Cinemark Holdings, Inc. (NYSE:CNK)
F1Q08 Earnings Call
May 9, 2008 8:30 am ET
Kate Messmer – Investor Relations Contact
Alan Stock – Chief Executive Officer
Robert Copple – Chief Financial Officer
Eric Handler – Lehman Brothers
Hunter DuBose - Morgan Stanley
Barton Crockett – JP Morgan Chase
I would like to welcome everyone to the Cinemark first quarter earnings conference call. (Operator Instructions) I will now turn the call over to Kate Messmer.
Welcome to Cinemark’s fiscal first quarter 2008 earnings call. Before we begin let me remind you that in accordance with the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995 the company knows that certain matters to be discussed by members of senior management during this call may constitute forward looking statements.
Such statements are subject to risks and uncertainties and other factors that may cause the actual performance of Cinemark to be materially different from the performance indicated or implied by such statements. Such risk factors are set forth in the company’s SEC filings. Today Cinemark CEO, Alan Stock and CFO, Robert Copple will be discussing the first quarter results. I will now turn the call over to Alan.
On today’s call I will comment on the industry and Cinemark’s first quarter 2008 results, the outlook for the upcoming film slate and provide an update on Cinemark’s digital cinema strategy. During the first quarter our geographically diverse theatre base helped contribute to a 7.5% year over year increase in our admission revenues and a 6.2% year over year increase in our concession revenues, driving a 6.1% improvement in total revenues.
The company’s overall revenue growth was the result of a 1% increase in attendance and a 6.5% increase in average ticket prices and a 5.1% increase in concession revenues per patron for the quarter. We generated adjusted EBITDA for the quarter of $84.2 million which represented a 5.1% increase over the prior year and a 21% adjusted EBITDA margin. Box officer per screen for the period was up 3.5% over 2007.
The first quarter box office started off stronger than expected with the help of carry over films from the fourth quarter of 2007 such as Juno, National Treasure: Book of Secrets, Alvin and the Chipmunks, I Am Legend and The Bucket List. There were several strong grossing films released during the first quarter of 2008 including Dr. Seuss’ Horton Hears a Who!, 10,000 BC, Cloverfield, Jumper and 27 Dresses.
Another highlight of the quarter was the release of the 3D Hannah Montana Concert film which generated strong attendance and significant box office revenues on a per screen basis. The success of Hannah continues to reinforce the opportunity that 3D pictures create for enhanced pricing and attendance.
During the later part of the quarter box office comparisons versus the prior year were difficult to overcome given the solid performance of Wild Hogs, 300, and Ghost Rider during the first quarter of 2007. According to industry sources the industry’s domestic box office for the calendar quarter posted growth above expectations, up approximately 2% to 2.5%. This was despite the weakening economic conditions in the US and difficult year over year comparisons.
The box office has proven to be relatively resilient in past recessionary periods and we are optimistic that this time will be no different as box office performance continues to depend more on the quality of the film slate and as consumers continue to seek low cost forms of entertainment. Additionally over 20% of our screens are located outside the US in countries that are not experiencing the same economic issues as the US providing an opportunity for our continued out performance.
The upcoming summer film slate features a steady flow of solid films including Iron Man which was released this last weekend and had the second biggest opening of all time for non-sequels. The next installment of Disney’s Chronicle of Narnia, a fourth Indiana Jones moving in May, Universal’s Incredible Hulk, DreamWorks Kung Fu Panda, Disney’s Pixar film Wall-E and Sony’s You Don’t Mess with Zohan staring Adam Sandler in June.
There are several more promising films in the 2008 lineup including the next installment of Batman called the Dark Knight, Hancock featuring Will Smith, Step Brothers staring Will Ferrell and the 3D release of Journey to the Center of the Earth all coming to theatres in July. During the later part of the year we expect the sequel to Madagascar, the next James Bond film called Quantum of Solace and the Harry Potter film Harry and the Half Blood Prince along with another 3D release called Bolt.
We continue to move forward with our organic expansion strategy and see plenty of opportunity to realize strong returns on our invested capital by expanding both in our existing markets and into new ones. We currently have signed commitments to open 14 new theatres with 153 screens during the remainder of the year and open seven new theatres with 104 screens thereafter. We continue to seek high quality additions and evaluate acquisition opportunities in both international and domestic markets.
To provide an update on our digital cinema initiative or DCIP the joint venture between Cinemark, AMC and Regal we believe that negotiations with some of the major studios are in their final stages and we anticipate beginning the rollout days during the second half of this year. We are excited about the potential for digital cinema and 3D especially giving the increasing commitments by our major studios to produce 3D films and other 3D content.
