Cinemark Holdings Inc (CNK) 2013 Q1 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 to Cinemark's Q1 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 hand the conference over to Ms. Chanda Brashears with Investor Relations. Ma'am, you may begin.

Thank you, Felicia. Good morning, everyone. At this time I would like to welcome you to Cinemark Holding Inc.'s first-quarter 2013 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. Thank you for joining us for our first-quarter 2013 results. This morning I will provide an overview of Cinemark and the North American industries' first-quarter box office performance, highlight the upcoming film slate, and provide an update on a few of our strategic initiatives. Robert will provide additional commentary on our financial results and capital structure and we will then conduct our customary question-and-answer session.

Cinemark worldwide admission revenues substantially outperformed the North American industry box office by nearly 600 basis points signifying the competitive advantage of our diversified assets, our worldwide box office has now outperformed the North American industry box office for 15 out of the past 16 consecutive quarters on a currency adjusted basis.

We had a very good quarter generating total revenues of $547.8 million. As expected, the Q1 2013 North American box office industry generated only a portion of the robust 23.5% gain generated in Q1 of 2012. This still demonstrated significant overall growth for the two-year period.

Our operations group worked hard to create efficiencies during the quarter and as a result, we were able to maintain our industry-leading margins producing a 21.2% adjusted EBITDA margin.

We are excited about the remainder of the 2013 film slate especially after previewing some of the additional footage at CinemaCon a few weeks ago. We are particularly enthusiastic about the 36 3-D wide release titles that have been announced to date which underscores the importance distributors continue to place on releasing major titles in 3-D.

Cinemark is well-positioned to benefit from the impressive 3-D film slate as 51% of our domestic screens and 40% of our Latin American screens are real-D, 3-D capable.

The second quarter's highlight so far have been the much-anticipated release of Iron Man 3 in 3-D this past weekend grossing an impressive $175.3 million in its initial weekend achieving the second biggest domestic opening of all time. Notably Iron Man 3 grossed $195.3 million in 42 international markets in its initial weekend and exceeded the international box office performance of The Avengers and also triumphed as the biggest opening weekend of all time in Latin America.

We are looking forward to the release of the Great Gatsby in 3-D next weekend as well as other 3-D titles including Star Trek Into Darkness, Man of Steel, World War Z, Monsters University and Epic. We are also anticipating the second quarter release of Fast and Furious 6, The Hangover 3, After Earth, The Heat, and White House Down.

The third quarter film slate also consists a strong 3-D film lineup including Despicable Me 2, Pacific Rim, Turbo, RIPD, The Wolverine, Smurfs 2, 300, Rise of an Empire, Planes, and Cloudy With a Chance of Meatballs 2. Other third-quarter films include The Lone Ranger which is receiving increased industry buzz and Two Guns.

The 3-D momentum continues in the fourth quarter with Thor, The Dark World, Frozen, Walking With Dinosaurs, and the anxiously awaited second film of the Hobbit Trilogy, the Desolation of Smug. In the fourth quarter, we also have the highly anticipated second film of The Hunger Games series, Catching Fire as well as Enders Game, Anchorman II, Jack Ryan, and The Secret Life of Walter Mitty.

Our SC screens performed very well in the market and studio recognition and promotion continues to expand. Our studio partners featured our XD premium large format in online, social, and mobile media.

As you will recall, we discussed a national advertising campaign for A Good Day to Die Hard, which featured our XD premium large format. Since then our XD screens have been promoted in national television advertising by two additional studios for Olympus Has Fallen and G.I. Joe Retaliation.

Universal will also feature our XD premium large format on the national television advertising for Fast and Furious 6.

The studio recognition of our XD screens also extends internationally. Disney promoted our XD screens in their television advertising and all their in theater marketing materials for Iron Man 3 throughout Brazil. Iron Man 3 played especially well on our XD screens in Brazil and generated approximately 12% of our box office on only 4% of our total screens in Brazil. Though our XD screens comprise approximately 1.9% of our domestic screen count, they generated more than 5% of our first-quarter domestic box office.

