Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to extend remarks third quarter earnings Conference call. At this time, all participants are any listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question during this session you will need to price star one on your telephone. Please be advised that today's conference is being recorded.
We require any further assistance. Please press star zero I would now like to hand, the conference over to Chanda Brashears, Vice President Investor Relations. Please go ahead ma'am. Thank you Regina and good morning, all at this time I would like to welcome you to Cinemark holding Inc. third quarter 2019 earnings release conference calls hosted by markets Roddy cheap.
Is that kind of officer, and Sean Gamble, Chief Financial Officer, and Chief operating Officer.
According to 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 to them or actual performance to be materially different from the performance indicated or implied by such statements such risk factors are set forth in the company that you see filings.
The company undertakes no obligation to publicly update or revise any forward looking statements today's call and webcast main click nongaap financial measures. A reconciliation of these non-GAAP measures for the most directly comparable GAAP financial measures can be found in today's press release within the company's quarterly filing on Form 10-Q or on the company's website investors not to the Mark dotcom.
I'd now like to turn the call over to marks the right.
Thank you Chanda and good morning, everyone.
We're pleased to report record worldwide third quarter revenues on the back of a film lineup that resonated extremely well with audiences across the United States and the 15 countries in which we operate through South and Central America.
The North American industry box office increased by 3.5% this quarter with an uptick in both attendance and pricing.
Meanwhile, set of marks domestic admission revenues performed yet again and outpaced the industry by growing 5.3% and exceeding industry result by a sizable hundred 80 basis points.
This result further extends our industry outperformance trend 38 out of the past 43 quarters.
Industry box office was propelled by several major shifts in the third quarter as a top five films drove 53% of the gross result, and while this degree a blockbuster concentration put pressure on Threeq you film rental rates it clearly delivered meaningful U.S. revenue.
You broke.
The robust Hollywood film product also carried over to Latin America box office, which was further supplemented by a sizable result of the second installment of not a per day or which is a locally produced title from Brazil, collectively Hollywood and local content drove attendance growth for the region of OLED.
1.9% during the quarter.
In addition to the benefits derived by strong film content, our third quarter performance was bolstered by the continued focus on an execution of our guest oriented strategic priorities, which include one providing top notch customer service and amenities to delivering quality and variety of food and beverage offerings.
And three engaging guests through targeted and personalized interaction both within and beyond our physical theaters I'd like to expand upon each one of these three priorities, including several of their underlying initiatives.
First off top notch customer service has been a hallmark of cinemark sculpture dating back to our founding 35 years ago.
We place great emphasis on training our employees to interact with guests in a manner that serves to enhance their overall experience when visiting our theaters, we fundamentally believe that our approach to customer service is a competitive advantage and a pillar of our ongoing success.
We also continue to prudently invest in amenities to further enhance the experienced guests enjoy at centermark.
Such as luxury lounger reclining seats consumers have demonstrated a strong preference for luxury loungers, which we see evidenced by the high utilization of our recliner theaters. This high utilization combined with increased pricing flexibility and food and beverage consumption has yielded an investment return welling well.
In excess of our 20% threshold.
At the ended the third quarter nearly 2007 hundred of our auditoriums featured luxury Loungers, which represents 58% of our domestic circuit and is the highest recliner penetration among major players.
At our current pace, we anticipate that approximately 60% of our U.S. footprint will feature recliner seats by the end of this year.
Going forward, while we expect our volume of recliner investments will continue decline. The overall percentage of our circuit that features Recliners, we'll continue to gradually increase as we pursue a handful of strategic theater remodels in the coming years and all of our new domestic build include this amenity.
Cinemark XD, our premium large format technology is another amenity that further heightens the viewing experience we provide our guests.
Our equity investment strategy includes incorporating the at least one XD auditoriums into each new theater, we build and adding second XD auditoriums, we're demand calls for it.
In addition to the enhanced site sound and immersive atmosphere that our expertise deliver 75% of our domestic equities are reclined.
