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Bona Film Group Limited (NASDAQ:BONA)

Q4 2013 Earnings Conference Call

February 27, 2014, 8:00 PM ET

Executives

Brandi Piacente - IR, The Piacente Group

Yu Dong - Founder, Chairman and CEO

Jeffrey Chan - Chief Operating Officer

Amy Xu - Chief Financial Officer

Analysts

Doug Creutz - Cowen

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Bona Fourth Quarter and the Full Year 2013 Earnings Conference Call. (Operator Instructions) I must advise you this call is being recorded today at February 28, 2013.

I'd now like to hand the conference over to your presentation for today, Ms. Brandi Piacente. Ms., please carry one.

Brandi Piacente

Thank you. Hello, everyone, and welcome to Bona Film Group Limited's fourth quarter and full year 2013 earnings conference call. The company distributed its earnings press release earlier today, and you could find a copy on Bona's website, ir.bonafilm.cn. On our call today are Bona's Founder, Chairman and CEO, Yu Dong; COO, Jeffrey Chan; and CFO, Amy Xu. After the company's prepared remarks, management will be available to answer your questions.

Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may differ materially from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company's Annual Report on Form 20-F for the fiscal year ended December 31, 2012, and in other documents filed with the U.S. Securities and Exchange Commission. Bona does not assume any obligation to update any forward-looking statements except as required under applicable laws.

As a reminder, this conference call is being recorded. In addition, an audio webcast of this conference call will be available on Bona's Investor Relations website.

I will now turn the call over to Bona's Founder, Chairman and CEO, Mr. Yu Dong.

Yu Dong

Good day, everyone, and thank you for joining our fourth quarter and full year 2013 earnings conference call. I am pleased to say that Bona delivered solid results in the fourth quarter and full year 2013. In the fourth quarter, we generated revenue was $42.8 million with non-GAAP net income of $1.5 million. And for the full year 2013, we generated revenue of $149.3 million with non-GAAP net income of $8.5 million, representing 165.5% growth year-over-year.

2013 was a successful year for Bona as we delivered solid financial results and completed several strategic initiatives. We maintained the leading position among non-state-owned film distributors in terms of box office and made significant progress in all of our business segments. More importantly, in 2013, we also significantly strengthened our corporate structure through the successful launch of RMB1 billion Bona Film Investment Fund, the strategic investment in our company by Fosun Group and the procurement of two credit facilities, a RMB200 million agreement from China Minsheng Bank and a RMB80 million agreement from Shanghai Pudong Development Bank. These corporate activities enhanced our operations last year and bolstered our ability to achieve our strategic goals in 2014.

For the full year 2013, Bona distributed and invested in a total of 18 films, 14 of which were for domestic theatrical distribution and generated a total of RMB1.3 billion in box office receipts, representing an 89% growth year-over-year. This equates to an approximately 10% market share in terms of total domestic box office, making us one of the top three domestic non-state-owned film distributors.

In the fourth quarter, Bona distributed three new films, The White Storm, Red 2 and The Game of Hide and Seek; as well as Out of Inferno, which we released on the last day of September. These four films delivered box office receipts of RMB415.4 million. The White Storm was our best performing film in the quarter, generating domestic box office receipt of RMB225.3 million. Directed by Benny Chan and starting Sean Lau, Louis Koo and Nick Cheung, the movie premiered as the opening film of the 2013 Hong Kong Asian Film Festival and was the first Chinese language film chosen to close the Rome International Film Festival.

Turning to our theater business, as of the end of 2013, Bona operated 22 company-owned movie theaters with a total of 182 screens. We generated net revenues of $61.5 billion from the theater segment for the full year 2013, representing a 47.5% improvement over 2012. During the quarter, we opened two new movie theaters in Shandong Zibo, Shenzhen Huangting, which added 19 screens and 2,822 seats to the Bona theater network. More importantly, in 2013, we signed contracts to construct seven new theater projects and reached preliminary strategic agreements with first tier property developers, including Fosun Group, Capital Land, (inaudible) and Yintai. As you can see, we have a number of exciting future projects in the theater segment pipeline and we expect to open another six to eight theaters during 2014.

Now let's look at our production business. In 2013, Bona participated in the production of over 10 films. During the fourth quarter, we began production on the highly anticipated 3D IMAX epic, The Taking of Tiger Mountain, formerly called Tracks in the Snowy Forest, directed by Tsui Hark and produced by Jian-Xin Huang. The Taking of Tiger Mountain is based on an extremely well known Chinese folk tale called Tracks in the Snowy Forest. Known for his mastery of 3D technology and expertise in martial arts movies, Tsui Hark plans to combine classic Chinese literature with the most advanced visual effects to create a blockbuster that appeals to a wide range of audiences.