At quarter end we had 120 XD screens worldwide, 75 domestic and 45 international. We anticipate 150 to 160 XD screens in operation worldwide by the end of 2013.

We currently have completed international VPF agreements with four of the six major studios. Now that we have signed the fourth agreement and anticipate the fifth agreement to be signed soon, we are accelerating our digital conversion internationally and expect to be fully digital by early next year. As of March 31, we were 43% digital in Latin America.

We continue to bring premium alternative content to our patrons and have recently negotiated with UEFA, the Union of European Football Associations, and will be presenting the league's championship soccer match live in 3-D in select theaters throughout Brazil. We are thrilled to bring the championship game to our patrons given the high demand and popularity of this sport and are confident it will look remarkable on the big screen.

We continue to expand our ability to directly connect with our customers by a Cinemark app, e-mail and social media. To date more than 2.2 million Cinemark apps have been downloaded.

Cinemode is a feature of our Cinemark app that dems phone screens and silences phones to address texting and other cell phone distractions during the movie with more than one million uses since its initiation late last year.

The studios are excited about improving the patron experience with Cinemode and we are proud to announce our first studio promotion for the two weeks leading up to the Star Trek release, patrons that earn a Cinemode reward will receive a collector's limited-edition Star Trek mini poster, courtesy of Paramount.

We are in the final stages with the Department of Justice on the Rave acquisition. The required paperwork is nearly complete and we anticipate the transaction to close in the next couple of weeks.

We continue to progress on the sale of our Mexican subsidiary. We are currently in discussion with COFECO, the Mexican Antitrust Department. It remains difficult to gauge the timing of the completion of the process and our best estimate for completion continues to be sometime in the third quarter.

Robert will now discuss the Company's financial performance for the first quarter and provide an overview of our capital structure.

Good morning and thank you again for joining us. Our total worldwide revenues for the first quarter were $547.8 million. Worldwide admissions revenues were $349.4 million, a decrease of 6.5% which is approximately half of the decline experienced by the North American industry.

Worldwide unadjusted EBITDA was $116.3 million for the quarter resulting in an industry leading adjusted EBITDA margin of 21.2%.

Our US segment's total revenues for the quarter were $363.6 million, admissions revenues for our US segment declined 12% for the quarter outperforming the North American industry box office estimates.

Attendance for the quarter was 34.7 million patrons, a reduction of 12.8%. Our average ticket price rose 0.9% to $6.76 which was impacted by the reduction of premium product mix during the quarter. Our premium product as a percentage of our domestic box office was 19.2% this quarter compared to 22.4% in the same period last year.

Domestic concession per patron increased 3% to $3.40. The increase is primarily due to incremental sales per patron and price increases. Concession revenues were $118 million.

Despite lower attendance, our theater managers did a great job of managing costs. Our US segment generated adjusted EBITDA of $80.1 million delivering a 22% margin.

Our international segment had a strong quarter offsetting the more challenging domestic comparison, reiterating the strength of our diverse worldwide theater circuit. Our international total revenues increased 8.5% to $184.2 million, admission revenues were $114.8 million for the quarter, an increase of 7.1% compared to the estimated North American industry box office decline of more than 12%. In constant dollars, admissions revenues increased 16%.

Attendance increased 4.6% to 22.7 million patrons and the average ticket price was $5.06, an increase of 2.4%. In constant dollars the average ticket price improved 10.7%. Our Q1 international concession revenues increased 12.2% to $54.4 million versus the year-ago period. Concession per patron was $2.40, an increase of 7.1% in US dollars and 14.3% in constant dollars.

Our Latin American segment generated adjusted EBITDA of $36.2 million for the quarter. Consolidated film rental and advertising costs improved 80 basis points to 51.5% of admission revenues. Concession supplies were 16.2% of concession revenues, a slight increase of 30 basis points due to higher cost.