Furthermore, our expertise provides us advantaged economics flexibility and control we're able to feature of the biggest movie every week in these auditoriums, which has helped our expertise delivered consistently outsized results as they typically generate approximately 9% of our worldwide box office, while accounting for only four.
Or percent of our overall screens in this regard to third quarter was no exception.
Moving onto our second guessed oriented priority, we believe that food and beverage helps to further enhance the experienced our guests have when they visit our theaters and we strive to provide concession options that appeal to every pallet.
As we've outlined in the past there are a range of initiatives. We are actively pursuing to sustained growth in incident consumption and overall food and beverage spend.
These initiatives include generating lift within our highest margin core categories that includes fountain drinks popcorn and candy as well as simultaneously driving incremental sales in emerging categories like alcohol expanded food multicultural offerings and merchandise.
Together these actions drove another third quarter per cap record a $5.22 in the U.S., which was up 9.7% and marked at 50 onest consecutive quarter of year over year per cap growth.
Well, we keep raising the bar for ourselves, we're continuously analyzing new and innovative food and beverage concepts to maintain this growth trend for many more quarters to come.
Albeit our historic Cagar of 5% to 6% growth seems more reasonable than the double digit growth we've delivered year to date.
Our third guest oriented strategic priority is engaging guests through targeted and personalized interaction both within and beyond our physical theaters, we've been investing in marketing advanced data analytics and information technology expertise to strengthen our ability to not only identify customer.
Yes, but also better understand their unique and individual preferences preferences, such as movie Sean was day, and Showtime inclinations favorite theater see collection selections food and beverage purchases et cetera. This knowledge is invaluable in creating tailored communication and offers for our guests that helped drive.
Loyalty and more frequent visits to our theaters.
Loyalty programs or an excellent channel for building customer relationships with personalized communication and as such we recently relaunched our free loyalty program, which we now call movie fans inclusive in this relaunch was a simplification of the of the programs features a transition to a dollar spend rather than a try.
It's actual model and an enhancement of reward options.
So it's still early we've had we've seen fantastic consumer response to movie fans, including a healthy uptick in sign ups, which has boosted our worldwide loyalty member base to over 11 million.
And while the near term ramp up of our loyalty program is generating a slight drag on our reported metrics and adjusted EBITDA results due to required accounting deferrals as points get issued we're already seeing the benefits of the revamp program through positive momentum and customer you can customer utilization and any.
Yes, but.
Furthermore, we believe we'll be able to use this program to drive even deeper engagement visits to our theaters food and beverage consumption through unique cinemark exclusive experiences and personalized digital offers.
Along these same lines movie club are paid subscription program that we launched nearly two years ago continues to perform exceptionally well and we remain enthused with the strength and consistency of its metrics movie club now has more than 850000 members which represent.
It's over 2004 hundred members per theater location and is by far the highest national subscription membership on a per location basis.
Movie Club success and high member satisfaction is directly related to the unique benefits value in convenience. It offers consumers which include the ability to rollover unused movie credits, a 20% food and beverage discount waived online fees add on tickets for.
Companions as well as the ability to share unused movie credits, making this effectively household benefit for the whole family and friends and a user friendly monthly membership with no sign up or cancellation strings attached.
Considering all of these benefits Cinemark movie club provides the best overall value for movie goers, who attend theaters two times or less per month, which encompasses the vast majority of the movie going population.
Since inception more than 29 million movie tickets have been sold through movie club during the third quarter alone movie club represented 15% of our domestic box office, where most encouraged with the increase in movie going frequency with members reporting their attending the theater more often since joining.
Which is also supported by our internal analytics.
Furthermore, this uptick in theater visitation is helping to boost our food and beverage strength as movie club members have comparable food and beverage spends to those of nonmembers, even with the 20% discount we're thrilled with movie clubs results and the impact it continues to have on our overall performance.
We remain focused on seeking opportunities to further grow our membership base, while leveraging the data and key learnings to enhance the centermark experience.
Rounding out my prepared comments I'd like to briefly touch on the film slate.
