Cinemark Holdings Inc (CNK) 2012 Q3 法說會逐字稿

Good morning, my name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone the Cinemark third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the conference over to Miss Chanda Brashears. Ma'am, you may begin.

Thank you, Felicia. Good morning, everyone. At this time, I would like to welcome you Cinemark Holdings, Inc. third-quarter 2012 earnings release conference call hosted by our Chief Executive Officer, Tim Warner and our Chief Financial Officer, Robert Copple. 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 Tim Warner.

Thank you, Chanda. Good morning, everyone. We appreciate you joining us on the call today. I will first provide a brief summary of Cinemark's third quarter results followed by a discussion of the overall domestic industry box office performance for the third quarter. I will also highlight the remaining 2012 film slate and a preview of the 2013 film slate. Lastly, I'll provide an update on a few of our strategic initiatives. Following my commentary, Robert will further discuss our financial results and capital structure. We will then open up the lines for a question-and-answer period.

Our global focus in operational excellence and efficiencies, combined with our unique and geographically diverse US and Latin America footprint of 5,207 screens in 39 US states and 13 Latin America counties helped us achieve an all time Cinemark record for worldwide attendance entertaining 69.7 million patrons during the quarter. Our third quarter worldwide total revenues were $633.6 million and our industry leading adjusted EBITDA and adjusted EBITDA margins were $148.4 million and 23.4% respectively. Cinemark's global admission revenues over indexed the North American industry by 370 basis points in the third quarter. Our worldwide strategy has now outperformed the North American box office for 12 of the last 13 conservative quarters. The third quarter North American box office faced challenging comps as the industry achieved an all-time quarterly high in the third quarter of 2011, up 5.5% compared to the 2010 period. Cinemark's US assets outperformed that record setting industry benchmark last year by 390 basis points. Despite this elevated hurdle, our domestic theaters performed relatively in line with this quarter's 7.2% North American box office decline, down 7.6%. Our domestic results were hindered to some extent by the higher mix of restricted R rated product and the less availability of 3-D product.

Leading the third quarter was the exceptional performance of The Dark Knight Rises with domestic grosses in excess of $445 million, ranking it the seventh highest grossing film of all time. We also saw the reboot of the Spider-Man franchise which performed very well in 3-D and grossed over $260 million. Ted also continued its successful run into the third quarter. Ice Age 4 and Brave, both featuring 3-D, and the Bourne Legacy rounded out the quarter's top films. Our Latin American operation generated another strong performance in the third quarter with admission revenues of $137.1 million, an increase of 5.5% versus the same period last year, up 18.4% in constant currency. Our international operations again outperformed the North American industry box office.

2012 remains on track to be a record-setting year for our industry, up approximately 5% year-to-date through this past weekend. Quarter four has experienced strong momentum with an increase of more than 20% quarter to date led by titles such as Taken 2, Argo, Paranormal Activity 4, Wreck It Ralph and the carry over of Hotel Transylvania, Pitch Perfect and Looper. Skyfall, the newest James Bond film, will open this Wednesday at midnight, 24 hours before its wide release on our domestic XD screens along with other large -- premium large formats. Skyfall has already demonstrated a strong box office performance overseas and we are optimistic for continued strength in its domestic opening based on industry projections. We are anxiously awaiting the release of the final sequel of the Twilight series, Breaking Dawn Part 2, which has already generated significant advanced ticket sales, exceeding the advanced ticket sales in the same timeframe of the previous records held for Harry Potter and the Deathly Hallows Part 2 and Breaking Dawn Part 1 and Hunger Games.

Lincoln is also receiving great word of mouth and we are looking forward to its wide release next week. The Thanksgiving slate includes the Life of Pi, for which Cinemark and 20th Century Fox are jointly promoting our XD auditoriums through a wide range of social, mobile, online and television advertising. The Thanksgiving holiday also includes the Rise of the Guardian, which is expected to have strong family appeal. In mid December, we have the much anticipated release of the Hobbit, an Unexpected Journey, which is the first of the trilogy. The Hobbit will have limited release of the 48 frames per second format, the next evolution of 3-D. Unlike many exhibitors, Cinemark is fully equipped to play the high frame rate format in all of our digital theaters in both the US and Latin America, including our XD auditoriums.

The Christmas slate includes Judd Apatow's comedy, This is 40, the star studded Les Miserables, the 3-D release of Monsters Inc. and the Tom Cruise driven film Jack Reacher, the first installment of Arthur Lee Child's popular crime series, which could be an exciting new franchise based on industry buzz. Last year we closed out the year with Quentin Tarantino's Djano Unchained, the family comedy Parental Guidance and the Seth Rogan and Barbra Streisand comedy, The Guilt Trip. Although the film slate for 2013 has not been finalized, we are enthusiastic given the content timeline and 3-D availability. There have already been 35 3-D enabled titles scheduled for wide release next year, similar to 2012. We open up the year with A Good Day to Diehard, the most recent Diehard sequel. Oz, the Great and Powerful, a 3-D Wizard of Oz prequel, and G.I. Joe Retaliation.

