Cinemark Holdings Inc (CNK) 2008 Q1 法說會逐字稿

Good morning. My name is Joy and I will be your conference operator today. At this time, I would like to welcome everyone to the Cinemark first-quarter earnings conference call.

All lines of the 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 will now turn the call over to Kate Messmer. You may begin your conference.

Thank you and welcome to Cinemark's fiscal first-quarter 2008 earnings call.

Before we begin, let we 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 senior management during this call may constitute forward-looking statements. Such statements are subject to risks, 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 first-quarter results. I will now turn the call over to Alan Stock.

Thank you, Kate. On today's call, I will comment on the industry and Cinemark's first-quarter 2008 results, the outlook for the upcoming film slate, and provide an update on Cinemark's digital cinema strategy.

During the first quarter, our geographically diverse theatre base helped contribute to a 7.5% year-over-year increase in our admission revenues and a 6.2% year-over-year increase in our concession revenues, driving a 6.1% improvement in total revenues. The Company's overall revenue growth was a result of a 1% increase in attendance and a 6.5% increase in average ticket prices, and a 5.1% increase in concession revenues per patron for the quarter.

We generated adjusted EBITDA for the quarter of $84.2 million, which represented a 5.1% increase over the prior year and a 21% adjusted EBITDA margin. Box office per screen for the period was up 3.5% over 2007. The first-quarter box office started off stronger than expected with the help of carryover films from the fourth quarter of 2007, such as Juno, National Treasure Book of Secrets, Alvin and the Chipmunks, I Am Legend, and the Bucket List.

There were several strong-grossing films released during the first quarter of 2008, including Dr. Seuss' Horton Hears a Who, 10,000 BC, Cloverfield, Jumper, and 27 Dresses.

Another highlight of the quarter was the release of the 3D Hannah Montana concert film, which generated strong attendance and significant box office revenues on a per-screen basis. The success of Hannah continues to reinforce the opportunity that 3D pictures create for enhanced pricing and attendance.

During the latter part of the quarter, box office comparisons versus the prior year were difficult to overcome, given the solid performance of Wild Hogs, 300, and Ghost Rider during the quarter of 2007. According to industry sources, the industry's domestic box office for the calendar quarter posted growth above expectations, up approximately 2% to 2.5%. This was despite the weakening economic conditions in the U.S. and difficult year-over-year comparisons. The box office has proven to be relatively resilient in past recessionary periods, and we're optimistic that this time will be no different as box office performance continues to depend moreover quality of the film slate and as consumers continue to seek low-cost forms of entertainment.

Additionally, over 20% of our screens are located outside the U.S. in countries that are not experiencing the same economic issues as the U.S., providing an opportunity for our continued outperformance.

The upcoming summer film slate features a steady flow of solid films, including Iron Man, which released this last weekend and had the second-biggest opening of all time for non-sequels. The next installment of Disney's Chronicles of Narnia, a fourth Indiana Jones movie in May, Universal's Incredible Hulk, DreamWorks, Kung Fu Panda, Disney's Pixar film Wally, and Sony's "You Don't Mess with Zohan" starring Adam Sandler in June.

There are several more promising films in the 2008 lineup, including the next installment of Batman called "The Dark Knight", "Hancock" featuring Will Smith, "'Stepbrothers' starring Will Farrell, and the 3D release of Journey to the Center of the Earth, all coming to Theatres in July. During the latter part of the year, we expect a sequel to Madagascar, the next James Bond film called Quantum of Solace, and the Harry Potter film, Harry and the Half-Blood Prince, along with another 3D release called Bolt.

We continue to move forward with our organic expansion strategy and see plenty of opportunity to realize strong returns on our invested capital by expanding both in our existing markets and into new ones. We currently have signed commitments to open 14 new theatres with 153 screens during the remainder of the year and open 7 new theatres with 104 screens thereafter. We continue to seek high-quality additions and evaluate acquisition opportunities in both international and domestic markets.

