Cinemark Holdings Inc (CNK) 2012 Q2 法說會逐字稿

Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Cinemark second-quarter earnings 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. Chanda Brashears. You may begin your conference.

Thank you. Good morning, everyone. In accordance with the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995, certain matters that are 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 Cinemark's actual performance 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.

I would now like to turn the call over to our CEO, Tim Warner, who is joined this morning by our CFO, Robert Copple. Tim?

Thank you, Chanda. Good morning, everyone. We appreciate you joining us on the call today. Before we discuss our second-quarter results, I would like to say a few words related to the tragedy that occurred on July 20 in Aurora, Colorado.

We would like to thank and acknowledge the endeavors of all those who acted with immense strength and bravery in assisting the victims, including patrons, our employees, the police department, the emergency first responders, and the area hospitals that treated the victims. We are also grateful for the governmental leadership including the Governor, his Chief of Staff, the Mayor of Aurora, the Chief of Police, and the many charitable and business organizations providing assistance.

Under the leadership of NATO, our industry's trade association, the theater industry has collaborated to help the victims and their families, as have our studio partners. Out of respect for the victims and their families, we will not be addressing any details regarding the tragedy or our specific efforts. Thank you again for the outpouring of support and concern for the entire community. Our thoughts and prayers remain with the victims, their families, and loved ones, our employees and the entire Aurora community as they grieve and continue to heal.

I will now provide a brief overview of our 2012 second-quarter operating results followed by a discussion of the overall industry box office performance, the upcoming film slates, and an update on a few of our current initiatives. Following my comments, Robert will share additional financial details from our Q2 results, after which we will address questions.

We continued to benefit from our unique and geographically diverse footprint of over 5200 screens located throughout 39 states and 13 Latin American countries as we posted worldwide Q2 revenue of $649.6 million, adjusted EBITDA of $157 million, and an adjusted EBITDA margin of 24.2%. Our results were driven by another quarter of strong domestic industry performance coupled with the continued growth of our Latin American business.

This quarter's box office was led by The Avengers, which grossed over $600 million, the second highest domestic grossing film of all time in its initial run. We also had a diverse genre of strong films complementing The Avengers' performance including the sequels Madagascar 3 and Men in Black 3, a twist on the fairytale Snow White and the Huntsman; Brave, Best Exotic Marigold Hotel, Ted, Magic Mike, and the carryover of the new franchise, The Hunger Games, all of which nearly propelled the quarter to the record level of domestic box office set in Q2 of 2011.

The strong film lineup coupled with our worldwide footprint allowed us to increase worldwide admission revenues 3% to $418.1 million.

Last year North American box office was up 4.5% in Q2 while Cinemark's domestic box office increased 8.2%. Despite the higher hurdle to clear, our US theaters performed in line with the industry this quarter, down approximately 1.4%.

Our Latin American operations outperformed North American industry box office in the second quarter with admission revenues of $130.9 million, up 14.2% versus the same period last year, driven by same-store attendance growth and screen additions.

This quarter's top films played extremely well in our premium XD large-format auditoriums. Our XD screen performance accounted for 4.3% of our total US admission revenues. Our domestic premium 3-D and XD large-format attendance increased 34% over the prior year, representing 27.9% of our domestic admission revenues.

As of June 30 we had 92 total XD auditoriums, 61 in our domestic theaters and 31 in our international circuit. We intend to expand our XD footprint by adding 20 to 25 auditoriums during the remainder of the year.

Year-to-date through July 31, the US industry box office was up approximately 6%. This past weekend Batman, The Dark Knight Rises led the box office for the third week with a projected weekend gross of $36.4 million and a cumulative domestic gross to date of $354.6 million. Total Recall opened at $26 million.

We are looking forward to the remaining third-quarter film slate including this week's release of The Bourne Legacy, The Campaign, Hope Springs, followed by The Expendables 2, and Finding Nemo in 3-D.