General and administrative expenses increased to $37.8 million primarily due to increased compensation expense and increased professional fees associated with the Rave acquisition. Total income before income taxes was $43.7 million versus $70.8 million in Q1 of 2012.

Net income attributable to Cinemark Holdings Inc. was approximately $32.6 million or $0.28 per diluted share.

Our Q1 effective tax rate was 24.3%. The reduction below our average 38% to 40% tax rate is primarily due to the impact of adjustments associated with the anticipated sale of our Mexican subsidiary.

Our balance sheet remains the strongest and least levered in the industry with a cash balance of $724.3 million of which $240 million will be used for the Rave acquisition. Our net debt position is approximately $1.04 billion, a net leverage ratio of 1.8 times adjusted EBITDA.

Pursuant to the NCM common unit adjustment agreement, Cinemark received an additional 588,024 common units of NCM during the quarter with a current value of approximately $9.9 million. We now own a total of nearly 18.7 million units.

At quarter end, our US circuit consisted of 298 theaters and 3916 screens in 39 states. We assigned commitments to open 10 theaters with 119 screens for the remainder of 2013 and six theaters with 74 screens subsequent to 2013. We expect to incur approximately $119 million in CapEx for these additional 193 screens.

Our total Latin American circuit at March 31 included 169 theaters and 1343 screens. During the quarter, we opened two theaters and 19 screens. We presently have signed commitments to open 12 new theaters with 76 screens for the remainder of 2013 and three theaters with 23 screens subsequent to 2013. Our estimated CapEx to develop these additional 99 international screens is approximately $88 million.

Our commitment to maintaining quality assets and increasing shareholder value through accretive organic growth continues. During Q1 we invested $36.9 million on capital expenditures including $15.9 million on new construction and an additional $21 million on maintenance which includes the addition of digital projectors and expansion of our XD premium large format screens discussed earlier.

We are projecting 2013 CapEx to be within the $325 million to $350 million range. As discussed last quarter, CapEx is elevated for 2013 with the robust new build pipeline estimating that we will open between 200 and 250 new screens worldwide this year as well as the Latin American digitization and XD conversions.

We continue to focus on growth and opportunity throughout South and Central America. These countries have significantly less screens per capita than the US or Canada and there is great potential for organic growth and opportunity for acquisitions in the future. We remain committed to increasing shareholder value via this tremendous growth engine.

Operator, that concludes our prepared remarks. Please open up the lines for questions.

(Operator Instructions). Barton Crockett, Lazard Capital.

Okay, great. Thanks for taking the question. I think the Latin American outperformance is really pretty remarkable this quarter I mean on a per screen basis up about 11% or so versus the US down about 12%. So the massive kind of variance there. I was wondering if you could explain what you think is going on this quarter? Was it anything particularly unusual with film mix or the comparisons or is it just the strong kind of secular story taking hold there?

Robert can also weigh in but last year in the US first quarter, Hunger Games was especially strong in the US where in Latin America it was sort of an unknown entity. And what happens like is your franchises -- and I will go back to Twilight -- as they become more exposed to the Latin American audience towards the end of the franchise, Twilight was huge. And Catching Fire for example will probably outperform Hunger Games because it will be a much better known entity and that had a good impact.

And then plus there was also some very good local product which plays into the Latin American market and that's dispersed -- sometimes it is in Brazil or it could be even in Peru or Chile or Colombia but as we develop our platform in Latin America, there has been increased production activity of local product.

The local product definitely helped a lot.

Okay. How much of it you think was attributable to the Hunger Games kind of variance and how much of it was just strong movies down there?

I don't know that we are broken that out. I mean clearly Hunger Games had a lot to do with it in that it was so significant last year in the U.S and then Latin America, it really did not perform so that obviously helped us a lot I think in comparative.

But again, I mean overall Latin America continues to just perform in existing theaters as well as our new builds and fortunately local product is picking up. We are getting films not just in Brazil which historically has been our mainstay but in a few other countries as well I think in Peru and Chile as well.

But it -- so it is a bit of a mix but I mean definitely Hunger Games made a difference.