To provide an update on our digital cinema initiative or DCIP, the joint venture between Cinemark, AMC and Regal, we believe that negotiations with some of the studios are in their final stages, and we anticipate beginning the rollout phase during the second half of this year. We are excited about the potential for a digital cinema and 3D, especially given the increasing commitments by our major studios to produce 3D films and other 3D content. Within the next few years, an estimated 30 3D films will be released, including DreamWorks films such as Monsters Versus Aliens, How to Train Your Dragon and the fourth Shrek movie, in addition to Ice Age 3 and James Cameron's Avatar from Fox, and Disney's Toy Story films. 3D should help our future ticket price growth due to premium pricing opportunities. Our 3D roll-out will follow our digital roll-out since digital is a prerequisite to 3D. We plan to have our entire circuit converted to digital cinema in approximately three to four years.

I'm pleased that our company has gotten off to a solid start in 2008 developing strong operating results in the first quarter of the year. We continue to focus on improving our financial performance and expanding organically in high-growth markets. We remain committed to secure a solid new theatre pipeline and taking advantage of digital and 3D opportunities to further enhance our profitability. I'm confident that we will continue to drive positive cash flow and deliver long-term attractive returns.

With that, I will now turn the call over to Robert to discuss the quarter's financial results in more detail.

Thanks, Alan. I will review our first-quarter 2008 financial performance in more detail and discuss our balance sheet.

As a reminder, in reviewing our information, we report on a 52-week calendar year basis, so for this quarter January 1 through March 31, versus 52-53 week period that would have run from December 28 through March 27. The difference in periods is meaningful as the last few days in December were a weekend that generated significant year-over-year growth and on absolute basis was the highest-grossing weekend of the period, while the last few days in March were a weekend -- represent a weekend that was one of the lowest-grossing weekend of the period, and sustained a substantial year-over-year decline in box office. The substitution of these few days resulted in reduced box office estimates of 2% to 2.5% for the calendar period. [Accordingly], rather than the box office growth of 4% to 4.8% for the period included the final days in December rather than March growth, which was reported in the 2% to 2.5% range for calendar period March 31.

During the first quarter, we increased our admission revenues 7.5% to $262.4 million and grew our concession revenues 6.2% to $122.2 million. As a result, our total revenues increased $23 million to $401 million. This strong performance was driven by a 1% increase in attendance, a 6.5% increase in average ticket price, and a 5.1% increase in concession revenues per patron.

On a segment basis for the quarter, our U.S. operations generated admissions revenues of $202.8 million, representing 2.7% growth over 2007. Concession revenues grew to $96.7 million, a 1.2% increase over 2007.

Average ticket prices for our domestic operations increased approximately 4.6% over 2007, and concession revenues per patient increased approximately 3.3%. Our total domestic revenues improved to $2.1 million despite the $4.3 million decline in other revenues that was primarily attributable to reduced screen advertising earned under the amended exhibitor service agreement with NCM.

Our international operations generated admissions revenues of $59.6 million, which were 28.2% higher than 2007, and concession revenues of $25.5 million, which were 30.8% higher than 2007. Average ticket prices for our international operations increased approximately 18.4% over 2007, and concession revenues per patron increased approximately 20.4%. Our international results were partially impacted by favorable exchange rates in certain countries in which we operate. In Brazil, the average exchange rate for Q1 was 2.11 in 2007 versus 1.74 to the dollar in 2008.

On a consolidated basis, our film rentals and advertising costs were $138.1 million for the first quarter of 2008, representing 52.7% of admission revenues, which was consistent with 2007. Concession supply costs were $18.7 million or 15.3% of concession revenues for the first quarter of 2008, compared to $17.5 million or 15.2% of concession revenues for the first quarter of 2007. Concession supplies as a percentage of revenue decreased in our domestic and international markets. However, the strong performance of international assets caused the relative weight of the two segments to change, resulting in a slightly higher average cost for the quarter.

