per attendee which should help boost our future ticket price growth. Since digital is a prerequisite to 3D our 3D rollout with follow our digital rollout strategy. We plan to have our entire circuit converted to digital cinema and be 3D compatible in approximately three to four years.

In summary, I am pleased with the progress that our Company made in 2007, delivering strong and competitive operating results, we continue to focus on delivering industry-leading operating results and organic expansion in high growth markets. In the face of a weakening economy, we are fortunate to operate in an industry that provides one of the lowest cost forms of out of home entertainment and that has exhibited resilient growth in the past recessionary periods. We remain dedicated to improving our profitability, developing our new theater pipeline and positioning ourselves to capitalize on industry innovation such as digital and 3D in order to return value to shareholders over the long-term. With that, I will turn the call over to Robert to discuss the quarter in more detail.

Thanks, Alan. I will review our fourth quarter and full year financial performance in more detail and discuss our balance sheet. During the fourth quarter we increased our admission revenues 2.6% to $252.4 million and our concession revenues 2.7% to $118.6 million. As a result, our total revenues increased $1.8 million to $393.3 million. This increase was driven by a 7.5% increase in average ticket price and a 7.3% increase in concession revenues per patron partially offset by a 4.5% decline in attendance compared to the fourth quarter of 2006.

On a segment basis for the quarter our U.S. operations generated admission revenues of $207.5 million which were flat with 2006. Our total revenues were $317.6 million, a decline of 3.3% versus 2006. This decline reflects the impact of the change in our other revenue attributable to advertising revenues received from National CineMedia as a result of the modification of our exhibitor service agreement associated with the IPO. Our international operations generated admission revenues of $44.9 million which were 16.6% higher than 2006. Total international revenues increased by 20% to $75.7 million.

On a consolidated basis our film rentals and advertising costs were $135.5 million for the fourth quarter of 2007 as a percentage this represents an increase of approximately 45 basis points to 53.7% of admission revenues. Concession supplies costs were $18.4 million for the fourth quarter of 2007 compared to $17.2 million for the fourth quarter of 2006. Our concession supply costs as a percentage of concession revenues increased approximately 65 basis points to 15.5%. For the quarter salaries and wages increased as a percentage of revenues to 10.7% from 10.1% in 2006. This increase is primarily a function of the relative revenues per screen, new theaters and changes in minimum wage.

Adjusted EBITDA for the quarter was $83.8 million resulting in a 21.3% adjusted EBITDA margin. Domestic adjusted EBITDA was $72.2 million, a decrease of approximately 12.8%. Adjusted EBITDA was impacted by the modification of our advertising agreements with NCM. In 2007 we picked up income of $6.5 million from NCM versus $10.3 million in 2006. Our international adjusted EBITDA increased 35.6% to $11.6 million. Net loss before taxes for the quarter was $11.6 million. Included in net loss is an impairment charge of $26.2 million. Impairment is tested annually in the fourth quarter and represents a noncash item of expense. Also included in the quarter was a $1.9 million loss on the early retirement of debt relating to the repurchase of $22.2 million aggregate principle amount at maturity of our 9.75 senior discount notes.

As I previously discussed Cinemark incurs a higher level of impairment than our peers as a result of measuring impairment on an individual theater basis rather than an aggregate basis. Aggregate basis allows companies to average changes in their portfolio of assets. Cinemark implies impairment calculation to individual theaters we're not able to average increases against decreases and therefore any change at the theater level may generate an impairment charge even though it may be a small change. And impairment charges recorded are primarily composed of goodwill relating to the write up in basis that occurred in 2004 to the Cinemark assets and in 2006 to our Century asset base.

As I discussed in our second quarter earnings call during which we reported an income tax benefit, the benefit was the result of interim period income tax allocations required under GAAP which began to reverse in Q3 and the final reversal occurred in Q4 resulting in an abnormally high effective tax rate for the current period. This interim period income tax fluctuation is primarily caused by a combination of impairment charges, coupled with the first quarter gain recognized to fund NCM's IPO. As a result,the effective tax rate for the three months ended December 31, 2007, was 364.8%. Net losses after taxes was $53.8 million for the three months ended December 31, 2007, primarily driven by the impact to the income tax allocation and impairment charges of $26.2 million.

Because of the fluctuations in income taxes quarter to quarter, it is best to look at our calendar year income tax rate to gain perspective. For the year our effective income tax rate was 55.7%. Adjusting for the approximately $67.7 million of impairment charges relating to goodwill which are not deductible for tax purposes, the Company's effective tax rate for the year ended December 31, 2007, would have been approximately 41.7%.