The summer season kicked off with Hangover 3, Fast and Furious 6 and four strong 3-D titles, including Iron Man 3, the Great Gatsby, Star Trek Into darkness and The Man of Steel, a Superman film produced in collaboration with Christopher Nolan. The summer season continues with Monsters University, Despicable Me 2, Pacific Rim and Smurfs 2, all featuring 3-D, as well as the World War Z and the Lone Ranger. In November, we have the release of Thor, The Dark World, in 3-D and for Thanksgiving holiday, the highly anticipated second film of the Hunger Games series, Catching fire. In December, we have the release of the second film of the Hobbit trilogy, The Desolation of Smaug in 3-D and high frame rate and also Jack Ryan, which is based on the popular Tom Clancy character.

Cinemark continues to be the market leader in premium large format, or PLF screens with our extreme digital or XD concept. Studios prefer to open new releases on premium large formats as they recognize the PLF significant contribution to successful openings. As of September 30, we had a total of 96 XD auditoriums worldwide, 63 domestically and 33 internationally. Though our XD format comprises only 1.6% of our screens domestically, they generated 4.6 of our admissions revenues during the third quarter. We continued to expand our global XD footprint and expect to break the 100 XD auditorium threshold soon with an additional 15 to 20 XD auditoriums opening by year end.

We are capitalizing on our market leading position in Brazil to create an on screen advertising model called Flix Media, which is similar to the US screen advertising concept. Though Flix is still in its early stages, we have already achieved strong results since its launch last year and anticipate a long-term growth opportunity to further enhance advertising revenues. While we initiated this model this Brazil, we anticipate expanding this on-screen advertising concept into our other Latin America counties as well. We are pleased to report that the Digital Cinema Distribution Coalition, DCDC, operating agreement has been finalized and should be fully operational as early as next year. As a reminder, DCDC is a joint venture between the exhibitors and distributors to seamlessly distribute all digital content to all theaters by satellite, which should significantly enrich alternative product availability such as live sports, concerts, and operas.

Regarding our international digital conversion, we are continuing to progress on the virtual print BPF agreements with the studios. We currently have three of the six major studio agreements executed and are nearing the finalization of -- on the remaining three. We will complete the digitalization of our Latin American assets once the agreements are in place. We are currently 40% digital and 39% 3-D capable in Latin America and expect to be 100% digital in our first run theaters and approximately 50% 3-D capable upon completion, similar to our US circuit.

We are proud to announce the successful launch of CineMode, our exclusive interactive technology that allows patrons the opportunity to earn rewards while being courteous during the show. Our innovative technology was designed to address texting and other cell phone distractions, which is the number one complaint of moviegoers. While in CineMode, the smartphone screen is automatically dimmed and patrons are prompted to silence their volume. If CineMode is enabled for the duration of the movie, patrons are rewarded with exclusive digital rewards and offers that can be used at their next visit to Cinemark. CineMode facilitates contact with our patrons, and this initiative provides an opportunity for us to further improve our relationship with the studios, our vendors via chief wanting and promotions such as discounted digital downloads. To date, approximately 1.5 million patrons have already downloaded CineMode.

We continue to look for additional ways to further enhance our patrons movie going experience. In conjunction with Dolby, we were performing selective testing of their revolutionary Atmos surround sound experience which has the capability to handle up to 64 speaker feeds creating a distinct sound mix for a life-like and immersive sensory cinema experience. We are enthusiastic about this exciting innovation and look forward to potentially expanding our test base. We are pleased to report that the two highly anticipated releases, Life of PI and The Hobbit it will feature Dolby Atmos soundtrack and we will be presenting these films in their enriched format in our test auditoriums. As our operating results consistently demonstrate, Cinemark has designed a Company with strong and stable domestic theater base which supports a substantial quarterly dividend, accompanied by our international circuit which represents a long-running growth engine and differentiates us from all our industry peers worldwide. Robert will now discuss the Company's financial performance for the quarter.

Good morning, and thank you again for joining us. Total revenues for the quarter were $633.6 million and admissions revenues which were $402.4 million. Third quarter worldwide concession revenues were $200.1 million, an increase of 2.7% versus the same period last year, and other revenues grew 10.7% to $31.1 million. As Tim stated, we achieved a Company milestone with record attendance of 69.7 million patrons for the quarter. Our worldwide adjusted EBITDA was $148.4 million resulting in a 23.4% margin.

Our US segment generated total revenues of $413 million and admissions revenues of $265.3 million. Attendance was 41.2 million patrons. Our average ticket price of $6.44 was relatively flat to the prior year period, primarily due to the reduction of premium product in the third quarter of 2012 versus 2011. Premium ticket sales accounted for 19.8% of our domestic box office this quarter versus 25% in the third quarter of 2011. US concessions per patron were up 5.1% in the third quarter of 2012 compared to the same period last year, and our concession revenues were $135.6 million. Our domestic adjusted EBITDA was $94.5 million, resulting in an adjusted EBITDA margin of 22.9%.