Okay, great. I will leave it there. Thank you.

Robert Fishman, Nomura.

One for Tim and then maybe a couple for Robert. Tim, coming out of CinemaCon and in light of the Iron Man 3 public negotiations, how would you characterize Cinemark's relationships with the studios today? Would you say it is better, worse or the same compared to two years ago with the premium VOD test?

We have always had great relationships with the studios and Disney has been one of our strongest relationships because of how their type of product plays off in our circuit not only here but also in Latin America. And from time to time we are obviously talking to all of the studios about a wide variety of business issues.

Probably the only thing that was unique about this discussion is somehow it became more public but our relationship with all of the Studios remains strong including Disney and we have a great relationship with them.

Okay. For Robert, so for your international screen guidance for the full year, can you give us a sense of how that should roll out during the year and maybe how we should think about next year's international screen count given the strong pipeline that you guys have outlined?

When we look at international, it is reasonably spread throughout the rest of the year. I mean it is a little heavier in Q3 and Q4. Again, we are thinking somewhere overall for our international screen growth to be in the 100 to 125 screens. And I would say we will have a little bit more kind of similar in Q2 to what we saw in Q1 openings and then Q3 and Q4 will be split with the remainder.

On the US side also similarly we are looking at ballpark 125 screens. That is much more weighted toward the back end of the year especially Q4 very heavily weighted towards Q4.

As far as next year again, we feel like we can maintain this run rate in international somewhere in the 125 plus screen count and always hard to say until we have better visibility on the projects as far as when they will fall but for the moment, I would assume even into next year that it would be somewhat evenly throughout the year.

Great. Just staying on Latin America moving to [Flix Media], while we understand it is early in the process, can you help us think about the potential revenue and profit opportunity for this year and as you see that playing out over the next couple of years?

You know, Robert, we haven't really given any specifics on Flix and it is one that we are excited about. It continues to generate great upside for us. As a matter of fact this quarter we just added our first outside party as an affiliate that we are booking advertising along with Cinemark and so it is a test for us to understand how that works.

And as far as the impact of it, we are not looking at it as a major revenue change at this point as much as just getting our feet wet into how to design all the programs and really grow the business. And so I think it will continue to add bottom line to us. It has done great and our group there is really building up a fantastic team but we see this again as a good three-, four-year kind of growth company and as well as we start spreading it into Argentina and Chile and other countries.

Okay, thank you.

Townsend Buckles, JPMorgan.

Thanks. Robert, in Latin America seeing your earnings roughly flat for the quarter despite the nice revenue gains you had, any particular operating headwinds you are seeing down there such as employee costs that we should keep in mind going forward?

Not necessarily. I mean employee cost definitely go up as -- in Latin America more so probably than the US but then we try to raise prices to keep up with it.

We had a few charges that just came through this quarter that weren't overly unique but we felt like kind of pushed our numbers down a little bit compared to where we would have liked to have seen the EBITDA go. And so a lot of it is just staying focused on both maintaining -- really creating efficiencies at the operating level on existing theaters while we are going through this growth mode and we think we have everybody there but definitely was a little off I would say in Q1 with keeping our expenses in line with where we like them to be.

And any update you can give on Q2 box office trends in Latin America? You mentioned the record Iron Man open. Are you seeing business up at this point or at least stronger than the US?

Overall I mean definitely if you look at the quarter to date, it varies a little bit by country but I mean it started off reasonably good. But I mean definitely there is the comps and everything that make it tough comps in Latin America as well.

Okay, just lastly, you mentioned acquisition opportunities in Latin America. Are you seeing a pickup in activity there where we could maybe see something later this year?

What we are really thinking is going to happen is as the industry builds out in Latin America along with us, and we have talked before that we have tended to focus on major markets and we are looking at secondary markets as well but obviously some other people have jumped in to those a little quicker than we have. We think that actually will create great opportunities longer term for us to be able to get back into -- maybe as a way to take some of those markets by acquiring some of these newer chains that are developing in those markets so that you will have better product really that you will be buying.