Moving to our results for the full year we increased our admission revenues 43% to $1.09 billion our concession revenues 37.4% to $516.5 million. As a result our total revenues increased $462 million to $1.68 billion, a 37.9% increase. The increases were primarily related to a 19.3% increase in attendance, a 20% increase in average ticket price, and a 15.2 increase in concession revenues per patron all of which were favorably impacted by the acquisition of Century Theatres Inc. that occurred on October 5, 2006.

On a pro forma basis the Company's total revenues for the year ended December 31, 2007, increased 4.4%, admission revenues increased 5.6%, and concession revenues increased 6%. The increases were due to increases in average ticket price, and concession revenue per patron offset by a 1.3% decline in attendance. Adjusted EBITDA for the year ended December 31, 2007, increased 38.8% to $376.9 million from $271.6 million for the year ended December 31, 2006. Our adjusted EBITDA margin increased by approximately 15 basis points to 22.4% for the year ended December 31, 2007.

On a segment basis for the year our domestic operations generated revenues of $1.35 billion, up 44.3% compared to 2006, and adjusted EBITDA increased by 42.2% to $309.8 million, favorably impacted by the acquisition of Century Theatres. Our international operations also performed very well in 2007 with revenues improving by 16.7% to $333.6 million and adjusted EBITDA increasing 24.9% to $67.1 million. Based on the markets we're in, we feel we will continue to have opportunities to realize incremental gains in revenue and profitability from the expansion and the size of our theater network.

Net income for the year ending December 31, 2007, was $88.9 million compared to net income of $800,000 for the year ended December 31, 2006. Net income for 2007 fiscal year benefited from a $129.6 million after tax gain on the National CineMedia IPO and was impacted by noncash impairment charges of $86.6 million the majority of which resulted from our amendment of the operating agreement with NCM.

Looking briefly at our balance sheet, our cash position was $338 million at the end of 2007, long-term debt was $1.52 billion, resulting in net debt at year end of approximately $1.2 billion. Coupled with our strong adjusted EBITDA this level of net debt results in a relatively low leverage ratio with which we're comfortable. At December 31, 2007, our total domestic screen count was 3,654 screens, total of which are in Canada. Ending the year we opened 13 theaters with 201 screens, sold two theaters with 34 screens, and closed five theaters with 36 screens. As of December 31, 2007, the Company had signed commitments to open ten new theaters with 128 screens and domestic markets during 2008 and open 5 new theaters with 78 screens in domestic markets subsequent to 2008. Our total international screen count at December 31, 2007, was 1,011 screens. During the year we opened seven theaters with 56 screens and closed one theater with ten screens. As of December 31, 2007, the Company had signed commitments to open three new theaters with 19 new screens in the international markets during 2008.

In 2007 we invested $146.3 million in capital expenditures including 4113.3 million on new construction and $33 million in CapEx maintenance. Included in the CapEx maintenance was $2.8 million related to the rollout of NCM's digital distribution technology to the Century Theatres and approximately $3.2 million related to the deployment of our new point-of-sale system. The point of sale system is designed to expand information we gather from our theaters and includes networking for our digital rollout. We expect our gross total CapEx before disposition proceeds for fiscal 2008 to be $145.2 million which includes approximately $43 million for CapEx maintenance. This will be offset by reinvestment of approximately $22 million from proceeds of the sale of assets that have recently occurred.

The Company declared its second full quarterly dividend on February 26, 2008, of $0.18 per common share. The dividend will be paid on March 14, 2008, to stockholders of record on March 6, 2008. During 2007 we paid a partial dividend of $0.13 during the third quarter which was pro-rated for the timing of our IPO and paid our first full dividend in December of $0.18 per share. Our annual dividend is $0.72 per share.

During the year ended December 31, 2007, we repurchased approximately 332.1 million aggregate principle amount of our 9% senior subordinated notes primarily utilizing the proceeds from the NCM transaction and repurchased 69.2 million aggregate principle amount at maturity of our 9.75 senior discount notes utilizing the proceeds from our IPO. We recorded a loss and early retirement of debt of approximately $13.5 million related to those -- to these note repurchases. While we intend to continue to use the proceeds from our IPO to pay down our long-term debt, given the current state of the debt markets we're proceeding at a slower pace than originally anticipated. We intend to opportunistically utilize the funds to reduce our debt while still optimizing our debt structure.