Our international segment had another robust quarter. International attendance increased 14% to 28.5 million patrons from 25 million patrons in the third quarter of 2011. Admissions revenues for Q3 of 2012 were $137.1 million, up 5.5%. Average ticket price was $4.81 for the third quarter of 2012, down 7.5% due to the currency translation. Average ticket price increased approximately 3.8% in constant currency.

International concession revenues were $64.5 million, an increase of 15.6%. Concession per patron was $2.26,an increase of 1.3%, 12.1% on a constant currency basis. International other revenues increased 19.5% from Q3 of 2011, primarily due to increased screen advertising in Brazil, Mexico, and Argentina. Total revenues for Latin America were $220.6 million, an increase of 9.4% versus the same period last year. Our international adjusted EBITDA increased 22.4% to $53.8 million, despite a blended FX headwind of approximately 14%. Our adjusted EBITDA margin improved 260 basis points to 24.4%.

In the fourth quarter, we should start seeing a reduction in the FX headwinds we have faced this year with most of the impact being eliminated by the end of Q1 of next year, assuming current rates stay relatively stable. For the quarter, our consolidated worldwide film rental and advertising expense decreased 80 basis points to 53.2% of admissions revenues. We had a slight increase of 20 basis points in our domestic segment compared to the same period last year. International film rental decreased 260 basis points versus Q3 of 2011.

Total income before taxes was $77.4 million. Net income attributable to Cinemark, Inc. was $47.4 million, which results in $0.41 per diluted share. Our balance sheet continues to be one of the strongest and least levered in the industry with a net debt position of $1.02 billion and a net leverage ratio of 1.8 times adjusted EBITDA as of September 30. Our US circuit at quarter end was comprised of 3,918 auditoriums at 299 theaters in 39 states. During the three month period, we closed one theater with seven screens. We currently have signed commitments it open two new theaters with 28 screens during the remainder of 2012 and 16 new theaters with 202 screens subsequent to 2012. We expect to incur approximately $135 million for the development of these additional 230 screens.

Our international circuit consisted of 1,289 auditoriums in 162 theaters in 13 Latin American counties. During the quarter, we opened one theater and seven screens. We presently have signed commitments it open six new theaters and 44 screens during the remainder of 2012 and 12 new theaters with 82 screens subsequent to 2012. Our estimated capital expenditures to develop these additional 126 screens are approximately $90 million. We remain committed to building and maintaining the highest quality global theater circuit.

Throughout the quarter, we reinvested $52.9 million on total capital expenditures consisting of $29.1 million on new theater construction and $23.8 million on maintenance CapEx, including four new XD premium format screens and our continued international digital projector rollout. We remain comfortable with the guidance previously provided of $225 million to $250 million in total al CapEx for 2012, which includes both build -- new build and maintenance expenditures. Our long-term focus remains on organically expanding the Company's worldwide footprint while selectively evaluating attractive acquisition opportunities that meet our high standards for asset quality and financial hurdles, which we believe will generate additional long-term value for the Company and our shareholders.

Before we turn to our question-and-answer session, I'd like this say a few words about the unforeseeable tragedy in Aurora. Our thoughts and prayers remain with all those affected. We continue to work closely with the community. Based on the results of a survey conducted by the city, the mayor requested our consideration in reopening the theater. As announced, we have agreed and hope to reopen the theater by the beginning of the new year. We have pledged to reconfigure the space and make the theater better than ever. There have been several lawsuits filed recently and our legal team is in the process of responding. We are not able to comment on pending litigation matters. Thank you for your thoughtfulness in this matter. This concludes our prepared remarks. We will now open up the lines for questions.

(Operator Instructions)

Your first question comes from the line of Townsend Buckles with JPMorgan.

Thanks. Can you talk about how you were affected by Sandy last week? Did your share of box office move higher given your limited presence on the East Coast?

We had a very small effect, although we remain very concerned about the victims of Sandy and the impact on the overall region. In fact, the Company had led a contribution drive to raise some funds to help the victims. But for our theaters themselves, we were closed down one or two days in the theaters in the area, and we only had one theater -- or one auditorium and one theater that was affected on any kind of permanent basis. And so it's had very little impact.

Okay. And then looking at your LatAm performance in the third quarter, looks like Brazil was down pretty sharply while the rest of the region continues to grow at a very strong pace. Aside from the Hoyts acquisition, can you talk about what's behind that divergent performance, whether it's differing screen growth, competition or maybe other factors?