The production process has been going well and it will no doubt be one of the biggest blockbusters in our current slate. We also successfully completed production work on Derek Erh's drama, I Am Somebody, a story about young aspiring film actress chasing her movie dreams at the Hengdian studios. Director Erh's next project, Swordmaster is also currently in the preparation stage and is tentatively scheduled to start shooting in the second half of 2014.

Additional films undergoing the post-production stage in the fourth quarter included the last installment of our popular Overheard franchise. Overheard 3; the 3D epic drama, The White Haired Witch, which was directed by Jacob Cheung and stars Huang Xiaoming and Fan Bingbing; the suspense drama, Insanity, directed by David Lee and starring Sean Lau and Huang Xiaoming; and the crime drama, Sunspot, directed by Cao Baoping and starring Deng Chao, Duan Yihong and Wang Luodan among others.

Lastly, during the fourth quarter, we also put the final touches on our first film release for 2014, The Man From Macau, which was released to coincide with commencement of Chinese New Year. Directed by Wong Jing and starring Chow Yun-Fat and Nicholas Tse, The Man From Macau successfully received box approval, paving the way for exceptionally strong box office performance to date.

Bona's distributed films were also recognized for numerous domestic and international awards in 2013. In the fourth quarter, the Bona distributed films, A Simple Life, Flying Swords of Dragon Gate, The Grandmasters and (inaudible) were awarded outstanding Chinese actress with foreign nationality, outstanding use of technology, outstanding co-production and outstanding animation respectively at the 15th China Huabiao Awards Ceremony.

Several other Bona distributed films earned accolades in 2013, including Zhang Ziyi received the best actress award for her performance in The Grandmasters at the 50th Taipei Golden Horse Film Festival. Unbeatable's lead actress Nick Cheung and Crystal Lee received best actor and actress awards at the 16th Shanghai International Film Festival.

And three, a Bona distributed film, The Grandmasters, Unbeatable and The White Storm received recently a total of 33 nominations for the upcoming 33th Hong Kong Film Awards, making Bona the biggest potential winner of the year at this prestigious event.

Looking back at 2013, the Chinese film market had another very good year, with box office receipts continuing to show strong growth and momentum for the future. Full year box office receipts in China reached RMB21.8 billion, representing 25.7% growth year-over-year. Domestic Chinese films represented 59% of the total market share with RMB12.8 billion of box office receipts compared to 41% market share for imported films. The growth rate for the Chinese film market in 2014 to date is even stronger than in previous years with February single month's box office receipt already exceeding RMB3 billion, which is the equivalent of the entire year's box office results for 2007.

With such favorable market momentum, Bona aims to capitalize on these advantageous market conditions by further leveraging a rich industry experience and maximizing our integrated business model.

As we look out at 2014, Bona has an exceptionally strong slate of more than 10 films in our pipeline, including The Taking of Tiger Mountain, The White Haired Witch, Overhear 3, I Am Somebody, Insanity and Sunspot among others. In addition, we have purchased a couple of high-quality Hollywood films, including the action thriller Nonstop and the 3D adventure of Pompeii, for which we are pursuing quarters and our COO Jeffrey will discuss in greater detail shortly.

So far in 2014, we have already successfully distributed The Mortal Instruments: City of Bones and The Man From Macau and have posted strong box office results. As such, I have confidence that our outstanding pipeline of high-quality films for 2014 will provide an exceptionally solid foundation for us to reach our long-term strategic goals.

Looking ahead, we believe that our clear vision, tangible targets, strong domestic and international partners and a focus on high-growth markets make Bona well positioned to achieve further growth and long-term success. I would like to take this opportunity to thank Bona's employees, partners and shareholders for the consistent support for our company and I look forward to sharing Bona's progress with you in the future.

And now I would like to turn the call over to our COO, Jeffrey Chan for our operational highlights. Jeffrey?

Jeffrey Chan

Hello to everyone on the call. 2013 was an exciting and successful year for Bona. Looking at year ahead and exceptionally strong films and thanks to the launch of the Bona Film Investment Fund and the increasingly strong Bona brand name, we have been able to continue to attract some of the most highly valued Chinese film industry today.