The fourth quarter kicked off stronger than expected with the huge success of Joker now the highest rated R. rated film of all time, we're eagerly awaiting the release of forward versus Ferrari a beautiful day in the neighborhood sequels from frozen and Jumanji and of course Star Wars, the rise of Skywalker.
And many others.
And as outlined during our earnings call in August we're enthusiastic for the 2020 film slate that's been announced to date with some fresh new content. In addition to some beloved franchises and sequels.
We continue to reinforce taking a long term view when evaluating exhibition industry, rather than a weekend monthly quarterly or even annual results as short term ebbs and flow box office can be misleading.
Over the past 30, plus years global theatrical movie going has demonstrated stability and resilience again and again across numerous economic cycles and technological advances, including significant in home innovations such as VHS cable Internet DVD.
And streaming.
With that backdrop I'd like to take a moment to discuss frequent questions. We've been receiving with regards to streaming and the potential impact new platforms coming to the market may have on theatrical movie going.
First of all streaming is not a new concept over the past decade during mass adoption of Netflix Amazon, who Lou HBO go theatrical attendance has held relatively stable consumer viewership within the home however has changed dramatically.
Furthermore, a third party study recently published by Ernst and young determined that the most active streamers are also the most active theatrical movie goers with 60% of those attending movies nine or more times, a year also stream eight or eight or more hours.
A week.
From a studio standpoint, the worldwide theatrical proceeds have continued to grow and now represent more than 50% for most major releases.
Moreover, the theatrical release window serves as a launching pad that helps events the movie and creates brand awareness contributing to the overall value for the content owner in in the accelerating markets downstream.
Often downstream revenues directly correlate to theatrical box office generated and the perceived consumer value for in home monetization is therefore enhanced.
In addition, a theatrical a successful theatrical release creates opportunities for sequels spin offs and even television series that may be better suited direct to the consumers that can cross pollinate between theatrical and DTC.
All that said theatrical movie going remains a social and truly immersive entertainment experience that cannot be replicated in the home and it should not be overlooked that people still very much want to and need to get out of their home to be entertained with that our industry and specifically cinemark has.
Recently been aggressively investing in premium technology, Remodels, recliners loyalty and subscription programs food and beverage all to further enhance the theatrical movie going experience and make it the destination of choice for out of home Entertainment.
In closing Cinemark has long excelled amid changes in the industry technological advancements box office fluctuations and various economic cycles, we consistently focus on the long term as demonstrated by the structure of our company the management of our operation and the and our prudent investments.
With an acute mindful mindfulness towards shareholder value that concludes my prepared remarks, I'd now like to turn the call over to Sean to address a more detailed discussion of our third quarter financial performance Sean.
Thank you Mark and good morning, everyone before diving into the details of our third quarter's financial results I'd like to again comment on a couple of modifications to our financial statements that occurred as a result of two recent accounting pronouncements.
While we have fully lapped our transition to assay six so six is revenue recognition accounting standards that took place over the course of 2018, the implementation of AMC 840, twos lease accounting standards continues to affect 2019 year over year comparisons.
As mentioned in prior quarters, the transition to assay 842 has zero impact on net cash flow and minimal impact on net income. However, it does create a slight non operational drag on our adjusted EBITDA and operating cash flow metrics.
It's important to emphasize again that AMC 842 is purely in accounting presentation change, which is largely intended to reflect all lease obligations on the balance sheet.
It does not impact cash rent payments obligations to landlords or any other underlying business or operating fundamentals.
Additional information about these changes can be found in the footnotes of our 10-Q or in the 8-K, we filed on May seven 2019 in tandem with our first quarter earnings release.
Shifting now to our third quarter financials during the quarter, our global company generated total revenues of $821.8 million and consolidated adjusted EBITDA of $169.8 million.
Our adjusted EBITDA margin was 20.7% and was reduced by 70 basis points as a result of the 42 accounting presentation changes just mentioned.