Within the next few years an estimated 30 3D films will be released including DreamWorks film such as Monsters Versus Aliens, How to Train Your Dragon and the fourth Shrek movie. In addition to Ice Age 3 and James Cameron’s Avatar from Fox and Disney’s Toy Story films. 3D should help our future ticket price growth due to premium pricing opportunities. Our 3D rollout will follow our digital rollout since digital is a prerequisite to 3D. We plan to have our entire circuit converted to digital cinema in approximately three to four years.
I am pleased that our company has gotten off to a solid start in 2008 developing strong operating results in the first quarter of the year. We continue to focus on improving our financial performance and expanding organically in high growth markets. We remain committed to secure a solid new theatre pipeline and taking advantage of digital and 3D opportunities to further enhance our profitability. I am confident that we will continue to drive positive cash flow and deliver long term attractive returns.
With that I will now turn the call over to Robert to discuss the quarter’s financial results in more detail.
I will review our first quarter 2008 financial performance in more detail and discuss our balance sheet. As a reminder, in reviewing our information we report on a 52-week calendar year basis, for this quarter January 1 through March 31, versus a 52/53 week period that would have run from December 28 through March 27. The difference in periods is meaningful as the last few days in December were a weekend that generated significant year over year growth and on an absolute basis was the highest grossing weekend of the period.
While the last few days of March represent a weekend that was one of the lowest grossing weekend of the period and sustained a substantial year over year decline in box office. The substitution of those few days resulted in reduced box office estimates up 2% to 2.5% for the calendar period currently, rather than the box office growth of 4% to 4.8% for the period included the final days in December rather than March growth which was reported in the 2% to 2.5% range for calendar period March 31.
During the first quarter we increased our admission revenues 7.5% to $262.4 million and grew our concession revenue 6.2% to $122.2 million. As a result our total revenues increased $23 million to $401 million. This strong performance was driven by a 1% increase in attendance, a 6.5% increase in average ticket price and a 5.1% increase in concession revenues per patron.
On a segment basis for the quarter our US operations generated admissions revenues of $202.8 million representing 2.7% growth over 2007. Concession revenues grew to $96.7 million a 1.2% increase over 2007. Average ticket prices for our domestic operations increased approximately 4.6% over 2007 and concession revenues per patron increased approximately 3.3%. Our total domestic revenues improved $2.1 million despite the $4.3 million decline in other revenues that was primarily attributable to reduced screen advertising earned under the amended exhibiter service agreement with MCM.
Our international operations generated admissions revenues of $59.6 million which were 28.2% higher than 2007 and concession revenues of $25.5 million which were 30.8% higher than 2007. Average ticket prices for our international operations increased approximately 18.4% over 2007 and concession revenues per patron increased approximately 20.4%. Our international results were partially impacted by favorable exchange rates in certain countries in which we operate. Brazil’s average exchange rate for Q1 was 2.11 in 2007 versus 1.74 to the dollar in 2008.
On a consolidated basis our film rentals and advertising costs were $138.1 million for the first quarter of 2008 representing 52.7% of admission revenues which was consistent with 2007. Concessions supply costs were $18.7 million or 15.3% of concession revenues for the first quarter of 2008 compared to $17.5 million or 15.2% of concession revenues for the first quarter of 2007. Concession supplies as a percentage of revenue decreased in our domestic and international markets; however the strong performance of international assets caused the relative weight of the two segments to change resulting in a slightly higher average cost for the quarter.
Salaries and wages were 10.6% of total revenues which was consistent with the first quarter 2007. Adjusted EBITDA for the quarter was $84.2 million representing a 21% adjusted EBITDA margin. Domestic adjusted EBITDA was $64.9 million. Our increase in average ticket price was offset by decline in attendance resulting in a 0.8% decline in box office per screen reflecting the relative movie performance of the calendar quarter in domestic markets.
We were able to control our costs resulting in only a slight decrease in income generated at the theatre level despite the impact of wage increases and the fixed nature of rent. Despite the decline our domestic EBITDA was primarily resulting from an increase in general and administrative expenses for the quarter of approximately $1.5 million which also accounts for the decrease in our domestic margin. Our general and administrative expense is in line with the last two quarters of 2007 and increased costs year over year for Q1 is primarily attributable to increased costs related to becoming a public company.
Our international adjusted EBITDA increased 44% to $19.3 million due to the solid performance of the 2007 year end US films which generally open in Q1 in our international markets. Growth in average ticket prices and concession per caps and new theatre openings also enhanced our growth. Net income for the quarter was $5.3 million which included an impairment charge of $4.5 million. Our effective tax rate was approximately 40.9% for the first quarter of 2008 which represents a more normalized rate as compared to the first quarter of 2007.
As a reminder during the first quarter 2007 we recorded a significant gain related to the sale of a portion of our ownership in conjunction with MCMs initial public offering. Also included in the first quarter 2008 results was a $0.1 million loss on early retirement of debt related to the repurchase of 10 million aggregate principal and now maturity 9.75 senior discount notes.