2014 is off to a good start. The two films we have released in the first quarter to date have performed well. On January 3rd, we released The Mortal Instruments: City of Bones, the first installment in the young adult franchise based on the best friction series written by an American author Cassandra Clare. The film features a young up and coming Hollywood star, English-speaking Chinese actor, Godfrey Gao.

On January 31st, the start of the Chinese New Year celebration, we released The Man From Macau, a nostalgic yet completely new interpretation of the popular God of Gamblers series on the early 1990s. This comedy utilized state-of-the-art technology and provides stunning images of extravagant gambling floors in Macau. Director Wong Jing enthusiastically talked on the topic that has long been missing from Chinese (inaudible). And the Man from Macau has already surpassed its personal box office record as the film has already exceeded RMB500 million in the domestic box office receipt.

We also plan to distribute a comedy Horseplay on March 21st. The film tells the story of a TV hostess played by Kelly Chen, a multi-faced thief played by Tony Leung and a washed out police detective played by Ekin Cheng who must work together to obtain a valuable Tang Dynasty Pottery Horse. Directed by Lee Chi Ngai and filmed largely in Prague and London, Horseplay aims to be a crowd-pleaser and its theme song was already well received at a CCTV New Year gala for the Chinese New Year of the Horse broadcast across the country.

Beyond the first quarter, we are particularly excited about projects in our upcoming slate, and I am going to walk you through with some more details. First, The White Haired Witch, a 3D romance based on the famous martial art saga features an exceptionally strong cast. Directed by Jacob Cheung and featuring art direction by an academy award winner team, this touching film promises a first rate visual experience.

Second, Overheard 3, co-directly by Alan Mak and Felix Chong and starring Sean Lau, Louis Koo, Daniel Wu, and Lau Ching, is next installment in our Overheard franchise. This edition of a series explored the inside story of Hong Kong's real estate business, an attention-grabbing topic that's seldom explored in Chinese cinema.

Third, Sunspot, a crime drama directly by mainland writer turned director Cao Baoping, stars some of today's most popular mainland Chinese actors, including Deng Chao, Wang Luodan, Duan Yihong. This captivating story based on the best-selling Chinese novel will make audience (inaudible) and redemption.

Fourth, Insanity is a psychological thriller starring Huang Xiaoming as a young hotshot psychiatrist who comes face to face with a violent yet devilishly intelligent psychopath played by Sean Lau. Producer Derek Erh worked closely with writer/director David Lee to set the stage for this crime drama.

Fifth, Daydream Believer is a light-hearted comedy that tells a story of four male roommates desperately trying to shed their single status before college graduations. With humor similar to the American Pie franchise, the film features a widely popular cast including (inaudible), all of who have strong appeal with the young Chinese audiences.

Six, I Am Somebody, a (inaudible) reality project from producer/director Derek Erh, all self-acclaimed of several wannabe actors with dreams of one day becoming big stars and reviews a little known world of film extras in China. It is a dream come true story that will (inaudible) millions especially the post-'90 generations.

Seventh, The Taking of Tiger Mountain is Tsui Hark's interpretation of one of the most well known Chinese stories from the revolutionary period. Incorporating 3D action technology, Tsui remakes this classic in the James Bond-style world blockbuster featuring Zhang Hanyu, Tong Liya and other A-list cast are expected to fascinate audience.

Eight, Swordmaster is director Derek Erh's upcoming project with his first film in 3D. It holds great personal significance for him as he achieved his early fame as an actor playing the swordmaster himself. Produced by Tsui Hark and based on (inaudible) Swordmaster is not only being developed as the movie, but we are also preparing a TV series under the same title. We believe these two projects will create synergies and stay up around our sword mastery themes in China.

Additionally, I'm pleased to introduce two foreign films that we are currently pursuing for this fall. First, Nonstop is an action thriller that tells the story of an air marshall who must spring into action aboard an international flight when an unknown terrorist threatens to kill every 20 minutes. The film features a top Hollywood cast including Liam Neeson, Julianne Moore and Downton Abbey's' Michelle Dockery.

Second is Pompeii. It's an action-packed saga that uses 3D technology to tell the story of a catastrophe that (inaudible) Pompeii. The film focuses on the relationship between Games of Throne star Kit Harington and his love interest Emily Browning.