The fourth quarter includes Wreck-It Ralph in 3-D, Skyfall, the newest James Bond film; and the final sequel of the Twilight series, The Twilight Saga-Breaking Dawn, Part Two. Thanksgiving weekend titles include The Rise of the Guardians in 3-D and Life of Pi in 3-D. In mid-December, the first of the newly announced trilogy The Hobbit, an Unexpected Journey in 3-D, will hit the big screen. The Hobbit was filmed and will be projected in 48 frames per second, double the usual speed.

We wrap up the year with the rerelease of Monsters Inc. in 3-D and the Tom Cruise starring as Jack Reacher, the first installment of author Lee Child's popular crime series, and the Great Gatsby in 3-D at Christmas, which we think will expand the audience of 3-D viewers.

In summary, our diverse geographical footprint has continued to provide us a distinct opportunity for continued growth and strength in operating results. We remain positive about the remainder of 2012's film slate.

I will now turn over the call to Robert, who will provide in-depth analysis of our Q2 financial results. Robert?

Good morning and thanks again for joining us today. Our second-quarter total revenues increased 4.7% to $649.6 million. Worldwide admissions revenues grew 3% to $418.1 million, and worldwide concession revenues were $201.4 million, a 6.4% increase from Q2 of 2011. Adjusted EBITDA was $157 million, a 4.8% increase over Q2 of 2011.

Our total domestic revenues were $441.2 million, flat to Q2 of 2011. Admissions revenues were $287.2 million, a decline of 1.4% resulting from lower attendance and partially offset by a 3% increase in our average ticket price to $6.84. The increase in prices was primarily a result of the mix of 3-D and XD tickets sold.

Our US concession revenues were $141.8 million, an increase of 1.4%. Concessions per patron were $3.38, an increase of 6% primarily driven by incremental sales.

Our domestic adjusted EBITDA was $103.4 million, a decrease of 6%. Our international segments attendance increased 20.7% for the quarter. Total revenues in Latin America were $208.4 million, an increase of 16.6% versus the same period last year. International admission revenues were $130.9 million, an increase of 14.2%, 27.6% in constant currency. Average ticket price decreased 5.4% to $4.88 compared to the prior year quarter primarily driven by currency translation impacts. Average ticket price increased approximately 6% in constant currency.

International concession revenues were $59.6 million, an increase of 20.6%. Our international concessions per patron remained flat to prior year at $2.23. However, our concession per patron increased 10.8% in constant currency.

Our international adjusted EBITDA increased 34.7% to $53.6 million. It increased despite facing a blended FX headwind of approximately 16%.

For the quarter, consolidated worldwide film rentals decreased 40 basis points to 54.4% of admissions revenues. In the US, we experienced an increase of 50 basis points due to the significant amount of box office generated by tentpole films. This increase was offset by a decrease in our international film and advertising of 190 basis points.

Concession supplies were 15.8% of concession revenues, a slight increase of 20 basis points compared to the same period prior year. Interest expense was $31.4 million, an increase of 5.4% due to our refinancing in June of 2011. The refinancing has been reflected in our last four quarters of operations. Accordingly, interest expense in future quarters should generally be comparable to the prior periods.

Total income before taxes was $83 million, a 29.1% increase compared to the same period last year. Net income attributable to Cinemark Holdings Inc. was $51.6 million, $0.45 per diluted share, up from $0.35 in Q2 of 2011. Our effective tax rate for the quarter was 37.2%.

Our balance sheet remains strong with a net debt position of $1.04 billion and a net leverage ratio of 1.8 times adjusted EBITDA as of June 30. At quarter end, our US operations were comprised of 300 theaters and 3,925 screens in 39 states. During the quarter we added two theaters with 30 screens. There were no closures during the quarter.

We currently have signed commitments to open two new theaters and an additional 27 screens during the remainder of 2012 and 11 theaters with 132 screens subsequent to 2012. We expect to incur approximately $105 million in CapEx to develop these additional 159 screens.

Internationally our circuit consisted of 161 theaters and 1,282 screens as of June 30. During the quarter, we closed four screens in an underperforming theater to maximize operating efficiencies. We currently have signed agreements to open nine new theaters with 64 screens for the remainder of 2012 and five new theaters with 35 screens subsequent to 2012. We estimate that we will incur approximately $80 million in CapEx to develop these additional 99 international screens.