As we have previously stated we still intend to continue to use the proceeds from our IPO to pay down our long term debt but given ongoing challenges in the credit markets we are proceeding carefully to ensure we reduce our debt while maintaining an optimized debt structure. Looking briefly at our balance sheet our cash position was $305 million at the end of Q1 and total long term debt was $1.52 billion resulting in net debt at quarter end of approximately $1.22 billion.
Coupled with our adjusted EBITDA this level of net debt results in a relatively low leverage ratio which we are very comfortable with. At March 31, 2008 our total domestic screen count was 3,650 screens, 12 of which are in Canada. During the first quarter we acquired two theatres with 28 screens and closed two theatres with 32 screens. One of the acquired theatres had been a theatre we previously managed and net change in structure will not produce any significant difference in bottom line.
As of March 31, 2008, the company had signed commitments to open 10 new theatres with 128 screens in domestic markets during 2008 and opened seven new theatres with 104 screens in domestic market subsequent to 2008. Our total international screen count on March 31, 2008, was 1,007 screens. As of March 31, 2008, the company had signed commitments to open four new theatres with 25 screens in international marketing during 2008.
The first quarter we invested $30.8 million in capital expenditures including $24.5 million on new construction and $6.3 million in CapEx maintenance. We continue to expect our gross total CapEx before disposition proceeds for fiscal 2008 to be approximately $145 million which includes approximately $43 million for CapEx maintenance. This will be offset by the reinvestment of approximately $24 million from proceeds of dissolved assets that occurred during late 2007 and during the first quarter of 2008.
The company declared third full quarterly dividend on May 9, 2008, in the amount of $0.18 per common share. The dividend will be paid on June 12, 2008, to stockholders of record on May 30, 2008. In accordance with our MCM operating agreement we receive a cash distribution of approximately $5.2 million from MCM during the first quarter of 2008. In 2008 MCM performed a common unit adjustment calculation in accordance with the MCM common unit adjustment agreement.
As a result of the calculations we received approximately 846,000 additional shares in MCM resulting in an increase in ownership percentage from approximately 14% to approximately 14.5%. We now own 13,991,652 shares of MCM common units.
In summary, we are excited about the film slate for the remainder of the year and we’ll continue to execute our operational strategy for long term revenue, EBITDA and cash flow growth. We will now be glad to answer your questions.
(Operator Instructions) Your first question comes from Eric Handler – Lehman Brothers.
Eric Handler – Lehman Brothers
Can you give a little perspective on the opening rollouts of your new screens, when those openings may occur? Secondly, with regard to DCIP would you expect an announcement to include financing as well? Last, have you guys decided about how with the 3D projectors or the 3D add ons do you think that’s going to be a revenue share model or are you looking to buy the 3D add on all in?
With respect to opening timing of theatres, this year it’s primarily weighted towards the end of the year. Probably about a quarter of it would be in the mid to late Q2 timeframe and then the majority of the remainder will be towards Q4. A little bit unusual weighting it just had to do with the timing when developers are opening the related malls and working on the building phase.
DCIP financing, I’m trying to remember the exact question. Timing of it hopefully would be when we start making all of our announcements. There could be a difference in timing between possibly having studio agreement and having the financing in place. We are diligently working on all fronts being equity debt and the studio agreements as well as our agreements. Those all are progressing very well and quickly as I think people said before that we have engaged JP Morgan, they’ve been working on this for some time, are very familiar obviously with all the agreements and are working diligently on the debt agreement.
Your last question, the 3D, we continue to evaluate 3D. There are several models out there that are revenue share base. Of course we can buy projectors on our own. We haven’t fully vetted out what is the best solution for us as we continue to first of all focus on the digital agreement to get done. We’ll continue to evaluate. There are good three or four alternatives or choices in the 3D world. Actually what we’re doing at this moment in time is testing and having those demonstrated to us and trying to work through those agreements about the same or shortly thereafter that we can get these things done all at the same time.
Your next question comes from Hunter DuBose - Morgan Stanley.
Hunter DuBose - Morgan Stanley
My first question is if I’m doing the math right it looks as if your domestic admissions revenue per screen declined about 1% year on year versus Q1 ’07 which seems to be tracking below the overall industry domestically. Can you comment on what factors may have contributed to that and with Regal results they also seemed to track below industry which they had attributed to having over indexed on the 300 film in Q1 ’07 and just having tough comps with that.
Was it a similar issue for you guys or where there other factors going on there and to what extent should we expect you to track below industry performance in the next few quarters?
In internationally could you give us some indication of what the FX adjusted organic growth rates were for the international performance especially with regard to increased average ticket prices and concessions per cap?