But I don't think that is going to happen necessarily in the real short term. I mean we do constantly look throughout the US and Latin America for opportunities and try to create those and so there is always the potential that one will come up but we see those as probably being a little longer term.

Okay, thanks very much.

Jim Goss, Barrington Research.

Thanks. A couple of them. First, with Cinemode, I know it is still pretty early but have you had any impact you have been able to notice on concession sales? And do you have any expectations ultimately on dollars or margins or is this totally shut off the cellphone type of initiative?

No, you know what it is is an initiative really to connect more directly with our customers on their smartphones and to create a connection between us and the studios and sort of the entertainment world and also to reward them for good behavior in turning off their phones or texting but also reward them for being a great customer of Cinemark.

But it is not intended to be a profit-making thing. It is more to have that direct connection with the customers. And we find that the -- we have always had a fairly robust direct e-mail type of program which has helped drive our concession increases and through direct couponing and now we are trying to transfer some of that over to Cinemode. But we think it is the wave of the future to have this direct connectivity with the customer.

Tim, some have suggested in the if you can't beat them join them setting up separate cell phone sections in the back of the theater or something like that where they can annoy each other and not the rest of the patrons. Have you thought of doing something like that?

Actually we have had a Board member recently bring that idea up too and it is not that we haven't thought of it and at some point, I don't know if -- I don't think we'd do it in the back of the theaters, we might run a test in just like one screen or something. But I think in general we spend so much effort to try to get the customers to behave properly that I don't know if we want to start --.

And then too with alternative entertainment, that is the other thing that we do have a lot of direct communication with the screen or talking going on in the theater and so there is two different types of experiences.

Jim, it is kind of interesting. I think our experience was that you are seeing a lot of cell phone usage a year, two years ago, the industry really put a lot of focus on it and I think we are seeing less of it now. I think people have actually reacted to the advertisements and the push to not use your cell phone during the movie and really we are seeing better behavior patterns now. So you kind of hate to suddenly open up and go backwards.

Separately in terms of Latin America, you have some parallel strategies it seems in Brazil, Argentina, Chile, some other markets and what do you do capital allocation decisions hinge?

Fortunately Latin America could generate sufficient cash flow to fund most anything that we are doing right now I mean as far as our new builds in all the countries that's being funded by free cash flow in each country. The digitization for the most part can be absorbed as well in a short period of time by each of the countries. So from a capital allocation (inaudible) company the based on we would look at some special use of our cash would be if we were to do an acquisition and we would be very open to funding that either with excess cash that we might have either down there or up here or a borrowing if it made sense and was a large enough acquisition. When we bought our Argentine subsidiary, we did borrow -- or actually we assumed some debt and so we are open to that type of financing as well. But really we just look at where the best use of our capital is based on returns and opportunities.

With organic growth each market is essentially self-sufficient so they have an incentive to create what they do and they are creating their own opportunities?

Absolutely, Jim. Each of these countries has cash flowed for a long time and fortunately while we have a lot of great growth opportunities they are generating sufficient cash flow to fund those opportunities.

All right. Thanks a lot.

Eric Handler, MKM Partners.

Good morning. Thanks for taking my question. Two questions here actually. Looking at sort of the three attach rates, it looks like in North America the three attach rates are a little bit down on a year-over-year basis. Just curious what trends you are seeing right now in Latin America?

And then also I believe you said your ticket prices in Latin America on a constant dollar basis were up 10% which seems like an unusually high number. Can you talk about some of the factors that drove that level of growth?

With respect to Latin America and the ticket price, it was primarily (inaudible) keep up both with inflation and normal ticket price changes and that will also vary a little bit based on relative premium product mix. But we did see some very strong increases both in concession revenue and box revenue through increases in our price.

And Eric, I am not sure I understood your first question. You had asked about Latin America --

The attach rates for 3-D, it looks like --?