In the U.S. admissions revenues were $351.1 million and increased 5.3% year over year.
Attendance increased 0.9% during the quarter and our average ticket price grew 4.3% to $7.96 driven by strategic increases in core pricing incremental opportunities from recliner conversions and favorable ticket type mix.
Total domestic concessions revenues grew 10.8% to $230.4 million.
In addition to a slate of films that appeal to higher consuming movie goers, our concessions growth can be largely attributed to new concept activations and product expansions with strong execution of incidence driving initiatives and promotions that helped us to maximize revenue potential.
Collectively these factors drove concessions per patron of 9.7% versus Threeq, you 18 to another third quarter high $5 in 22 cents.
Similarly, other domestic other revenues also grew and were up 25.3% versus last year predominantly as a result of increases in promotional and transactional related income.
Overall, our US circuit delivered total revenues of $633 million adjusted EBITDA of $132.3 million and an adjusted EBITDA margin of 20.9%.
In addition to pressure from an eight typically high third quarter film rental rate that Mark previously referenced our domestic circuits. Adjusted EBITDA margin also included in 80 basis point unfavorable drag from the combined impact of the new assay 842 lease accounting standards as well as deferred revenue timing of.
Shaded with the expansion of our movie fans loyalty program.
Internationally admissions revenues were $103.4 million, which increased 9.7% versus last year as reported and 21.6% in constant currency.
International attendance grew 11.9% to 29.2 million patrons propelled by the favorable film content drivers that Mark discussed earlier.
Our reported average ticket price of $3.54 translated to a constant currency increase of 8.9% and was driven primarily by inflationary price growth.
This growth was partially offset by the impact of the local title not a per day or two which generated a meaningful lift in attendance, but carried a lower than normal ticket price and minimal concessions similar to its first installment in Two Q1 8.
International concessions revenues were $59.1 million, which increased 5.2% as reported and 16.4% in constant currency.
Our as reported international concessions per patron was two to $2.02 and grew 4.2% in constant currency as a result of inflation and are varied food and beverage initiatives.
Similar to average ticket price our constant currency concessions per patron metric was distorted by not a per day or two and would've been up approximately 11.5%. Excluding this title.
International other revenues were $26.3 million, which increased 22.9% as reported and 39.7% in constant currency.
This increase was largely driven by favorable growth in screen advertising promotional activity and transactional related income.
Overall total international revenues grew 9.8% to $188.8 million as reported and adjusted EBITDA increased 4.7% to $37.4 million.
Our adjusted EBITDA margin was 19.8% and was adversely impacted by the non operational transition to assay 42 lease accounting that lowered the rate by 140 basis points.
Foreign currency translation was more of a challenge than initially anticipated in the third quarter as a result of a sizable currency devaluation in Argentina that created an approximate 11% drag on our overall reported international financials.
And while future currency fluctuations are difficult to predict if current rates continue to hold we would expect a percentage headwind in the low teens for the fourth quarter and full year.
As a reminder, the vast majority of our international operating expenses are transacted in local currency, including film rental and facility lease expenses. So the impact of currency exchange is predominately translation based and not transaction oriented.
Shifting back to our worldwide consolidated results.
Film rental in advertising costs as a percentage of admissions revenues increased by 230 basis points to 56.1%.
As has been previously discussed this increase was driven by an unprecedented concentration of third quarter blockbuster titles and was also impacted by reduced offset from international virtual print fees that are winding down as costs associated with the conversion to digital projectors fully recoup.
Concession costs as a percentage of total concessions revenues also increased and were up 160 basis points predominantly as a result of product mix associated with expanded food offerings in merchandise sales.
As mentioned on prior calls while these newer offerings tend to create a slight drag on our concessions margin rate. They continue to drive sizable growth in overall concessions revenues and income.
Salaries and wages were 12.6% of total revenues and grew by 30 basis points compared to the third quarter of 2018, as a result of wage and benefits inflation, the ramp up of new theater additions and incremental hours to support our varied concessions initiatives.