Probably one of the bigger issues was local film product and just the change in this quarter of how much that product impacted us. We're not really -- when we've looked at performance, actually, we saw very strong performance in Brazil towards the end of the quarter. It had been lagging a little bit and then -- and a lot of that had to do with the film product. And then towards the very end, it really came back on. So, really no concerns about what's happening down there in its overall performance. We just feel like the majority of the changes -- I mean, clearly FX, if you look at our filings and stuff, you'll see Brazil being down, and FX had a pretty significant impact. But just on a constant dollar basis, probably the biggest thing we saw had to do with the film product.

Okay. And then just, lastly, your cash balance continues to grow, Robert. Can you give us an update on your focus on US acquisitions? Do you see deals being closed by year end and can you give a sense of what's out there in terms of size?

Again, we don't necessarily comment on specific deals, but there definitely is activity in the market as we've all see the Carmike acquisition. And there are more opportunities that we feel are out there and they definitely vary in size from some rather small deals that might represent a few theaters to some larger potential circuits. So, as we mentioned in our comments, we're looking for opportunities that enhance our overall shareholder value and that the theaters we would acquire would be similar in quality to what we have today. And we do think there is some potential out there, and it will just depend on ultimately what the price negotiations are based on those particular circuits.

And would you think things materialize by year end, or maybe still get pushed out, further out?

It's definitely a question. While there is activity, it's very difficult to really understand what the timing will be of any of those deals closing.

Got it. Thanks a lot.

Your next question comes from the line of Robert Fishman with Nomura.

Yes, hi, I've got one for Tim and maybe a couple for Robert. Tim, how do you think about where we are in the 3-D lifecycle for future film releases? And how will your ability to offer The Hobbit in 48 frames per second differentiate 3-D in your theater as relative to those circuits that are not able to offer this enhanced technology?

Well we feel good about the overall lifecycle of 3-D, mainly because of the very talented directors that are working in it. Like James Cameron, who probably set the industry standard for 3-D with Avatar, has come out with some public comments on the Life of PI and Ang Lee's use of 3-D. And then, of course, Jackson with the 48 frames or the high frame rates taking it to a whole other level, and there's going to be an enhanced evolution in 3-D. And when you look at the number of films being made in 3-D, you had I think 32, 33 this year. You going to have --35 has already been announced for next year. And so we're seeing sort of a consistent number, but probably more importantly is the level of creative talent that is now working in 3-D. So you are going to see real advancements in the use of the technology as they adapt to it. But I think when people see the Life of PI, because it screened publicly at the New York Film Festival and it's had some publishes screenings, and it's just getting raves. I think that the life cycle of 3-D, not that it's just starting, but it's sustainable and permanent. And next year we've -- like we've announced in our public thing, is there is 35 3-D titles already announced.

Great. And for Robert, can you help us think about the fourth quarter's film rental and advertising costs for the US and in LatAm, relative to the historical fourth quarter average, given this upcoming strong expected release slate? Maybe a follow up to that would be, how do you expect the US releases, the strong slate there, to perform in Latin America in fourth quarter? And as you mentioned to the previous answer, are there any local releases that we should be aware of that could have an impact on the results?

I think with respect to the film rental, clearly the safest thing I think is you kind of look back and see what we have run the last few years. And while it's varied somewhat in the fourth quarter, you tend to -- and let's say a heavier weighted quarter, we would run anywhere between -- a heavier weigh with 10 pulls, I think if I look back at fourth quarter last few years, you are running somewhere between 55% and 56%. And offhand, obviously, as you're saying, you would guess it would be on the higher than the lower side. But clearly, you would have a lot of great box office revenue to go with that. So, I think if you look at the last three or four years, I would assume you're moving towards the upper end of that. With respect to specific product, I think internationally in Q4, I don't know that there is anything really unusual that will throw the slate off one way or another with respect to local product for international. And I think as far as the releases in international, I don't think that there is any major differential that, again, would throw off international versus domestic.

Yes. Because when you look at one of the big releases, which is The Hobbit, that's based, of course, on the Lord of the Rings trilogy that's been -- and what tends to happen in Latin America, even on, like an example, this year you had The Hunger Games, and it performed okay in Latin America versus the US. But I think that when, the next Hunger Games comes out, it will perform better. And so the base audience for The Hobbit is well established in Latin America.

Okay, great. Thanks, guys.

Sure.

Your next question comes from the line of Eric Handler with MKM Partners.

Thanks for getting my question. A few things for you guys. First, when you look at your concession -- per cap concession spending, this is the fifth quarter in a row now in the US that you are above 5%. Is there something in the product mix or just general price increases that's allowing you to sustain above-average price increases there on the concessions? Then secondly, can you talk about where you expect to end the year in terms of your net screen growth or what your year-end total expectations per screen, your open screens are, both US and international? And then what percent of your revenue is premium ticket sales in the quarter?