I got you. I missed the 3-D part. We see 3-D as actually being very -- I mean in our minds still growing part of the industry. If you look over the last year and is it varies by quarter based obviously on product but it seems to be running around ballpark 20% give or take. But I also think this quarter is pretty exciting with a lot a product that is coming out right now. As a matter of fact we are going to see Gatsby coming out this week which I think will be an exciting alternative.

And I think that takes 3-D to -- it will be a little bit like the Life of Pi. It is absolutely spectacular and it takes 3-D into another dimension and then of course we've got Star Trek and on and on in 3-D. So it is going to be -- 3-D I think is very sustainable and continues to grow in the industry.

But when you are seeing let's say US for a live action film around 45%, 50% and a bit lower for animated films now, where is that in Latin America, how much higher?

What we've seen in Latin America one of the issues you have there is as we mentioned, we only have 43% digital which is mostly 3-D and so you don't actually quite have the same penetration both from us and we are probably ahead of nearly all of our competitors in digital rollout. And so 3-D has done extremely well and performed easily up to I would say the levels in the US if not even outperformed the US on many movies.

But we feel like there is even still more room as you digitize all of Latin America because you just literally have a supply issue in terms of seat availability.

Great, thank you.

Ben Mogil, Stifel Nicolaus.

Thanks for taking the question. First one is actually a follow-up on Eric's questions when Eric was talking about the (inaudible) pricing in Latin America and I want to flip over to concessions which were ex-currency like 14% again a very strong number.

How much longer -- like I mean one, what is the inflation rate that you sort of see on a blended average in the markets you operate in Latin America sort of on a weighted basis? And I mean how much longer do you think you can get CPP and I get that obviously the ticket price is probably a mix shift issue but on CPP, is there a mix shift? How much longer can you kind of post that kind of growth rates?

First off I will start with the concessions in Latin America (technical difficulty) when we went into Mexico is that a lot of times when you are introducing the experience it just sort of tends to grow because they might not have had extensive concessions in the theaters prior to the modern theaters being built. An example of this was in Argentina in our first theater we built in Argentina, the existing theaters in Argentina did not even have concession stands. And one of the big debates that we were having down there is whether you should put a concession stand in a theater. And so as we have filled out the modern theaters and the modern concession stands with the concession stands mix and that -- it is sort of the customer sort of -- not that you are training the customer or the customer is adapting to that being part of the experience -- and so it tends to start out at one level and then tends to grow. And so that is part of the process.

Then as far as the pricing, a lot of that just follows inflation and there is some actual price increase but there is also inflationary price increase that just gets passed on to the system whether it be in ticket pricing or in our concession pricing.

Robert, on a follow on to that or Tim as well, when you look at your fixed costs in the market in Latin America, do you have a sense of what they were ex-currency on a growth basis and on a percentage basis? And again, maybe look at it on a per screen to sort of normalize it a little bit?

Offhand, I don't know. I have met in front of me. If we looked at relative percentage of -- what we would consider most of our fixed cost base stayed reasonably in line with where they have been in the past. I mean our rent varies a little bit because we have more percentage rent in Latin America than what we do in the US and so it will move with stronger quarters up and lesser quarters down.

But I think as a general percentage most everything stayed generally in shape. We did have a few -- as I said -- a few items that we just didn't see the efficiencies that we had hoped to in but they are somewhat identifiable by us and they are things we are working on.

Okay. Then flipping over to domestic, I think it looks like you underperformed against the benchmark by about 30 bps. So not a huge number but sort of a trend we have seen now over almost the last four or five quarters. Is there something domestically -- are you seeing people build against you or are you seeing people -- you seem to be building as actively as anyone else on the market. Is there anything on the domestic front that you think has sort of flipped where you guys used to be pretty big outperformers domestically to that no longer being the case?

And I guess it is perspective, I mean when I look at -- our understanding when we have looked at sources was that box office domestically for the calendar quarter was off somewhere in the 12.3, 12.2, 12.3 range, somewhere in there. We are showing that we were off box office 12 so we felt like we actually outperformed slightly.