Utilities and other costs as a percentage of total revenues increased slightly by 10 basis points, while facility lease expenses as a percentage of total revenues declined by 10 basis points. Despite a $5.6 million year over year presentation increase associated with the adoption of Asea 42.
And gionee for the quarter increased by 30 basis points as a percentage of total revenues.
This increase resulted from incremental investments in head count and cloud software to support various strategic initiatives as well as a tough comparison to DNA in the third quarter of last year that was somewhat reduced by onetime items.
Collectively third quarter pretax income was $46 million, a third quarters effective tax rate was 30.5% and net income attributable to Cinemark holdings, Inc. was $31.4 million or 27 cents per diluted share.
This quarter's earnings were adversely impacted by elevated impairment expenses of $27.3 million predominantly associated with an underperforming theater that was a test of a high end 21 and over concept, which has struggled to gain traction.
With respect to our balance sheet, we ended the quarter with a cash balance of $482.8 million and a net debt position of one and a half billion dollars.
Our net debt improved by $107 million versus prior year as a result of reclassifying certain capital lease obligations to operating lease obligations connected to the new lease accounting guidelines.
Shifting attention to our U.S. footprint, we operated 344 theaters in 4630 screens in 41 states and 100 to deemphasize at quarter end.
We assign commitments to open one theater in 12 screens during the remainder of 2019 and 13 theaters, representing 154 screens subsequent to 2019.
We expect to spend approximately $107 million and capex associated with these 166 screens.
Internationally, we operated 204 theaters in 1452 screens in 15 countries across Latin America.
As of quarter end, we had signed commitments to opened six new theaters and 51 screens during the remainder of 2019 and nine theaters, representing 60 screens subsequent to 2019.
We anticipate spending approximately $52 million and Capex for these 111 screens.
Consistent with our prior comments, we continue to view Latin America as a long term growth opportunity and we anticipate adding on average 50 to 75 international screens per year in the near term.
That said the majority of this year screen openings have become heavily weighted toward the back end of the fourth quarter and carry risk slipping into 2020, which could result in fewer than 50, new screens. This year.
Regarding overall Capex, we spent $71.3 million in the third quarter, including $25.3 million on Newbuilds and $46 million on existing theaters that was predominantly associated with recliner conversions and other revenue generating investments.
Based on some shifting recliner in Newbuild project timelines associated with very construction complexities. We now anticipate spending at the lower end of the $300 million to $325 million full year Capex range. We previously guided with the possibility of coming in slightly below $300 million.
Yeah.
That said, we continue to expect to the annual depreciation and amortization will remain roughly in line with 2018 at approximately $260 million to $270 million as incremental growth associated with new capital expenditures is largely offset by the impact of assay a 42.
Before I conclude my prepared remarks, I would like to address a sizeable uptick in cash distributions, we expect to receive over the next several quarters from DC IP. The entity that was created to facilitate our us conversion digital projectors.
In accordance with DCP is operating agreement its distribution of excess cash to its founding members has started to increase in the third quarter as its debt servicing obligations have been fulfilled.
This excess cash is the result of a negotiated profit pool that kicks in following the efficient deployment and recoupment of the digital projector rollout and income generated from third party services that DCP has provided such as VP of contracts support and trusted device list management.
Annual cash distributions, we have received from DC IP had been approximately $6 million for the past few years and as we look ahead current projections suggest they will increase to approximately $20 million. This year $35 million in 2020, and then dropped to $5 million in 2021 App.
At which point they will end.
To maintain alignment with cash flows we will continue to recognize these distributions in adjusted EBITDA consistent with the treatment of other equity distributions over the past several years.
In closing, we're very pleased with the enriched entertainment experience and heightened customer engagement, our strategic investments are producing that helped drive our record third quarter worldwide revenues.
Looking forward, we will continue to prudently invest in the growth in security of our company to position. It for ongoing success as we maintain our focus on creating long term shareholder value.
Regina that concludes our prepared remarks, and we would now like to open up the lines for questions.