We continue to reinvest in our circuit to maintain the highest quality theaters for our patrons. During Q2, we invested $46.6 million on capital expenditures including $23.7 million on new theater construction and $22.9 million on maintenance CapEx which includes the addition of five XD large-format screens and continued international digital projector rollout.

We remain comfortable with our guidance of $225 million to $250 million in total CapEx expenditures for 2012 which includes both new build and maintenance.

We continue to concentrate on maximizing the performance of both our domestic and international operations. Despite the slight decrease in US attendance, we are able to create efficiencies in our operations, allowing us to continue to maintain our industry-leading adjusted EBITDA margin.

That concludes our compared remarks. To reiterate --

To reiterate Tim's request at the beginning of the call, we ask you to please refrain from questions regarding the tragic incident in Aurora or our specific efforts out of respect to the victims, their families and loved ones, our employees, and the entire Aurora community. We thank you in advance for your sensitivity to this matter.

Operator, please open up the lines.

(Operator Instructions). Eric Handler, MKM Partners.

Good morning, thanks for taking my question. Just two things on international. First with the currency headwinds that you are facing in Brazil right now, is this having any impact at all on new theater development?

And then secondly when I look at the third quarter release slate in Latin America is there anything we need to be aware of in terms of some comp issues or anything along those lines?

Eric, with respect to the headwinds we've faced over the last 16 years we've been down there, times when the currency is helpful and times where it goes the other way. And what we find is over the long-term it averages out and we have a great business down there, so we continue to stay focused on our expansion plans. The currency headwinds are not impacting that. Brazil still is the country that we have the largest amount of new theater development going on over the next 12 months. And we will continue to have that even going into future because of the great opportunities down there.

And so the headwinds, obviously prefer not to have them but they will happen, they will turn later and it's just you have to be in for the long haul and we have done very well. And as our numbers show even with those, we did well this quarter.

And then on your other question, film slate was nothing in particular. It's this quarter we actually in Brazil had Rio that we were up against that impacted us a little bit there primarily end results. This next quarter, there wasn't necessarily anything unusual I think in terms of special film product. I think we will face similar issues that we do in the US where it's going to be we think another good quarter. However clearly last year was a record quarter overall in the US and with the Olympics and everything else impacting us this quarter clearly is showing the heat a little bit.

Okay, thank you.

Barton Crockett, Lazard Capital Markets.

Great, thank you for taking the question. I noticed in the Q that you were talking about a nearly 22% increase in other revenue in Latin America really tied to advertising. I was wondering if you could talk about what's going on down there with pre-movie advertising? And also update us how far are you along in the digital projector rollout there and in coming to a virtual print fee agreement with the studios down there?

Okay, first off on the advertising, I think we've said in previous calls that we were launching our version of the NCM model here in Brazil and it's called Flix. That is proving very successful. It's in its initial stages. Once we develop the model in Brazil, it's our intent to roll it out in some of the other countries.

Then regarding the digital rollout, we are about 37% of our screens are digital or its 39% at this time and we continue to work with studios. We have signed some agreements but we don't have all the VPF agreements finalized and I apologize. I know we have said we are getting very close on VPF agreements and like I said, we have some of them signed and we are hoping to finish the others in the next few months and get the digital rollout started.

Okay, just a follow up on the advertising down there, are you working in collaboration with other theaters down there or is it really just your own thing?

Right now it's just our theaters as we develop the model, but it's our intent, it would bring in other theaters again on a similar model that NCM uses here in the US.

Okay, one final question. Could you update us on where you see acquisition opportunities such that something you've been eyeballing, you and Regal, over the next 18 months or so, any developments there?

Right, there's -- we continue to look for both opportunities both in Latin America and then also of course here in the US and there is a fairly good M&A environment in the US now trying to reach agreement on price and values is always a challenge between the seller and the buyer. But we continue to be optimistic that there will be M&A activities available to us.

Okay, great. Thank you.

James Marsh, Piper Jaffray.