Salaries and wages were 10.6% of total revenues, which was consistent with the first quarter of 2007.

Adjusted EBITDA for the quarter was $84.2 million, representing a 21% adjusted EBITDA margin. Domestic adjusted EBITDA was $64.9 million. Our increase in averaged ticket price was offset by a decline in attendance resulting in a 0.8% decline in box office per screen, reflecting the relative movie performance of the calendar quarter in domestic markets. We were able to control our costs resulting in only a slight decrease in income generated at the theatre level, despite the impact of wage increases and the fixed nature of rent.

The slight decline in our domestic adjusted EBITDA was primarily resulting from an increase in general and administrative expenses for the quarter of approximately $1.5 million, which also accounts for the decrease in our domestic margin. Our general and initiative expense is in line with the last two quarters of 2007 and the increased cost year-over-year for Q1 is primarily attributable to increased cost related to becoming a public company.

Our international adjusted EBITDA increased 44% to $19.3 million due to the solid performance of the 2007 year-end U.S. films which generally open in Q1 in our international markets. Growth in average ticket prices and concession per caps in new theatre openings also enhanced our growth.

Net income for the quarter was $5.3 million, which included an impairment charge of $4.5 million. Our effective tax rate was approximately 40.9% for the first quarter of 2008, which represents a more normalized rate as compared to the first quarter of 2007. As a reminder, during the first quarter of 2007, we recorded a significant gain related to the sale of the portion of our ownership in NCM in conjunction with NCM's Initial Public Offering.

Also included in the first quarter of 2008 results was a $0.1 million loss on the early retirement of debt related to the repurchase of $10 million aggregate principal amount and maturity of our 9.75% senior discount notes. As we have previously stated, we still intend to continue to use the proceeds from our IPO to pay down our long-term debt, but given the ongoing challenges of the credit markets, we are proceeding carefully to ensure we reduce our debt while maintaining an optimized debt structure.

Looking briefly our balance sheet, our cash position was $305 million at the end of Q1, and total long-term debt was $1.52 billion, resulting in net debt at quarter end of approximately $1.22 billion. Coupled with our adjusted EBITDA, this level of net debt results in a relatively low leverage ratio which we are very comfortable with.

At March 31, 2008, our total domestic screen count was 3650 screens, 12 of which are in Canada. During the first quarter, we acquired 2 theatres with 28 screens, and closed 2 theatres with 32 screens. One of the acquired theatres had been a theatre we previously managed, and the net change in structure will not produce any significant difference to the bottom line. As of March 31, 2008, the Company had signed commitments to open 10 new theatres with 128 screens in domestic markets during 2008 and open 7 new theatres with 104 screens in domestic markets subsequent to 2008. Our total international screen count on March 31, 2008 was 1007 screens. As of March 31, 2008, the Company had signed commitments to open 4 new theatres years with 25 screens in the international markets during 2008.

In the first quarter, we invested $30.8 million in capital expenditures, including $24.5 million on new construction and $6.3 million in CapEx maintenance. We continue to expect our gross total CapEx before disposition proceeds for fiscal 2008 to be approximately $145 million, which includes approximately $43 million for CapEx maintenance. This will be offset by the reinvestment of approximately $24 million from proceeds of the sale of assets that occurred during late 2007 and during the first quarter of 2008.

The Company declared its third full quarterly dividend on May 9, 2008 in the amount of $0.18 per common share. The dividend will be paid on June 12, 2008 to stockholders of record on May 30, 2008.

In accordance with our NCM operating agreement, we received a cash distribution of approximately $5.2 million from NCM during the first quarter of 2008. In 2008, NCM performed a common unit adjustment calculation in accordance with the NCM (inaudible) adjustment agreement. As a result of the calculations, we received approximately 846,000 additional shares in NCM, resulting in an increase in our ownership percentage from approximately 14% to approximately 14.5%. We now on 13,991,652 shares of NCM common units.