When we look at per screen, box office per screen, I think we are at 12.6 so you can say 12.6 or so versus 12.3 but again when you start getting into per screen, a little different question whether it is 12.3 or worse.

So actually we felt like we outperformed slightly -- not significantly -- not the way we would love to beat it but based on our historic growth and the outperformance we have had in the past, we still felt strongly that being able to beat the box was beneficial.

Lastly, just on capital return -- thank you for that, Robert, for the calendar and versus the per screen. Flipping over to capital return, obviously you've got a heavy CapEx schedule ahead of you which I think we all appreciate what the value is there. When you look at capital return I mean you have got still significant liquidity, you have got some -- and you've got lots of NCM shares which were given to you over the years for acquisitions so where you have a much higher cost base than the original sort of creation if you will of NCM.

Do you have a sense of maybe a target levered ratio, do you have a sense even if we sort of look into '14 of where CapEx becomes more normalized, what kind of share of free cash flow you want to be returning? I'm sort of curious your thoughts around capital return?

Obviously we remain committed to our organic growth as well as acquisition opportunities and that is our primary focus in terms of use of capital. We also realize that we have generated a fair amount of free cash flow and we watch our dividend.

When we get into 2014, a little more difficult. As you said hopefully the CapEx starts normalizing as we get over the Latin American Digital expansion and at that point I am sure our Board will review policies.

As far as overall leverage ratios, we have been very fortunate growing our EBITDA substantially which has really helped our leverage ratio come down and then we make the basic payments on our debt as we go and that helps as well. But we don't necessarily have a target I would say at this point that we are trying to be at whether it is 2 or 3 or 4.

If we have acquisitions, just as we have with Rave, we are very open to borrowing and on Rave we borrowed probably a little over 80% of the purchase price and so if we have something that is large enough to warrant a borrowing, we are very open to it and especially with today's rates on debt.

But as far as capital pay out, it is something we will explore more. The Board will I assume as we move into next year and again a lot of it will just depend on alternative uses to grow the Company.

Okay, that is great. That is it for me. Thanks, guys.

Tony Wible, Janney Capital Markets.

Thank you. Partly answered already but can you talk a little bit about how fast you can redeploy some of the Mexican proceeds and are you willing to take on some debt in the interim to kind of bridge that you wanted to reinvest before that? And also on Mexico, how will that skew some of your cost metrics once that is out of the business?

As far as redeploying capital, definitely could. If there were to be a large acquisition in the interim that made sense to us, definitely would be very open to borrowing and so I don't think we will have any limitations because of waiting for the proceeds.

With respect to skewing our numbers, it clearly -- Mexico has been very productive for us over the years. The EBITDA margins actually were some of the highest in Latin America that we had and so it will have an impact as Mexico goes away from us.

Now the flip side is over the last few years, Mexico has been relatively flat as we have been able to grow the rest of our business. And so it has been a drag on our overall growth numbers just pulling down percentages. So I think on that side of the business it will help us out. Again as far as just operating metrics it might pull us down just slightly.

Got it. Thank you.

Chad Beynon, Macquarie.

Good morning and thanks for taking my question. I just had one follow-up on the international margin side of things particularly as you open the robust pipeline that you outlined today and in Las Vegas.

I guess my question is around the initial margins for properties out of the gate in Latin America compared to some of the margins at more of your mature properties in the area. And as you roll out this pipeline if we should start to see kind of that mix impact kind of your blended margins? Any color they are would be helpful. Thanks.

When we invest our money, we go for a 20% return on our capital and that is the same in Latin America as it is here in the US. And to date our Latin properties have performed on a very similar level as the US and then they continue to grow. And so we don't see any real deterioration in those margins.

The one thing I would say, Chad, is as we do open more theaters we tend to have more upfront costs in Latin America than what we have in the US of opening theaters and so with the 125 theaters when you look at those as a percentage of our total screen base obviously it is higher than the same 125 would be in the US. And so there could be a little margin pressure from openings.