Just to follow up on the acquisition comment, do you have different criteria across your markets as you look at potential M&A? Obviously Brazil you've got a large percentage of ownership there. You potentially have some regulatory issues in Peru. You are kind of under screened there and then the US has different growth profiles. How do you reconcile all the different M&A opportunities as you look at them?

First off, they have to be high-quality and what we call sustainable assets, the modern theaters that would be the type that we would build or operate. And so that's probably the first qualification.

In Brazil, we do still see some M&A activities. You are right to point out that in certain markets that would be a regulatory issue such as Sao Paulo but then in other markets in Brazil, it wouldn't be that big of an issue. Really you are right that Peru is really developed for us. We continue to develop organically but there is some possible M&A day activity in Peru with some assets that would be attractive to us.

Here in the US, still the same criteria that we have always followed. I think when you look at the type of acquisitions that Cinemark has done over the years, the Century Theaters was a really high quality circuit. The four Muvico theaters that we purchased were really high quality and so our focus will be on that quality of theaters.

Okay, then Robert, could you follow up on the 190 basis point reduction in some rental costs internationally? Is there any particular drivers there and should we expect those to be sustainable over time?

There's a couple things influencing that. One, I think we have remained focused on trying to manage our costs and clearly something to be careful of is as you see if you go back over a four-quarter period, our film rental will vary quarter-to-quarter. Generally it has to do with how film does. Latin America is slightly different in that it doesn't necessarily follow the US pattern of big tentpole but are going out with big tentpole that you see in the US.

I think over a four-quarter period, it tends to average back out and so I don't necessarily want to suggest that this benefit we saw this quarter will stay there. It will be -- we would project it to be slightly better. Some of the reason is as we do VPF agreements, those are looked at as part of a film benefit.

And so as we receive VPF payments back from the studios the way we record it even though it really has nothing directly to do with the film because it is part of our overall program, those will be applied against film rentals. So it should bring down film rental and we don't have a long-run number yet but it will impact it some.

Okay, thanks very much.

Anthony DiClemente, Barclays.

Good morning, thanks for taking the questions. If my math is correct, and correct me if I'm wrong, in the US I think you just modestly underperformed the industry on admissions per screen. Do we have that right? And if so, just wondering if there's anything anomalous in the quarter that may have contributed to that? I have a follow up, please.

Sure, Anthony, we feel like our US assets did extremely well. While we added screens and not everybody has done that, we think if you look at the overall numbers in the US, various groups, both -- and throughout North America have added screens as we have so we think our numbers are reasonably in line.

One thing not to lose sight of is if you went back over the last even let's say four years, we have increased this -- just looking at this quarter, our box office has grown 23% while the industry grew 13% so we have -- we are always trying to outperform. We are always trying to keep our numbers going up but we also face some higher hurdles we have set for ourselves but I think we are generally in line with what the industry did.

Got it, Robert. Thanks. Then turning to your balance sheet and your leverage is down quite a bit. You've got a lot of cash on the balance sheet. You don't have many things in common with Google and Apple but one of them is that you got a lot of cash, which is great. Understanding that you have M&A opportunities here what Tim said earlier, I am just wondering if you could talk about if it's possible for you to pursue those M&A opportunities while at the same time possibly growing your dividend with that balance sheet and leverage ratio where it is?

First, I want Google's cash balance, some of those, that would be good, Anthony. Our focus is still as we have had in the past, is going to be growing the Company both through organic as well as acquisition opportunities. And so looking where our leverage is and our cash balance today that will be -- remain our primary focus.

We do realize that we are a strong cash flow business and continue to be. We feel like we pay a favorable dividend but -- and our Board will continuously review the dividend policy. But I think at least in the foreseeable this year and I'm not suggesting it changes next year but at least where we're at right now, I think we'd probably stay in line with our policies. Again our Board hasn't met yet to review where our dividend is at and so obviously they can make adjustments if they see it's appropriate.

Okay, fair enough and then last one for me and maybe this is for Tim, wondering what you have been hearing from your studios around windowing -- it feels and sounds like we haven't heard as much around like an early premium pay-per-view window from the distributors. It feels like that noise has died down a little bit, so just wondering is it safe to say that that buzz has passed through around this premium pay-TV window? Are there still examples of that that you hear about testing and maybe for the franchise or blockbuster films or not? That's it for me, thanks.