In summary, we are excited about the film slate for the remainder of the year, and we will continue to execute our operational strategy for long-term revenue, EBITDA and cash flow growth.

We will now be glad to answer your questions.

(OPERATOR INSTRUCTIONS). Eric Handler, Lehman Brothers.

Can you give a little perspective on the opening roll-outs of your new screens, when those openings may occur? Then secondly, with regard to DCIP, would you expect an announcement to include financing as well? Then last, have you guys decided about how, with the 3D projectors or the 3D add-on, do you think that's going to a revenue-share model or are you looking to buy the 3D add-on just all-in?

Generally with respect to opening timing of theatres, this year it's primarily weighted towards the end of the year. Probably about a quarter of it would be in the mid to late Q2 time frame and then the majority of the remainder I think will be towards Q4, and so little bit unusual weighting. It just had to do with the timing of when developers are opening the related malls and working on the building phase.

DCIP financing -- I'm trying to remember the exact question, Eric, but the timing of it, you know, hopefully would be when we start making all of our announcements. I mean, there could be a difference in timing between possibly having studio agreements inked and having the financing in place. We are diligently working on both, or actually all fronts -- being equity, debt and the studio agreements, as well as our agreements. Those are all progressing fairly well and quickly, so I think people have said before that we have engaged JPMorgan. They've been working on this for some time, are very familiar obviously with all of the agreements and are working diligently, a debt agreement.

To your last question, Eric, the 3D, we continue to evaluate 3D. There are several models out there that are revenue-share-based. Of course we can buy projectors on our own. We haven't fully vetted out what is the best solution for us as we continue to first of all focus on the digital agreement to get done, but we will continue to evaluate. There are a good three or four alternatives or choices in the 3D world, so actually what we're doing at this moment in time is testing and having those demonstrated to us and trying to work through those agreements along with these so that about the same time or shortly thereafter that we can kind of get these things done all at the same time.

Great, thank you.

Hunter DuBose, Morgan Stanley.

Thank you. Good morning. My first question is, if I'm doing the math right, it looks as if your domestic admissions revenues per screen declined about 1% year-over-year versus 1Q '07, which seems to be tracking below the overall industry domestically. Can you comment on what factors may have contributed to that?

With Regal's results [reported], they also seemed to track below the industry, which they attributed to having over-indexed on the 300 film in 1Q '07 and just having tough comps with that. Was there a similar issue for you guys or where there other issues going on here, and to what extent should we expect you to track below industry performance in the next few quarters?

Then also internationally, could you give us some indication of what the FX adjusted organic growth rates were for the international performance, especially with regard to increased averaged ticket prices and concessions per cap? Thank you.

Sure. You know, Eric, in your number of box office per screen -- sorry, sorry about that, Hunter -- the box office per screen is -- did decrease. I think I had mentioned it and as you said, it's about 0.8% for the period.

You know, looking at what the impact is, is that over or underperformance? I mean, I wouldn't lose sight of the difference in periods and what projected growth was. If you take -- I think if you look at the industry sources, and industry sources are showing as we've seen it 2% to 2.5% increase in boxed in the period, but then I guess you've got to look and say where is that growth coming from? Is that new screen growth? Is that really box year-over-year? At least when we've looked at it, we feel we are very in line with the industry and definitely in line with our peer group. There has definitely been some growth in regional, the smaller chains that have we think propelled that box office number but is not necessarily a per-screen number. It's not over-growth in the market. It just happens to be some smaller chains that have added more theatres, again when we've looked at the detail.

There is definitely a significant difference between the reporting periods in that, when you look at that 2% to 2.5% differential between a 52/53-week basis and our calendar basis, that really drops all to the bottom line. You know, outside of your film costs and your concession costs and say for some very minor labor. So when you're comparing, I would be sure and account for that differential.

Your other question I think had to do with international. We did tell you and I think it's in our press release data as well. We tried to add a fair amount of information to our press release so people can analyze our data better.