In closing I would like to say that we're looking forward to the film slate for the remainder of 2008 which combined with Cinemark's operational strategy should continue to produce attractive returns and drive increased cash flow. We will now be glad to answer your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Hunter DuBose from Morgan Stanley.

I have a few for you actually. The first one is I wanted to verify that you had said that the number of signed contracts for new screen openings for 2008 was 128 domestically and 19 internationally. Assuming those are the correct numbers, can you comment on the extent to which the actual number of total screen openings for the full year may deviate from that number, perhaps if you could compare the number of signed contracts at this point in 2007 relative to the full number of screen openings in 2007 that would give us an idea of how likely they were--?

Sure. On the 128 domestic I think there are two or three more theaters that might roll into 2008, so I think we'll open up potentially a few -- last year we opened up 201 screens. I think that number could be slightly down, but it will be similar, but so domestically a few screens could be added on to be honest with you as always happens. We also could have some of the screens that we anticipate opening this year roll into next year. The timing of our screens which can be important for you guys we foresee about 50 screens opening toward the latter part of Q2, and then about 80 of the screens opening towards really the end of the year. So we're definitely weighted towards the end of this year if you look at the timing of our screens because the majority are opening in Q4, and then those that are opening before that are again towards the end of Q2.

Internationally kind of similarly there where we had actually I think it was 19 screens, we do have probably actually another 19 to 20 screens -- actually I am sorry, 19 to about 25 screens that could roll into this year. They're not signed contracts. They're contracts we're still working on, so that number could go up slightly for the international as well, and again it just depends on the timing of the project when it is ultimately built, but those primarily also would be towards the existing 19 screens that we've committed to would be towards the third quarter and then these other screens would probably be towards the fourth quarter if they're able to make it this year.

Okay. And my other question relates to your other revenue line, other revenues for the quarter came in about 6 million or $7 million ahead of where I was expecting and maybe simply I got the pro forma adjustments for 4Q '06 wrong, because I was going with the wrong base here, but I wanted to see if there was anything unusual with other revenues for this quarter that may not be repeated in 4Q '08?

I wouldn't say anything unusual. In Q4 is when we generally recognize maybe a bigger piece of the revenues related to gift cards and those type of items, but it is not inconsistent with prior years. That number is probably growing as we've added the Century circuit to our gift card network, and super saver network, we've increased the total sales of that so pricing probably seeing some benefit from that. The other thing that occurred in this year is internationally we had a fairly strong quarter in our advertising in Q4, so that might have been slightly higher than someone would have anticipated. We would expect that to continue, though.

Okay. Thank you very much.

Sure.

Your next question comes from the line of Eric Handler from Lehman Brothers.

Hi. Thanks a lot. If I heard you correctly, I think you said you expect the 2000 box office to be flattish, flat. Does that include the, your Latin America box office as well and if not, what's your outlook for the Latin American box office? And as well if you do have a flat box office this year, do you think you can grow your adjusted EBITDA on a year-over-year basis?

Good questions, Eric. On the box, generally international let's say on the available movies, and it is related performance would be somewhat similar to the U.S., so when we say flattish box, we argue that international could be similar. We probably have a better opportunity to grow internationally I think than we do domestically off the same box because you could have some international films that show up into the marketplace that play well in those markets, so I think our expectations are that there could be a high likelihood of seeing growth internationally than what there would be domestically based on the product that's out there. Eric, you could tell from our speech we did not provide guidance on EBITDA. Clearly with flat box to maybe slightly better box in international, it does -- when you run through your models, you will come to a conclusion on the EBITDA that the good part is obviously we're increasing prices, but that's still reflected in the total box. We don't have the NCM hit that we had last year where we lost a fair amount of revenue in EBITDA because of the change in NCM contract this year with hopefully those revenues will continue to increase and more so benefit that we'll have is is the dividends should increase, so that from a pure cash flow and EBITDA perspective, that will help us out a little bit.

And just what was your share count for the fourth quarter?

The basic share count I think was about 106.7 million, and the fully diluted was about 109 million.

Thanks a lot.

Sure.

(OPERATOR INSTRUCTIONS) Your next question comes from Barton Crockett from JPMorgan.

Great. Thanks for taking the question. I was wondering first if you could talk a little bit -- if I heard you correctly, I think you said that you plan if the financing gets set up to roll out digital projectors through your the entire circuit three to four years, so I read that to be international and domestic if I heard you correctly. I just want to clarify that? And then if you could comment on generally what you see about the international versus domestic rollout of digital and 3D? I think the general perception is that international is behind the U.S., and if that's what you see and maybe you guys are just deviating from that in your circuit?