We -- as you point out, you know the noise is really died down a lot on premium VOD and I think the studios have gotten some traction with the downloads of their product and they seem at least -- the in-home revenues stabilize or some small growth. And so they think they have come up with a pattern that is -- they have at least stabilized growth in the in-home market.

Windows is always a part of the discussion in our industry. I can't say they never come back but I think that with the success that the studios have or are having, the number one window for their performance has been the theatrical window both domestically and internationally. And so -- they realize that. We realize that. I think there is a common goal to protect that window and any adjustments in the window I think will always be around its potential impact on the theatrical window.

Thank you both.

Robert Fishman, Nomura.

Thank you, in Latin America, can you help us break out how much of the quarter revenue or average ticket price was driven by premium, either 3-D or XD?

The increase there was similar to what we saw in the US. I think the percentage actually was slightly higher. I don't necessarily have that right in front of me, but again in the US, I think we gave the number of about 27%. I think actually it was slightly higher than that in Latin America.

We continue to see strong patronage in both 3-D and XD down there but the overall relative growth I think was similar this quarter as it was last quarter. Again as we roll out more 3-D down there, I think that will continue to benefit.

Thanks and any update on expanding your IMAX relationship in Latin America or do you still have that preference to stick to the XD branded screens?

Clearly we like XD. We also understand where IMAX is a strong brand and as you know, we have IMAXes in the US and so we continue to talk and work with IMAX. But we are rolling out our XD brand throughout Latin America. We continue to increase the number of screens down there and we feel it has again performed very favorably but obviously we will look at what all the options are.

Last one if I might. Are there more screens that you do plan on closing for cost efficiency purposes in Latin America and any other more cost initiatives that you have planned maybe learnings from the US theaters from a staffing or any other perspective? Thanks a lot.

Sure, two things. When we close screens, that tends to be opportunistic. It's usually where we will find that we feel like if we can gain some net efficiency by reducing screens at a theater and fortunately in Latin America generally where we are at in malls, we can have that opportunity because many times the landlord would like the space back to use for alternative purposes. Clearly those two things have to line up and we generally just don't close a screen and retain it as part of the theater. But that has worked I think favorably for us.

We do continue to put focus on throughout Latin America because we have been in a fairly strong growth mode and we will continue to be, but we want to make sure that we are also applying, as you said, the lessons we have applied over the last few years in the United States to increase our margins and become more efficient. We're trying to make sure all those are being passed down to Latin America.

I think you actually saw some of that this quarter as well when you saw a fair amount of margin improvement in Latin America and we put more emphasis on controlling labor costs and other costs that we incur down there. So continue to do that and even as we roll out digital and become fully digitized, that will also provide us some opportunities over the next couple of years.

Great, thank you.

David Miller, Caris & Company.

Hey, guys, congratulations on the stellar results. A couple questions for Rob. Rob, what was the free cash flow number in the quarter? I just don't see it in the press release. And then also, without prognosticating too much on CapEx for next year and new builds for next year or the year after, I'm trying to finger out when depreciation kind of hit the plateau. When do you think this growth -- when do you digest this growth and allow depreciation to plateau in order to realize additional leverage on the P&L? Thanks very much.

With respect to free cash flow, I think if I look at it the way most people defined it, which would kind of at Robert which would kind of be net before dividends, I think we're at about $32 million this quarter. I think year to date on that basis is somewhere around $82 million or so.

With respect to building -- this year not necessarily total CapEx but let's just look at building itself and then I will kind of jump back to the actual CapEx kind of number. We feel like Latin America still has a great runway in front of us and so that building somewhere between 90 to 150 screens per year is very reasonable and hopefully on the higher than the lower side during that period. I think the US we are this year if you look at our total building program, new builds, I think you are in the neighborhood of about 60 screens. Then we had one acquisition of 16 screens earlier this year. That's probably we think reasonable. Sometimes it will be a little higher, sometimes a little less but let's say someone between about 75 new screens. So I think that's still a reasonable run rate in the foreseeable future.