Okay. I'll take your first question on the concessions, and Robert is going to answer your last two. But on concessions, our concession group has been very focused on delivering value to customers and then also to our social media and our direct contact with our patrons. We have been trying to upsell them through putting together value coupons and that to trigger more sales at the box office while at the same time delivering our, customer a better value. There has been some marginal price increases, but then it has been marginal. And I think it's sort of a combination of these value coupons and then the direct contact with the customer as to how we're now able to relate to the customer. Now, this here is going to be expanded, or our ability to do this is going to be expanded with our new technology called CineMode, which will put us on -- directly on our customers' smartphones. And so, Robert, you can --

Sure. Eric, with respect to screen count, as we come into the call, would expect to open about 28 more screens domestically this year. However, we also think we'll close about the same number of screens. Maybe a few more, so that actually screen count domestically will be pretty close to where we are right now. Internationally, I think we're slated it open about net 40 new screens by year end. So, that would be about the up side on that. We are definitely opening fewer screens internationally than we had expectations of at the beginning of the year, but that's primarily just a timing issue where we have seen screen count move into next year.

We had originally -- many of the screens that we had originally estimated to open this year where we talked upwards of 100 screens were very heavily weighted towards year end in Q4. And as some of the new building projects in Latin America have just taken longer to develop as well as changed themselves within the malls we're building, that has just been pushed out a little bit. So, it's not reflective of any issues. Just more of a timing change on when those will open.

Great. And then premium revenue for the quarter?

As a percentage of total revenues, I think it was about just a little less than 20%, about 19.8%. That compared to just -- that's domestic. That compared to about 25% last year.

Thank you very much.

Your next question comes from the line of Eric Wold with B Riley.

Good morning. Two questions. I guess one on the acquisition opportunities. Can you just talk in a general sense. If you compare and contrast your domestic and international opportunities from what you're seeing in terms of both the quality of the assets you could acquire both how they are now and obviously, any necessary improvements, whether it's digital or normal renovation? And then, two, what the valuation difference is, may currently look like from the sellers.

Yes. I think right now we're seeing most opportunities domestically. From a Company point of view, we would be as, if not more, interested, I think, in international opportunities. But those just -- you're not seeing things present themselves as much as I think what's happening in the US right now. I think from a multiple point of view, I go back to what we look at is when we building is organically, we are after that 20% return. That kind of establishes a framework when we're looking at any new opportunity. And so we're trying to fit it in similar to what a new build would be. Clearly, it can vary a little bit from that because you know what you're buying, you know the history of it. But that's our ballpark we're shooting for and clearly, we're trying to -- we look at assets that we think create creative opportunities for the Company. But definitely more activity going on right now in the US

Okay, and just a quick follow-up on that. If there was something opportunistic down in Latin America, remind us -- I know there is tax implications from bringing cash from Latin America back in the US, but is there anything going the opposite way, or would you most likely borrow down in that market to buy something down in that market?

Yes. As far as being able to fund it, there shouldn't be any problem whether we move cash around within the countries. Many of our countries have excess cash anyway that may be able to fund it. Or ultimately, if we had to move it from here, none of those would create real tax issues for us. And to your point, depending on the size of the deal, we might even consider borrowing locally as kind of a natural hedge on the deal. So, all those are available, but none of them really have leakage associated with it.

Okay, and then final question. Going back to the 3-D slate for next year, looking robust already. A lot of movies shifted from this year. What are your thoughts on how you are in terms of 3-D screen penetration now and any risks as this continues to grow to getting back to where we were a few days ago with 3-D movies crowding it, or is that a thing of the past and studios have gotten smarter about their scheduling?

I think the studios got smarter about their scheduling, but -- and like to my earlier remarks, you are starting to see some of the top creative talent in Hollywood working in this format. And so the other thing that we're doing, we're at 50% now in -- of our screens in the US are 3-D. But we're also evaluating in we need to expand that format a little bit to get more stepdowns to allow 3-D to play out more and more in the marketplace. Because a lot of the 3-D -- in fact, you even got Christopher Nolan, who in the Batman series is now collaborating and working on doing Superman, Man of Steel, in 3-D. So, a lot of the really big budget pictures that tend to play out longer, we might have to add additional stepdowns.

Perfect. Thank you both.

Thanks, Eric.

Your next question comes from the line of Anthony DiClemente with Barclays.

Thanks. This is actually [Bo Tang] for Anthony. Robert, to follow up on your previous comments on the timing of new builds getting pushed out, can you help us think through your screen growth and CapEx outlook for next year?

Yes. It's still a little bit early, Bo, to provide numbers. But I think broadly speaking that international, we feel more confident next year that we would get in the 100 screen growth opportunity. And then domestically, probably not a lot different than this year, maybe a little more. But again, we're still firming all that up. And so if anything, I'd say we have more potential for upside on screen growth than any reductions. But it -- next quarter, we'll be able to give you much more solid numbers. But definitely to the point we move projects from this year to next year, it's still very robust in Latin America and we do feel like we'll feel much more confident that we can hit that 100-screen-plus growth internationally.