Another operational initiative I would like to highlight is the restructuring of bonus distribution teams. At the end of 2013, we systematically reviewed the distribution business segment and decided to take on the new organization structure in 2014. By establishing new Northeastern Central and Southeastern distribution offices and solidifying our existing Eastern and South Southern branches, we aim to further expand bonus distribution coverage to fully leverage the regional distribution resources of the 22 Bona-owned theaters and eliminating major blind spots in our national coverage.

Additionally, we expect this new structure to supplement and fortify our efforts to China's booming second and third tier cities, which are becoming increasingly important box office contributors. We believe these changes will enhance both the size and capabilities of our distribution teams and provide us with a greater competitive advantage in 2014, allowing Bona to make the most of our strong slated films this year.

With that, I would like to turn to our CFO, Amy Xu. Amy?

Amy Xu

Thank you, Jeffrey, and hello to everyone on the call. I would now to provide a brief overview of our financial results for the fourth quarter and full year of 2013. Please note that all numbers I will discuss today are in US dollars unless otherwise noted.

First, net revenue for the fourth quarter of 2013 were $42.8 million, which is 19.7% lower than the fourth quarter last year. Revenues were lower year-on-year because Bona did not release any TV series in the fourth quarter of 2013 compared with sales generated from Bona's TV series, The King's Battle in the fourth quarter of 2012.

On segment basis, total net revenues from the distribution, investment and production and the movie theater segments were $27.7 million, $3.3 million and $15.4 million respectively in the fourth quarter of 2013. This compares to $8.7 million, $37.4 million and $13.1 million respectively in the fourth quarter last year.

Gross profit for the fourth quarter of 2013 was $16.9 million, an increase of 67.2% year-over-year. This increase in gross profit was primarily attributable to the strong box office performance of Out of Inferno and The White Storm compared with lower gross margin in the fourth quarter of 2012 that resulted from the higher salvation of amortization of production costs based on the economy performance and public acceptance of certain films, the impairment of product cost using a discounted cash flow approach and a lower than expected box office performance from The Last Tycoon.

Gross margin for the fourth quarter of 2013 was 39.5% compared with 19% for the fourth quarter of 2012. Total operating expenses including participation expenses, general and administrative expenses and selling and marketing expenses for the fourth quarter of 2013 were $16.9 million, a decrease of 10% year-over-year. The year-over-year decrease in operating expense was primarily due to the decrease in selling and marketing expense for the promotion and advertising of the company's four films released in the fourth quarter of 2013 compared with three films and one TV series released in the fourth quarter of 2012.

Operating income for the fourth quarter of 2013 was $3.3 million compared with an operating loss of $5.7 million in the same quarter a year ago. Operating margin for the fourth quarter of 2013 was 7.8% compared with negative 10.7% in the fourth quarter of 2012. The improvement in operating margin in the fourth quarter of 2013 was primarily due to the strong performance of The White Storm and Out of Inferno.

Net income attributable to Bona Film Group Limited for the fourth quarter of 2013 was $400,000 compared with a net loss of negative $5.4 million in the same time year ago. Net income attributable to Bona Film Group Limited per ADS for the fourth quarter of 2013 was $0.01 basic and diluted compared with negative $0.09 in the same time a year ago.

Excluding share-based compensation of $1.2 million, our non-GAAP net income for the fourth quarter of 2013 was $1.5 million. Non-GAAP net income attributable to Bona Film Group Limited per ADS for the fourth quarter of 2013 was $0.03 basic and diluted.

Excluding interest, tax, depreciation and amortization, our non-GAAP EBITDA was $7 million for the fourth quarter of 2013, which compares with non-GAAP EBITDA loss of $2.4 million for the same period last year.

Cash and cash equivalents, term deposits and restricted cash as of the 31st of December 2013 totaled $63.4 million. Operating cash flow for the fourth quarter of 2013 was a net inflow of approximately $9.5 million, which related to the receipt from several TV series.

Turning now to our full year 2013 financial results. Net revenue for the full year 2013 were $149.3 million, an increase of 5% year-over-year. Our full year 2013 performance improvement was primarily attributable to an increase in revenue from the company's movie theater segment and better box office performance by the 14 films theatrically released in 2013 compared with 2012.

Total net revenues generated by our film distribution segment in 2013 totaled $76.6 million compared with $64.1 million generated by this segment in 2012. Total net revenues generated by the investment and production segment in 2013 was $41 million compared with $73.7 million in a year-ago period. Total net revenues derived from the movie theater segment were $61.5 million for the full year 2013 compared with $41.7 million for the full year 2012.

As a reminder, total net revenues included into segment revenue of $2 million in our film distribution segment and $28.4 million in our film investment and production segment.