Overall CapEx I think comes down slightly simply because again especially on the maintenance side, we are still very focused on the international rollout and the XD rollout and over the next few years, those both slow down a little bit. But 2013 will still be a pretty big CapEx year.

Thank you.

Townsend Buckles, JPMorgan.

Thanks, a few on Latin America. Nice to see a return to core attendance growth there. Could you give some more color on whether these gains were broad-based or more specific to certain markets?

They were actually fairly broad-based. Obviously not every market did perform the same. I think if I looked I think all but one country had same-store box office growth and the one country was a very small country that we didn't see that. Attendance varied though, same-store attendance varied. All of them grew overall but again, same-store box office kind of was up everywhere.

Same-store attendance varied a little bit and again some of that has to do with relative film product. But if I look across our overall number of countries down there, we actually have felt very good for a number of quarters now where some might slow down a little bit, some are picking up. This particular quarter most everything was up though.

Okay and can you talk about how you are seeing performance at this point in the third quarter?

Overall the US industry is as we know, is slightly off for the quarter looking at box office reports, a number of issues there and the Olympics definitely are impacting it. I think as we look at international, international in some countries is really starting off well but I also think they will face similar issues throughout the quarter. That it's still again, Olympics is facing them as well as just overall product and so I wouldn't necessarily see it being that different.

I would add -- this is Tim speaking -- that last year was just a record quarter for the entire industry for the history of the industry, Q3 was last year. So I think that we will have a very good quarter this year when you put it in a historical perspective and you know, we remain optimistic about the overall year because Q4 stacks up the other way and looks very promising.

Got it. Just finally, Robert, to follow up on your comments about your screen growth outlook, looking into next year and the pace of retail development down in Latin America, any changes you are seeing there? It sounds like you have reiterated your long-term guidance, so should we think about 100 plus new screens next year as a good number?

Yes, that would definitely remain our goal. We feel like from everything we are seeing that that opportunity still exists and again, we're adding projects now and clearly we always have some that go between years but I do feel like the opportunities we are seeing, the mall development as you are seeing throughout Latin America is very promising for us.

Okay, thanks.

Matthew Harrigan, Wunderlich Securities.

Thank you, firstly, now that most people have acceded to the primacy of the theatrical window on economics and the marketing side, are you seeing more efforts to actually work with the studios using your databases to facilitate -- ultraviolet and some of the other potential streaming and [locker] products?

And then secondly, and the question is a little bit academic and I know you're not going to try to tell us exactly how much the business is worth. But when you look at Latin America, 82% I think of the box office from Ice Age was international. You've got unbelievable growth runway down there but at the same time, you have political risk and some of the markets is up a little bit with (inaudible), valuation parameters down there and the capital markets particularly growth adjusted; your relatively governed bond rates are very different. Just with that, I know it's my job to do evaluation but when you toss things around, how do you think about valuing a Brazilian business that belongs to a US company?

I'll take the first part of it and I will let Robert get in on a last part of it. The studios, you refer to ultraviolet or digital download services and that, the studios ideally would like to move away from the DVD and go to the digital download so that the consumer in the in-home experience can watch it on -- as to how they choose. Also they get a lot more protection from a copyright standpoint via the digital download than they do by selling the DVD. And so I can see those services in the studios' attempt to go more direct to the end consumer expanding.

And with that, Robert can address the Brazilian question.

Do you feel that you have a role in that in terms of someone (multiple speakers) maybe they buy it at the theater?

No, no, we could definitely have a role with that and as we introduce a lot of our mobile devices into our theaters and because I think that we can be helpful to them with our customer base, which is over 255 million people last year in the trailing 12 months to help drive those consumers to the digital download. And you know, I can see us as well as other exhibitors playing a role as we work with exhibitors to try to help them solve their in-home entertainment problems.

Then you're right, it's a bit of a question on Latin America as far as how would you look at value? We clearly look at our Company as well as by company and we haven't really separated out either where Latin America is as a whole or any individual company would be where we think the great growth prospects it offers us is we will continue to concentrate and we see it as an integral part of our overall company.