The comment towards the rollout would have been more reflected towards our U.S. because that is the negotiations currently with DCIP. We do anticipate and I think right now the whole international objective is really waiting until we can get the U.S. answered and get it rolling and once it is going, however, I would comment I think once the U.S. starts the process and begins that rollout, I think international will follow in a relatively quick manner. I think you kind of have to get the whole thing set up and the parameters behind it and get it financed. The bigger question perhaps internationally comes on the financing side, not as much on the studio side, so we have to figure out there is a lot of different ramifications internationally, different countries have different issues you have to deal with, so that's going to have to be taken into consideration, each country by country and as we begin to roll this thing out.

Okay. Great. And then keeping with kind of the international focus, can you give us a sense of what the impact of foreign exchange was on your international revenues?

Really the only country that had a meaningful change I think is Brazil where the real obviously strengthened and fortunately continues to generally. It wasn't a real significant impact. I think -- let's see if I have a number here. I think internationally for the year -- I guess with the real, I am doing a quick calculation would probably be maybe 20% of the benefit maybe or EBITDA maybe a little higher because again the only country we had that was benefiting was Brazil, and so it impacted all of our local and costs as well as revenues are in local currency, so it is just purely an exchange, change as you pull it up. There is no impact of the exchange rate itself on operations, so it is just a conversion, but I think with the real it would probably be in that range.

Maybe I will follow-up with you more off line on that. In terms of the DCIP thing, you mentioned credit markets as one potential kind of issue. On the other hand we had Jeffrey Katzenberg, DreamWorks saying that he thought the deal could be wrapped up in on 30 to 45 days. That was a week or so ago. Do you have any thoughts with the recent turbulence in credit market, are you seeing anything that could make this more difficult? And on the flip side what do you think about Katzenberg's idea that it could be wrapped up pretty quickly in terms of the financing plan?

Wow. I don't know that we comment totally on where it will go. We think the 30 to 45 days perhaps realistic on his side of the equation negotiate with the studios and finish the piece up. Of course the financial markets are just scary right now, so you got to figure out ways, but we have been told by some of our banks and people they still are optimistic that there is some ways to finance this and continue on the plan to get this rollout going as we stated in the second half of this year, I know Jeffrey is the optimist about it and we all, hopefully, with him can get this going as quick as possible, and everybody is focused on trying to meet as quickly as we can the deadlines that come upon us. So again I don't know how to answer the financing side until you really get the thing out there and start figuring out where it is going to go.

And just a number of questions if we can quickly here. The 41.7% effective tax rate, do you think that's sustainable into '08?

That's generally where we would feel like our effective tax rate is. Again, you always on a GAAP basis it is going to roll if I have impairment charges or some noncash charges, but from a real cash point of view, that's basically our rate plus our state impact.

Can you break out domestic and international concessions?

You need individual -- how about I can give you those off line? I am trying to think what the filing we just did. I guess I didn't have that breakdown.

Okay. That's great.

I can hit that off line if you want, and obviously that will be in our K when it comes out.

Great. Thanks a lot.

You have a follow-up question from Hunter DuBose rom Morgan Stanley.

Thanks for taking the additional questions. On the subject of the K, can you let us know when that's likely to be out?

I am sorry. Right now I would still say that would be around the due date which is March 30, 31.

Great. Can you walk us through the domestic and international breakout for screen openings and closings for the quarter?

I think I am going to have to grab another piece of paper. I think I have that. Sorry about that. I've got for domestic I think for the quarter we've got -- I've got four at 62, and then, so four theaters, 62 screens, internationally had two in 21 screens, and then I closed domestically two theaters and 14 screens.

And zero for international?

Zero for international.

Got it. My next question is when we look at G&A for 4Q '07, it looked like it was pretty much flat year-on-year in 4Q '06, and it doesn't appear that any kind of synergies from the Century screen acquisition was rolling through there. Can you give us any raw commentary on what kind of additional synergies we might be seeing if at all going into '08?

If you look at -- if I just added Century's G&A and Cinemark's G&A and then compared that to our current G&A, I think we reduced G&A costs about $7 million year-over-year.

Okay.

That was, I would say very close to what we had targeted.

I see. There could be more savings, but wouldn't say they're going to be real substantial.

Great. Thank you very much. You bet.

There are no further questions at this time.

We greatly appreciate everybody's participation and look forward to our next call.

Thank you.

Ladies and gentlemen, this concludes today's conference. You may disconnect at this time.