At this time, if you would like to ask a question simply press star followed by the number one on your telephone keypad.
First question will come from the line it Eric handler with MKM partners.
Good morning, and thank you for the question.
What are the focus a little bit expense lines of possible.
It's not too often we see attendance go up domestically, but yet adjusted EBITDA margins declined I don't remember less than that happened.
Was wondering how much of that.
Decline was because of.
C.
And if theres anything else that we should be aware of that causes aside from the fact that.
You did have higher film rents.
Secondly, when I look at your salaries and wages and utilities and other line.
We continue to remain quite elevated on a year over year basis 100.
What are some of the causes of that how long could this continue and are you looking at maybe.
Addressing some of those cost for future quarters.
Eric This mark I think I'll take the first part of that question and then I'll turn it over to Sean.
As I noted in my prepared remarks.
The third quarter was a little unusual it actually played more like a typical second quarter in regards to the concentration of very big blockbuster films.
For example.
In the third quarter the top five films in the third quarter represented.
53% of the box office.
Where top five films last year represented 35% of the box office and and taking that.
Even one step further if you look and say what to the top two movies do they were lion King and Spider Man and those those were creating 550 in $400 million and box office, where the top two movies of last year were ant man and mission impossible, which were creating approximately two.
200 million. So you had a much higher concentration in the big make a block blockbusters at the third quarter and Thats going to cause film rental to go up so that that was a significant portion of the increase costs. There a second portion that all call out before handing it over to Sean is we have been in.
Vesting in our marketing efforts, both the whole digital transformation as well as our relaunch of our loyalty program movie fan and as such you get some level of deferral relative to when points are given out so between those two things that was a significant portion of the increase.
Leasing costs beyond the accounting issue and I'll, let Sean pick it up from there and just to just to round out and put some a couple of specific numbers to it I mean, the effect on the margin rate.
Film rental this quarter was about 90 basis points and we as we mentioned it was kind of an atypical quarter for a third quarter, while lease accounting was about 70 basis points. So if you were to if you had a normalized for those two items margins would be flat year over year.
And just to talk to a few other elements of the question that you asked Eric on salaries and wages as well as utilities and other in the category of salaries and wages about half the growth that you're seeing in the quarter as a result of wage rate and benefit cost inflation increases its combination of inflation minimum wage hikes.
The remainder is pretty evenly spread across just the ramp up of new theaters.
Support of different strategic initiatives. There was also perhaps a little bit of inefficiency in the number this quarter on account of certain films that Didnt fully live up to the full potential that we had expected going into some of our opening weekends in.
In terms of what to expect going forward for those costs, we think that things such as the minimum wage increases and benefits inflation. Those are things that will likely continue we've been seeing those go up about 5% to 7% per year.
Some of the impact of the strategic initiatives, we've been pursuing like food and beverage will just depend on the nature of the program, but at least recently those have contributed about 2% to wait. So some of those things are going to be ongoing whereas other things like attendance factors, obviously will fluctuate in terms of the demand for more more bodies when tenants goes up and fewer.
Bodies when attendance goes down.
On the the utilities and other fronts, a large part of the growth you're seeing there is is kind of connected to other revenues, where we've got increases in service Pete fees paid to third party ticket sellers going up internationally. We've also been seeing some nice success and growth with our flicks.
Screen advertising business, where they've been taking on additional third party affiliates and we book all the revenue they bring in in other revenue, but then the payments we make out to those affiliates goes out through that other utilities and other line. We've also seen just some ongoing growth of credit card fees as more and more people use crew.
Cards to make their payments versus cash so I would say a lot of that stuff is going to continue but it's also being offset on the other revenues line.
Just to just to kind of close out I would say no with your question about actions planned.
Cinemark has historically operated as you know is a pretty lean organization and cost and margins are very much.
The focus of ours and in our DNA, we do have a range of cost management initiatives that are underway to enhance efficiencies.
Talking high level to two of them.