I am not trying to put a value on it as much as clearly as you said, it's a much higher growth business down there which compared to the US. So normally when you are valuing something that the relative potential for growth on top of rate, we think generally favorable economics down there when you look at how Latin America is doing as a whole compared to what the US or the long-term opportunities for the economies on top of really the long-term stability that it has had.

If I look at relative to FX rates, yes we are facing some headwind right now but I can go back. We faced that before and then it turns on us, so I think that's just timing issues.

We do think that's an incredibly valuable asset we have in our portfolio but we really haven't tried to put an exact number on it or anything.

Great, thank you.

Ben Mogil, Stifel Nicolaus.

Good morning and thanks for taking the question. This is really a two-part question. When you look at 3-D domestically, we have now seen 3-D sort of three years in a row fall each year but more importantly, we've seen now over the last couple of years they sort of start off stronger in May and June and then kind of peter out as the year goes through.

So curious on what your thoughts are on what's happening there. And then sort of as an adjunct to that, we have also seen where IMAX competes against standard 3-D on the live-action films and them taking increasingly higher share of the domestic -- sort of premium markets -- so sort of curious given your sort of underweight position on IMAX, how you sort of juxtapose the sort of deal with all these issues?

I will take the 3-D piece, Ben. We see our percentage of revenues growing from the 3-D and the XD format as we highlighted during this past quarter. Also I think when you see the results on Avengers, being the second-highest grossing film of all time, it's going to drive a lot of the creative community and the studios that a lot of the big tentpole pictures aren't going to be released in a format other than 3-D. And our percentages on 3-D continue to be very, very strong. And so we see 3-D as a big part of our future.

Also I think the 48 frames we talked about it in The Hobbit is the next evolution in 3-D, which we will continue to expand the format. And we talked a little bit about it in our introductory remarks about The Great Gatsby, which that's -- you wouldn't think of it as a 3-D potential but when you see the footage that we have seen, the cinematography in 3-D, the absolute sets in 3-D and the whole presentation was absolutely spectacular. And I noted on some other calls, the footage on Life of Pi almost remind me of the early footage we've seen on Avatar.

And so 3-D is both an evolving process but it's also an expanding process as being a percentage of the overall box office performance.

And regarding our XD, we are convinced that our XD theaters perform every bit as good when they are played head-to-head with IMAX because we also operate IMAX. But the other thing we like about XD and we made this before is that it's a totally different business model than IMAX is that each week we can pick the biggest film of the week and put it in our XD format. And throughout the year that -- so say we perform about the same as they do when a film is in IMAX, we have the upside of showing the films that are not in IMAX that is the biggest film that week. So when you compare it on the year-to-year or an overall year, our XD theaters perform extremely well.

Okay, that's great. Thanks, guys.

Joe Hovorka, Raymond James.

Thanks, guys, just two quick questions. One, is there an end date for new VPF agreements internationally like there is domestically?

Yes, I don't know that there is an end date. We are clearly in our negotiations, so we're not real concerned about any specific date at this point. We are hesitant to give timing since it has taken longer than we had hoped it to but with respect to when we are able to complete our agreements, we are very comfortable and confident that that will be done and no issues from the studios with respect to cut offs or anything.

Okay, and how many of your -- I think you said 39% of your screens are digital internationally. Are they all under VPF agreements right now or no?

Yes, well they are in that we have worked out -- they are verbal agreements in that we have worked out with the studios as we roll those out because they are also all 3-D-enabled as we showed 3-D film on there that we do receive some VPFs. But again, we are memorializing those as well as getting really the long-term contract in place.

Okay, so all 39% of those screens are in that lower film rent that you are seeing internationally because of the net of the VPF agreements?

Yes, and again, those aren't necessarily long-term. The terms could change in all those but they are -- the VPF is flowing through.

Okay, great. Thanks.

Tony Wible, Janney.

I was hoping we could dig in a little bit on the advertising. On the international lift that you guys saw, how sustainable is that benefit? What kind of growth rate do you guys look at at an international advertising push?

Then flipping over looking at the US, I think the NCM contributions were the lowest I've ever seen and have been down I think year-over-year for the last couple of quarters. What's driving the disparity there?