Got it, thanks. And also just on margins. I was hoping to get your thoughts on where margins can go long-term. Is there still much fat to be trimmed on the margin side?

In the end, our margins, as you have seen, vary primarily with box office and attendance because the way our industry is leveraged from an operating point of view, if I can put more people into the theater, I'll be able to create a better margin out of it. I think you have seen, especially in the US, a very strong focus on operating costs for the last two to three years. And while we continue to do that, we've definitely pushed our margins at the levels they are at to being pretty much highest in the industry. And while we'll still look for improvements, we definitely have realized a lot. I think that you are seeing internationally we have moved a lot of our focus of what we've learned here down to our international group, and we're starting to see some benefits there because over the last few quarters we have improved our margin. And so we'll continue to maintain our focus in the US and hopefully, find some improvement there. But I think internationally is probably where our biggest opportunity lies right now.

Okay. Great. Thank you very much.

Your next question comes from the line of Barton Crockett of Lazard Capital Markets.

Hi, this is actually Thomas Lee in for Barton. I have two questions. First, can you give us more color on where you are on your digital projection rollout and potentially what it means for CapEx over the next year? Secondly, as you expand internationally, can you talk about other potential territories that could be of interest? Maybe China, considering their box office growth? Thanks much.

Yes. Well, in the US we're 100% digital and in Latin America, we're approximately 40% at this time. And with the intent, as soon as we get all the VPF agreements executed, we have three of them executed now to take Latin America up to 100% digital. The -- regarding China, we looked at China. I personally went there a number of times for several years, and we felt it was a great opportunity and a market that we wanted to explore. In fact, we did a joint venture in Taiwan to prepare us to operate in mainland China. But they have a government rule where you can only own -- you have to own less than 51%. And so you have to be a minority partner. And although we were up hoping and optimistic that that rule might change, it still exists today. And I think the -- our interests in exploring opportunity in China would be related to that rule changing.

Great, thanks.

Your next question comes from the line of Tony Wible with Janney.

Yes, two questions. First is, how would you size the Latin American advertising market that you guys are building out there? I don't know if you have done any kind of preliminary work around that? And secondly, if the 4Q ends up being as strong as it seems like it's going to be, are you guys optimistic that the US box office would grow year over year in 2013, or would it look more like 2011 when you kind of had a strong Avatar and film slate that was tough to comp against? Thanks.

Yes. Tony, I think on box office, we don't end up giving projections. I think we're excited about the film slate that we've seen, as Tim mentioned, and we think there is some fantastic 3-D films that will be out there that can drive box office on top of just overall names that are out there. And as we talked about earlier, a number of films even that were supposed to be this year were moved to next year, and I think that helps as well. But, not really giving guidance on how we think that matches up against this year. But again, we're excited about those opportunities next year. And then --

Okay.

Yes. With respect to the advertising, the market is actually better developed in Latin America than what it is in the US However, just as in the US, screen advertising is still a small percent of the overall advertising market, and there is definitely opportunity to expand the presence. One of the big things you haven't had in Latin America was digital. And so just the conversion to digital and what that offers, both in terms of quality and diversity, more opportunity to do local and regional and national. And then really as we develop this -- our Flix concept and expand it throughout our circuits all across Latin America so that not only are we able to offer major advertisers the largest coverage in Brazil or separately Chile or something, now suddenly we can offer it across all of the southern cone as well as throughout Latin America. We think that has a lot of value in it as well. And so that's why -- those are the things that are exciting us about Flix.

And also, one of the big changes in the model, to Robert's point, is that the actual advertising market has always been fairly robust in Latin America. Even more so than the US prior to the US developing the MCM and companies like Screen Vision. But with Flix, we are taking our advertising in house. And to Robert's point, with the -- as it goes more digital, the barrier to being on the screen will pretty much be eliminated. So, we think there's some real upside as we roll it out throughout Latin America.

Will you guys be moving that platform to incorporate competitors' screens to improve reach, or will that just stay inside the Cinemark footprint? And then do you have a dollar number, roughly speaking, around kind of what you think this could be in, say, five to ten years?

Yes. With respect to competitors, we are very open to that. We are exploring that now actually, in that we think ultimately the model that has been used in the US where you look at this as an industry could be beneficial to developing the overall potential of that market. Fortunately for Cinemark, we have such a large market share in many of these countries that, again, in Brazil we are able to kick it off by ourselves and have a very meaningful impact. But we still think consolidating the market with our peer groups down there makes a lot of sense. And so we're trying to understand the best way to do that now.

I don't really have a dollar figure of where it can go. We definitely think there could be a lot of growth and we think it's a long-term engine because again, this is something that's going to take us a while to continue to develop just the market on a digital basis, to develop what we have within Cinemark. If we take it and roll in outside groups, that's a whole process in itself. And so a little bit, nearly to your point, this could well be a five or a ten-year process as you really develop it. The exciting part we're seeing is just that with the little bit we've done, we are already seeing benefits in our numbers. And so we know that the potential is there as we create more expertise. But I don't really have a number of how big it could be.