Earlier this year, we implemented a whole new workforce management team, whose primary goal is to streamline our theater payroll processes and generate incremental operating productivity within that that Peter payroll line that you see there. Another is the end of last year, we created a contango.
Segment program that we launched that and it's essentially based on lean six Sigma principles and we expect that's going to yield material benefits for our collective company over the coming years.
Thank you very much thanks, Eric Thanks, I appreciate it.
Your next question comes from the line of Alexia Quadrani with JP Morgan.
Hi, Thank you very much and mark. Thank you for that commentary beginning of the call about the.
Frequent questions you get about streamers and habits change behavior I, just wanted to circle back to that.
And that to your comments about how it does sound like the the frequency.
Results for the frequent moviegoers and therefore, just make they're not impacting the market, but what about the more kind of casual fans you think they might be less inclined to go to the movie because at the streaming options. It sounds like given how given the growth of box office, it probably doesn't sound that meaningful but curious to hear your thoughts there and that the follow up.
Alexia I think I think the one thing that we look at a lot here is going to say strict like I start I think I started that comment with streaming is not new whether its netflix or hulu or or HBIO go we've been living with this and consumers had been enjoying it.
The biggest effect that streaming has made has been the way the television viewership has shifted within the home and what we've seen even over the huge ramp up of Netflix Hulu, Amazon et cetera has been relatively consistent attendance.
And relative to the Ernst and young study that that I pointed out it's not just the heavy.
Movie goers that actually watch more it's also works the other way those that don't go to the movies also don't tend to watch those are the ones that watch straining the least amount. So what would it really is it goes back to something that we've seen for 2030 years and that is high consumption of entertainment meal.
Yes.
Our really the same people so we.
We're we're actually encouraged with what's going on a relative to the streaming platforms. Because we think it's going to continue to provide additional content I think theres going to be some cross pollinization as I noted back and forth.
Disney continues to be extremely supportive where their major theatrical releases that are going to go straight to theatrical and as we look at the importance of the worldwide theatrical business.
The worldwide theatrical business has gained in importance for content providers over the last few years, because you've seen the denigration of the DVD you Havent seen the big increases an S. T. So what's happened is the theatrical revenue has has not only grown in.
I've itself on a worldwide basis, but on a percentage basis be has become more and more popular and I'd like to have one thing to add which is.
For those casual moviegoers, we havent seen an impact on that category of movie goer to date.
Lot of those moviegoers tend to fall into the category people, who are saying, hey, Im going out this weekend, what I want to do you know I haven't been to the movies and while let's go see a movie and as Mark mentioned, a big part of what we're aiming to do is pack in more and more value into that movie going experience. So that when they're trying to decide okay. What.
I don't want to do.
I want to go see a movie in a movie theater, because I just haven't done that and I know, it's going to be a great value for my dollars. So to date not a huge impact on that category. We think that still can be sustained with a great products offering that we can provide in terms of capturing their attention. When they are deciding to leave the home Alexia I know you have a follow up but I just want to add one thing to it.
Really.
This was what motivated us to design and create movie club, which was more for your moderate to significant movie goer. Those that go six or eight times a year and our goal was to get people to go 810, 11, 12 times a year and in fact, that's what we've been able to do and and with the share ability.
I have it with other members of the family or even friends. It's made it a very simple nine or $10, depending on where you live in the country affordable way to go to the movies with family friends and the fact that the credits rollover and never you always can get the benefit of it.
And they never expire allows our our group to actually stay with the membership program for an extended period of time.
Thank you that that's very helpful. And then just circling back to your comments also helping remarks about the out at the ex the investments can you remind us how you balance those investments sort of your finance financial considerations compared to your partnership with IMAX.
Well, we have 15, imax's, which we're very happy to have and we.
We're pleased to have those we've put much greater investment in XD, where we've invested 100% of the capital and we completely control those screens. We can program each and every week exactly as we think which will be most profitable for us.
It's in a very important to our content providers because.
They noted that.