As Tim said, we look for a 20% ROI, 20% margins and we feel like we hit those very quickly but when we are first opening that first quarter can have some impact and might pull it down some. It is not going to be real significant but it will put a little pressure on us.

Okay. Thanks, guys, and congrats on the good quarter.

Eric Wold, B. Riley & Co.

Thank you. Just one question, unfortunately it has got four parts to it but it is pretty quick. On the Latin American market, I know you talked about you are getting close on the studio deals. I guess if something gets finalized down there, how quickly do you expect your screens -- to become fully digital in that market? And will the go-forward projector purchases be then acquired through the network or you continue to purchase those on your own?

No. We are funding our own rollout in Latin America for digital and like we said on our call, we have four signed agreements and the fifth is pretty much all agreed to. It just hasn't been executed yet. At this point our expectation is it is going to be executed in the next couple of weeks.

But on an ongoing basis of course we would fund the same way and as part of the contracts there is some funding of additional ones as you know we continue to roll out.

And as far as the timing of completing that, we initially had a goal of finishing by the end of this year with the contracts taking a little bit longer than we had hoped as well as trying to work with some of the special tax provisions that are now becoming available in some of the foreign countries. We think that this can lead a little bit into early next year, the first quarter we don't think it will be real significant but where we had hoped to be 100% digitized by year-end, we probably won't quite hit that mark though we think we will be by the end of the first quarter of next year.

Okay and then one kind of on a somewhat pro forma basis, I guess once you are fully digital and all the agreements are in place and everything is flowing normally, what should we think about in terms of kind of a normalized benefit to the film rent line from the VPF flowing through?

We haven't run that through yet, Eric, and probably as we start getting a little later into the year and we see really what our VP upfront rate is because that is what will determine it, we will be able to give a better picture of what that will look like.

Okay and then lastly, what would be the optimal mix for you guys?

I am sorry, Eric, you broke up just a little there.

What would be the optimal 3-D screen?

I see. We hope to have pretty (multiple speakers) pretty much 50% both in Latin America and the US and really as more film comes out we are very open to increasing that.

Perfect. Thank you, guys.

Matthew Harrigan, Wunderlich Securities.

Thank you for taking my question. It doesn't feel like there has yet been a Clash of the Titans experience down in Latin America where people have gotten disillusioned with 3D and we saw Paramount do it with G.I. Joe, I mean hopefully Star Trek I think has done only about 30% of its receipts internationally hopefully that will change.

But have you ever seen any movies where there has been some real resistance or people just kind of reflectively love the format? And I guess flowing out of that, the alternative entertainment doesn't seem like it is going to be that big a deal stateside but down there it really feels like it could be on a different level and given the operating leverage that is inherent in your business is that something that you really think could uptick the (inaudible) results pretty significantly as that business develops out?

First off to your 3-D question and to Robert's earlier comments, is because of I guess the lack of premium screens and 3-D with well received in Latin America and 3-D tends to outperform the US and Latin America and we are finding that our XD screens are the premium experience and also in Latin America, we have the VIP screens and the VIP experience. So there is a great market for the premium experience in Latin America and 3-D is part of that and I think it continues to grow.

Regarding alternative content, I mean in the US, we are in the process of putting the DC-DC network in place and I think that the business models for alternative content has some expansion possibilities in the US but those models to the point you are making still haven't developed but we are hoping that they will develop.

And Latin America where we have such a strong leadership position, we think that we can take the lead in developing alternative content in Latin America and I think for the out of home experience it has great potential.

Obviously we are excited and we have been doing a lot of testing with it and we are excited about the European Football championship which we think has significant potential and we have done some testing on the last World Cup in 3-D both here and in Latin America and it was very well received. So we do think there is strong potential down there for alternative content.

Thanks, Tim. Congratulations on the numbers.

Thank you.

I would now like to hand the conference back to management for any further remarks.

Thank you very much for joining us this morning. We look forward to speaking to you again following our 2013 second quarter. Thank you.

Thank you for participating and you may now disconnect.