You know, we've always had a very strong advertising revenues from our international company and advertising was probably more commonplace in Latin America than it was ever in the US prior to NCM. But what we like about Flix is it is bringing the international marketplace into the digital age from an advertising standpoint and so we are trying to sort of duplicate or modify the NCM model to adapt into Latin America.

Now in Brazil, we have gotten very strong results and we are going to expand that in Brazil but with our strong presence in a lot of the Latin American countries, it gives us the ability to roll out that model and it will include other exhibitors in the marketplace. But we see a lot of potential in that format throughout all of Latin America.

Is that something where we could interpret that you feel comfortable you can sustain like a 20% growth rate?

You know, Tony, it's a little bit early to kind of estimate where the growth rate will be. What we have done right now is we have put assets in place really developing the business. We do think there is great potential in it, and as Tim mentioned in the earlier comments, we look to bring in other companies into it, other exhibitors. But we are just really kind of getting our feet wet and making sure we understand it. So it's kind of hard for us to project what kind of growth rate it could achieve. Obviously we think that it's the right move and will achieve growth or we wouldn't of gone down that path. But I don't know or have any estimates yet of where it could go.

You also asked about NCM and the dividend from NCM. We do feel like NCM's business is doing extremely well. We think in the future the dividends might be more comparable hopefully to what we've seen in the past. This particular quarter was off somewhat so again, we report in our quarter, we pick up the previous quarter of NCM and so that data is out there. And as far as what drove that, again I would have to tell you to go look at NCM's numbers but I think in general, it had more to do with some of the refinancing and things that affect free cash flow that's pushed over to us versus anything having to do with their business in particular.

Great, thank you.

Jim Goss, Barrington Research.

Thanks, some elements of this might have been touched on a bit but I was just wondering as you look at your facilities base and given your focus on a high-quality facilities-based, are there many theaters that would require significant changes or possibly replacement at this stage as the contracts come up for renewals? What sort of renewal activity do you expect to have over the next couple of quarters and maybe even into next year?

Jim, good question. As you look at our history, we really haven't closed that many theaters. We do have some situations where we might be rebuilding in a market. One of those that's coming up is Napa, California, where we had an incredibly old facility and we will be opening a new facility later this year. But that tends to be where our closures are. We're able to generally renegotiate deals or they still have long-term opportunities in them.

I think if you go back over the last few years we have probably closed, I don't know, 10 to 25 screens here domestically and I think that would be consistent with where we go forward. We do definitely have theaters up for renewal every year but again if I looked at net closures, it's probably somewhere in the range I just gave you.

When you do have the contracts coming up for renewals, so then it's just a matter of determining the rate at which you extend the lease?

Yes, clearly we are looking for the opportunity to maintain our profitability at the theater and so when it is renewed, we are looking at a number of items. The location is will it be sustainable if we renew it? And really generally what's the investment to be made in it? No we do tend to keep our -- we spent a fair amount on maintenance and so when we are going into a theater situation most of the time we feel pretty confident that if we think -- if it has been doing well, we are going to obviously try to renew it and look at making sure that the facility itself is able to sustain itself from an operational point of view and that it's clean and obviously everything is up-to-date in it.

Okay, then a couple of XD questions. Are you getting to the stage where domestically and internationally you are getting marketing efficiencies as that brand grows? And if a movie is in 3-D, is it always in 3-D on XD? And what is the price differential you usually have in the XD theaters between a 2-D and a 3-D title?

First off, for the XD Auditorium, it would be the biggest film that week would be in the XD auditorium and that could be a 2-D or a 3-D.

But if it's a movie in 3-D -- okay.

But then in general, our average upcharge for our XD Auditorium is like in the $3 plus range. And then if it was in 2-D -- I mean if it was in 3-D, you would add another $2 and so it would be like a $5 upcharge if it was an XD 3-D. So --

Thanks, I think that covers a lot of the things that have been taken already.

Sir, we have no further questions in the queue at this time.

Okay. Thank you, everybody, and we look forward to reporting our third-quarter results. Thank you very much for joining us today.

This does conclude today's conference call. Thank you again for your participation. You may now disconnect.