The box officer per screen did decrease I think I mentioned it and as you said it’s about 0.8% for the period. Looking at what the impact is, is that over or under performance I went the side of the difference in periods and what projected growth was. If you look at the industry sources they are showing as we’ve seen it 2% to 2.5% increase in box in the period but then I guess you’ve got to look and say where is that growth coming from.
Is that new screen growth, is that really box year over year. At least when we’ve looked at it we feel we’re very in line with the industry and definitely in line with our peer group. There is definitely been some growth in regional, smaller chains that have we think propelled the box office number but is not necessarily a per screen number. Its not overgrowth in the market it just happens to be some smaller chains that have added more theatres when we’ve looked at the detail
There is definitely a significant difference between the reporting periods in that when you look at that 2% to 2.5% differential between a 52/53 week basis and our calendar basis that really drops off to the bottom line. It’s out of your film costs and concession costs and some very minor labor. When you’re comparing I’d be sure and account for that differential.
Your other question I think had to do with international. We did say, I think its in our press release data as well, we tried to add a fair amount of information to our press release so people can analyze our data better. The attendance was up internationally 8.2%. I can give you a few numbers adjusted for FX one is the box office or actually the ticket price on an FX adjusted basis would have been up about 4.6%. The concessions per cap on an FX adjusted basis would have been up about 8%.
Your next question comes from Barton Crockett – JP Morgan Chase.
Barton Crockett – JP Morgan Chase
I wanted to ask a question about the timing of the film releases internationally. Can you give us some sense of how much you think that might have helped the attendance internationally versus what happened in the US. Is there any way to ballpark that? When we look at the second quarter does the timing of movie releases help our hurt internationally?
What we’ve generally found is that taking the whole year it will have no meaningful impact because obviously it’s just the movie flow gets pushed similarly. Q1 can vary; I do think we had some benefit in Q1 from the point of view that a number of the big hits that were released at the very end of December but really drove a lot of the US box office were not released day and date. Internationally they were released actually in the first quarter. National Treasure and some of those actually hit fully in Q1.
I don’t know as I see the carry over impact going into Q2 or Q3 that can vary. I think we’re seeing more and more day and date releases especially in Q2. I think the benefit happened to be more weighted towards Q1 than you would normally see.
I think the best way to think about it is as Robert just stated when we get into any major release it has always been this way. They release most of those, the Harry Potter, Iron Man, the big ones they release as close as they can day and date and that happens, its always happened that way. A lot of the other films just flow through based on holiday periods or based on whatever’s going on in these different countries.
At the end of the day, as Robert said in the beginning, on a year over year basis the release pattern and how it flows through has not changed.
If there’s a difference I would tend to say it happens in Q1 because the holiday season in Latin America especially is more weighted towards the January, February rather than November, December. The release of product sometime is delayed again for those last few weeks. I wouldn’t necessarily expect increases we saw this quarter would be reflective of continued increases throughout the year in attendance. Obviously we feel international will do extremely well, we feel like it will still outperform the US but there might have been a little extra weight this quarter.
Barton Crockett – JP Morgan Chase
I just wanted to be clear, you said something in the script about a screen you had purchased that won’t affect the P&L because you are already running it, can you clarify what that was.
That was a unique situation where we had entered into a management agreement on a theatre a few years ago with a developer. We had the right to convert that to a lease but the basic economics bottom line between either choice is not that substantially different. There are definitely some upside under the lease and that’s why we decided to convert it into a lease agreement. It’s not as meaningful of a screen count growth. That’s the reason I mentioned it when you’re looking at screen count changes and trying to do your multiplication and what the net was. Arguably that won’t change our numbers much.
Barton Crockett – JP Morgan Chase
One final question, can you update us on what percentage of your admissions revenue, attendance and screens are the discount theatres and how those performed relative to the rest of your network in this past quarter?
It’s actually as a relative piece of our total box office; it’s not a significant piece. It’s less than 5%. They performed well. We talked about them one quarter some time ago when there was just a little bit unusual and that’s the only reason we mentioned them then. They’ve actually performed well and in line with the rest of the circuit.
Your next question comes from Hunter DuBose - Morgan Stanley.
Hunter DuBose - Morgan Stanley
I just wanted to follow up on your dividend strategy, can you give us some indication of what circumstances you would consider raising the dividend during the next year or so?
That’s a Board decision to make so I don’t know that there’s any way I can really comment on what strategy would cause us to raise the dividend. As we’ve said before it’s a decision the Board makes. They look at obviously our cash flow, our use of proceeds in terms of CapEx needs currently and going forward. Then obviously what the environment would be for other opportunities to enhance value and so I can’t really give you direction on that.
At this time there are no further questions.
Thank you everyone for participating in our call and we look forward to talking with you next time.
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