Great. And congratulations on the great results.

I appreciate it.

Your next question comes from the line of James Marsh with Piper Jaffray.

Great, thanks. Just wanted to circle back on the CineMode discussion. Do you guys believe that cell phone annoyances are negatively impacting attendance for the industry, or do you think it just lowers the quality of the experience? Just trying to get a sense, are you getting more complaints today than you used to? And maybe what was the top complaint that you used to get before the advent of smartphones?

I think as you -- if you have gone to the movie theaters, whether it's us or our competitors, the industry has launched a real competitive campaign, or a campaign to encourage people not to talk on their cell phones or not to text and that in the theater while they're in the theater. And if they need to talk or text, to take it outside, to take it out of the auditorium. And so it's not so much a huge issue that's impacting attendance today.

But what CineMode is, is what we feel is the smart way to address the issue. And so that you are giving customers incentive to actually put their phone in CineMode, which dims the lights and silences the phone, and then you reward them for doing that. Now, that makes for a better customer experience. But more importantly what it does, it puts us in direct contact with that customer on their smartphone. And so it allows us, whether it's our concession couponing program, it allows us to work with (inaudible) such as studios that we might give them coupons for digital downloads. And also, it will help us identify what movies they like, what movies they don't like. And so there is a lot of information or additional customer benefits that we think our patrons will get because we will have this here direct relationship with them.

The other thing about CineMode is, unlike some other value programs or customer loyalty programs, it's at no charge to the customer. In fact, it's a technology reward to the customer. And also, they don't have to carry around a card. It's right on their phone. And so it's really using technology at a very high level to have that direct relationship with our customer.

Okay. That is interesting. And then just quickly on XD. Does your early release window on Skyfall, does that contract with Sony limit you playing Twilight the following week in XD?

No, it does not. Because the XD format is totally different than the IMAX or -- the business model for the two are totally different. IMAX makes long-term commitments to the studios to do a film in IMAX, but they also get paid for that, where the XD model is just it takes what we feel is the biggest picture of that week and open it in our XD premium format.

Okay. Thanks very much.

Your next question comes from the line of Ben Mogil with Stifel Nicolaus.

Hi, good morning, and thanks for taking my question. I just want to make sure I got the numbers right. Did you say at the beginning that you figure you were down on a box office per screen? Because I know you obviously opened and closed screens during the quarter, at around a negative 7.6%. You think the industry was around a negative 7.2% on the benchmark Is that what you said?

Yes, that's right, Ben. When we look at our numbers, we slightly under performed. One of the things we tried to put in light of is if you look at last year, we were up 390 bips, and so it definitely is one of those that we had a heck of a hurdle compared, we think to, if you want to call it the industry or our peer group. If you looked at what we have done since 2010, so we kind of combine last year's over performance with this year's slight under, again, we meaningfully outperformed the industry for that period.

Do you have -- when you look at this year and so you say, you have under performed a little bit this year, is it -- partly I understand the comp issue. Is there anything else going on that you think is leading you to revert back to the mean? Is it some of the geographies that you are over weighed in are no longer as over weighed on the box office as they were a little while ago? Is IMAX on the margin crimping a little because they have had not a great year, but a decent year? I am curious what your thoughts are around what's happening on the domestic results compared it the benchmarks.

Yes. Personally, I feel like it has to do with the relative film product. Dark Knight made up a significant percent of this quarter's box office. It was a higher percentage of the top 5 or 10 or total films than what we saw last year for the top films. And Dark Knight played well in our theaters, but the history of that franchise is that we slightly under perform in it.

We had a few more R films that don't necessarily play in our markets as well. And again, that's going to vary by quarter. Some quarters have films that play better. But this particular quarter we are just facing product that plays slightly under what our norms are, and I really think that had more do with it than anything. We are not seeing any performance issues in our theaters. We look at our different DMAs and we think we are doing well in those. But we can track films, and we look at things like Ted or Dark Knight, those don't -- unfortunately they're two different genres, but they just don't play quite as well to our audiences.

And too, and Robert made the point. We just -- which was a sensational third quarter in 2011, and we outperformed that by 390 basis points. So, we just have an incredibly high hurdle to overcome.

For sure. That makes sense. And then I know it's early days, but with Wanda now running AMC, have you seen any changes the way that AMC is operating in some of the markets that you compete in in the same zones, et cetera?

No, we have not.

Okay. I think that's it for me. Thanks again, guys.

You bet. Thanks, Ben.

Your next question comes from the line of Matthew Harrigan with Wunderlich Securities.