The attendance was up internationally 8.2%. I can give you a few numbers adjusted for FX. One is the box office or actually the ticket price on an FX-adjusted basis would have been up about 4.6%. The concession per cap on an FX-adjusted basis would have been up about 8%.

Great, thank you very much.

Barton Crockett, JPMorgan Chase.

Thanks for taking the question. I wanted to ask a question about that timing of the film releases internationally. Can you give us some sense of how much you think that might have helped the attendance internationally versus what happened in the U.S.? Is there any way to ballpark that? Then, when we look at the second quarter, does the timing of movie releases help or hurt internationally?

You know, what we've generally found is that, again, taking the whole year, it would have no meaningful impact because obviously it's just the movie flow gets pushed similarly.

Q1 can vary. I do think we had some benefit in Q1 from the point of view that a number of the big hits that were released at the very end of December but really drove a lot of the U.S. box office were not released day and date internationally; they were released actually the first quarter. So National Treasure and some of those actually hit fully in Q1.

I wouldn't necessarily see that carryover impact going into Q2 or Q3. I mean, that can vary. I think we are seeing more day and date releases, especially right in Q2. So I think the benefit happened to be more weighted towards Q1 than you would normally see.

Barton, I think the best way to think about it, and as Robert just stated, when we get into any major release, it has always been this way. They release most of those Harry Potters, the Iron Mans, the big ones they released as close as they can day and date. And that happens -- it's always happened that way. Then a lot of the other films just flow through based on holiday periods or based on whatever is going on in these different countries. So at the end of the day, as Robert stated in the beginning, on a year-over-year basis, the release pattern and how it flows through has not changed.

The one time that -- if there's a difference, I would tend to say it happens in Q1 because the holiday season in Latin America especially is more weighted towards January/February rather than November/December. And so the release of product sometime is delayed again for those last few weeks, so I wouldn't necessarily expect that the increases we saw this quarter would be reflective of continued increases throughout the year in attendance. I mean obviously we feel that international will do extremely well and likely will still outperform the U.S., but there might have been a little extra weight this quarter.

Okay, great. Then I just wanted to be clear. You said something in the script about a screen you had purchased that won't run through the P&L because you already (multiple speakers) because you're already running it. Can you just clarify what that was?

Yes, that was just a unique situation where we had entered into a management agreement on a theatre a few years ago and with a developer. We had the right to convert that to a lease.

But the basic economics, bottom-line, between either choice is not that substantially different. I mean, there definitely is some upside under the lease and that's why we decided to convert it into a lease agreement, but it is not as meaningful as the screen count growth. That's the reason I mentioned it. When you're looking at net screen count changes and trying to do your multiplication on what the net was, arguably that won't change our numbers much.

Okay, and then one final question -- can you just update us on, again, what percentage of your admissions revenue or attendance and screens are these discount theatres and how those performed relative to the rest of your network in this past quarter?

You know, it's actually, as a relative piece of our total box office, it's not a significant piece. I mean, it's less than 5%. And they performed well. I mean, we talked about them one quarter some time ago when it is just a bit unusual, and that's the only reason we mentioned them then. But they've actually performed well and in line with the rest of the circuit.

Okay, great. Thanks a lot.

Hunter DuBose, Morgan Stanley.

I just wanted to follow up on your dividend strategy. Can you give us some indication of what circumstances you would consider raising the dividend during the next year or so?

You know, Hunter, I mean that's a Board decision to make, so I don't know that there is any way I can really comment on what strategy would cause us to raise the dividend. I mean as we've said before, it's a decision the Board makes. They look at obviously our cash flow, our use of proceeds in terms of CapEx needs currently and going forward, and then obviously what the environment would be for other opportunities to enhance value. So, I can't really give you direction on that.

Okay, thank you.

At this time, there are no further questions. I would like to turn the conference back over to Alan Stock.

Well, thank you, everyone, for participating in our call and we look forward to talking with you next time. Thanks.

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