Gross profit for the full year 2013 was $66.5 million, an increase of 18.3% year-over-year. This increase in gross profit was primarily attributable to strong performance for four of our films released in 2013 and the expansion of Bona old movie theaters. Gross margin for the full year 2013 was 44.5% compared to 39.5% for the full year 2012.

Segment profit margin for our film distribution segment was 30.1% in 2013 and profit from this segment accounted for 34% of the consolidated segment profit for the full year. The segment profit margin for our investment and production segment was 21.1% in 2013 and the profit for this segment represented 12.7% of the consolidated segment profit for the full year. The segment profit margin for our movie theater segment was 57.7% and profit for this segment accounted for 52.4% of the consolidated segment profit for the full year 2013.

Total operating expenses including participation expenses for the full year 2013 were $62.9 million, an increase of 3.4% year-over-year. The year-over-year increase in operating expense was primarily due to a decrease in selling and marketing expenses for the promotion and advertisement of company's distributed films offset by the increase in general and administrative expenses related to the expending one-off movie theater segment.

Operating income for the full year 2013 was $8.6 million. Operating margin for the full year 2013 was 5.8%, which compares with negative 0.5% operating margin for the full year 2012. The improvement in operating margin for the full year 2013 was mainly due to the strong performance of the films released in the second half of 2013 and our greenfield theaters gradually maturing in 2013. We opened two new theaters in Shandong Zibo and Shenzhen Huangting in 2013.

Net income attributable to Bona Film Group Limited for the full year 2013 was $5.7 million compared with net loss of $1.3 million for the same time a year ago period. Net income attributable to Bona Film Group Limited per ADS for the full year was $0.09 basic and diluted compared with a net loss per ADS for the full year of 2012 of negative $0.02 basic and diluted.

Excluding share-based compensation, our non-GAAP net income for the full year 2013 was $8.5 million compared with non-GAAP net income of $3.2 million for the full year 2012. Non-GAAP net income attributable to Bona Film Group Limited per ADS for the full year 2013 was $0.16 basic and diluted compared with $0.06 basic and diluted for the full year 2012. Excluding interest, tax, depreciation and amortization, our non-GAAP EBITDA was $20.4 million for the full year of 2013.

Operating cash flow for the full year 2013 was a net outflow of approximately $21.6 million, which relates to the investment in several films released in 2013 or scheduled for release in 2014.

Now turning to our guidance, based on current market and operating conditions, we expect our non-GAAP net income for the first quarter of 2014 to be between $1 million to $1.5 million. Brandi, over to you.

Brandi Piacente

Operator, I think that we will turn the call over for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Doug Creutz from Cowen.

Doug Creutz - Cowen

I imagine The Man from Macau at a $500 million-plus R&D is going to be a pretty profitable film as a whole. I wonder given that you invested in films, I think that's going to be your model going forward. Can you talk conceptually about how much of the profit going to the film will flow into Bona and when we would expect to see that profitability?

Amy Xu

Let me maybe briefly update on how the process goes with Bona Film Fund. And Jeffrey can add in additional comments. With the Film Fund, Doug, as you remember, we participated in a 30% within the Film Fund. So with the $500 million box office for The Man from Macau, all the interest that Bona has will go to the Film Fund. And out of that, we will take 30%. So I don't know if this helps answer. Now the box office for the film will be pretty much recognized in Q1. But in terms of other rights and IP, it'll come in later.

Doug Creutz – Cowen

I assume in addition to that 30%, you take a distribution fee on top as well.

Amy Xu

That's correct, Doug.

Yu Dong

Doug, let me add one more detail in terms of the $500 million. If you remember that we discussed before that usually with the box office of $500 million, the distribution of revenue will roughly close to about $200 million, about 37%, 38% of the box office. And then out of the distribution revenue, we then take a percentage of the commission and it's usually 10% to 15%. And so we will take roughly maybe close to $20 million or a little shy of $20 million of the commission for the film.

Brandi Piacente

Okay, Bruce, thank you very much for taking the Q&A session. At this time, there are no further questions. So everyone, we'd like to thank you on behalf of Bona for participating on our call today. If you have any further questions, please feel free to contact the company or the The Piacente Group Investor Relations and we'd be more than happy to answer any questions you have or help you in any way. Thank you very much and have a great evening and afternoon.

Operator

Thank you, ladies and gentlemen. That concludes our conference call for today. Thank you all for your participation and you may now disconnect.

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