Thank you. You got an occasional (inaudible) end on a local product, but it looks like the privacy of the US product is still pretty amazing, over 80% at the box office on Ice Age overseas. Obviously the Skyfall numbers. But you have got such an amazing distribution network down there. Is there something to do to foster more local product? Or even events, the culture or the theater experience, almost seems to resonate a little bit better down there than it does here. People maybe here are a little bit more jaded and sometimes product sensitive.

And then secondly, I know a few -- you and a few of your peers have had discussions at the studios on ultraviolet and some of the other digital locker initiatives, cloud initiatives. Can you talk to anything on that in terms of how you might fit in the ecosystem and foster a win-win between you and the studios? Thank you.

Yes. No, first off, I'll take your first question. Internationally, in all the countries we're in, we work very, very closely with the local creative community. In fact, the fact that Cinemark has built such a great modern footprint in a lot of these countries, and you have seen the expansion of the theatrical platforms in these countries have really renewed or refurbished their in-country ability to produce and to show films on the theatrical screens. So, we have a great relationship with the local creative community.

Regarding the digital download question, and I'm sure you have been following that Fox has had some success. They started with Prometheus and some of their other films to start to test the digital downloads prior to going out on DVD, and the results have been positive. Now, that to me has been a win-win to the industry. When you refer to Jim Gianopulos' remarks that they're trying to do it in context with the theatrical window because there is -- which might be surprising to people because of things you read in the press. But there is a real general consensus of the value of the theatrical window. And so what they're trying to do is with the digital download is to put the digital download window between the theatrical window and the DVD window, not to encroach upon the theatrical window.

I guess what I was really asking, is there almost a way that you could even bundle a cloud product with a ticket going into the theater, which would be a huge win-win for everyone involved? Have you looked at that? And then, secondly, I know you don't do box office year by year, but on that local product, soccer, movie, whatever, thing down in Latin America, do you think that over the next, 5 or 10 years you're going to get a significantly higher secular growth rate in the local product than you will on the US originated product?

Well, first on your one question as to how we might work with the studios in that digital download format. And of course, one of our objectives behind CineMode, again, is to create that direct relationship with our customer that -- and this is just the theory as to how it could work, is that they come in and they see a film and as a reward, they might get a coupon that would give them a -- some monies off on the digital download of that film. So -- when it becomes available for digital download. We will have that direct ability to work with our customer, work with our vendors,. That could be a huge win-win for both parties and that is part of our thinking in CineMode.

Now, regarding local product, from the time we have started building the platform in all these countries, we have seen a reemerging of their local productions and the creative talent in these countries. Now, Argentina and Brazil and Mexico have been the leaders in this area. But even countries like Chile or Peru and Colombia are starting to ramp up their production. So, it's only logical as you get a larger platform built out in these countries, that there is going to be a lot more opportunity for local production.

Thanks for your time. Congratulations on quarter.

Thank you.

Your final question comes from the line of Jim Goss with Barrington Research.

Hi, [Sean Lee] actually standing in for Jim Goss today. Thanks for taking the question. First, just a maintenance issue. The other income line seems to have ticked up a bit higher than usual at about $9.5 million in the quarter. I was wondering if you could clarify if there is anything unusual being captured there. And secondly, I was wondering if you could provide just some background XD landscape internationally. We have seen some large screen competition develop in other markets like China. We are wondering if you have seen any significant competition there, and has an IMAX become more attractive there at all, or is still XD the primarily focus for now?

I will take your last question, then Robert can comment on the first one. Is that we are expanding our XD brand internationally. And in Latin America, one of the main competitors is the Cinepolis Group out of Mexico, and they have also developed their own large screen format. And they have expanded that brand also internally for their company. And so our intent is to continue to roll out our XD brand. It's been very, very well received in all the international countries where we've launched it. Also, 3-D works extremely well internationally. And so -- and our -- domestically, our intent in 2013 is to hopefully launch another 25 XD formats and internationally, 20 to 25. And so you can see by our commitment to build 45 to 50 new XD screens next year on a global basis means that we're totally committed to our XD format.

Great.

Then Sean, I think your other question, if I understood it right, was our other income line is below the line item.

Yes.

That's primarily a result of our investment in DCIP. It's our equity pickup from them, which in general has been, I think, more consistent this quarter. I think it's probably more a result of Q3 of last year. And if I recall, Q3 of last year, we had a large loss and that has -- from -- and I think it had more to do with just pass throughs that they had within their -- not pass throughs, but some things they have to do within their company that related more to interest rate edges. And then it was pretty much flat. And then this quarter, we're getting to the other side of that. But generally, we've found that DCIP is reasonably consistent and I think this is just more of a flip kind of something that we saw last year. I don't know you'd see these kind of numbers on a regular basis.

Okay, great, thank you very much.

Sure.

And at this time, there are no further questions. I would like to turn the call back to the presenters for any closing remarks.

Yes. Well, I'd like to thank you very much for joining us today. We look forward to speaking with you again following our 2012 fourth quarter results. Thank you.

Thank you for participating in today's call. You may now disconnect.