They are dealing only with us and when we when we share the revenue we're sharing the revenue again only with our content provider as opposed to third party. So XD on big movies, and Theres, obviously more and more big movies ex these are our first auditoriums to sell out we're doing presales right now for.
For Star Wars, and the first auditoriums that go are the XD auditoriums. So.
And less the size of our our real estate deal will not allow NXT auditorium were always putting into next year auditory and as I mentioned, we're actually evaluating also where consumer demand as such and where we have a large enough auditorium in screened actually put in second XT auditory.
Yes.
And then we're finding also that that movie club members are twice as likely to upgrade XD, because they're walking in the door with their credit on their phone feeling like they don't have to pay.
Pay any money to walk in so that extra $3 is a very easy upcharge and like I said, we're seeing two times.
The amount of people upgrading to XT, who are moving club members.
Thank you very much.
Thank you we'll exit.
Your next question comes from the line of CAD Biomarin with Macquarie.
Hi, good morning, Thanks for taking my question.
Sean Mark in Brazil, It looks like.
From an economic data standpoint things are starting to move into right direction I think what a lot of people expected.
Given everything that we went through in 2018 and I know you laid out the number of commitments that you have in Latin America, which obviously includes Brazil.
But when you talk to your leaders in Brazil.
Does it sound like maybe the mall development could pick up given some of the economic data points that we're seeing or they're a little bit more bullish outside of what you've kind of announced and this could lead to maybe future newbuilds that we saw in years past. Thanks.
Thanks for the question I was actually down in Brazil, not long ago, and I'm going to use these words and I.
Careful with them, we're cautiously optimistic about Brazil, and we actually think that the country from an economic standpoint is starting to turn the corner.
As you know nearly all of the New theater development. There is within a mall. So it's not completely within our control to just go build a freestanding theater, but as such we do think that in the coming 12 to 36 months that we will start to see some uptick in in mobile develop.
Current there and therefore, the ability to continue to to grow the business.
As you know we have we have the number one market share in that country and it's absolutely our intention to continue to grow and develop that business and hold on to that number one market share.
Okay, Great that's great to hear and then just around the 2020.
Expectations, not the kind of pin you down to a prediction, but this close to two the following year are you comfortable with the amount of output just the number of films that we're expecting for 2020, I know theres been a lot of noise about how the back half will look I'm just trying to gauge. How this is looked in prior years could they are still be some movies that.
Fall into Threeq and Fourq you have the following year that that we're really not talking about at this point. Thank you.
Thats a really good question and we have been looking at it as you could expect very very carefully.
We're excited about just the content you've got you've got to cut to new movies coming from Pixar you get to new movies coming from Marvel You've got three Disney live actions, you've got wonder woman fast and furious minions bond. It's it's a it's a it's a very significant lineup.
And then when you just look at quantity.
In 2020, there's already 10 more movies that have been scheduled for release then we're scheduled for 2019.
So we're looking at at and say Boy Theres, a lot of very strong event titles coming and also it looks like there is going to be a slightly greater.
Quantity of pictures now.
Saying that I always want to go back it's really not a quantity game, it's absolutely a quality game, but.
As we look forward to 2020, I think we're we're pretty optimistic about both.
Thank you very much better luck. Thank you. Thanks.
Your next question comes from the line of Eric Wold with B. Riley.
Thank you and good morning, guys.
And going back to.
From a cost versus you've seen on the wage pressure, there's something that fits.
Continuous going forward as the best.
Offset of that is.
Price increases you're going to pushing our ticket pricing concessions I'm, assuming you you'd rather push up concessions spending on concessions versus ticket prices given.
Given the margins lack of sharing the studio it's I guess might look at the fly the 6% Cagar you're looking at going forward how much of that is actual price increases your expectation versus frequency or basket size and kind of what's been the.
Kind of baseline price increase from concessions going over the last 12 month.
Sure it's.
When you look at kind of the five to six we've generally had probably around a 2%.
Price growth in concessions year generally around there so more of that increase has been generated from new product introductions and just efforts to stimulate incidence of our existing categories.
I'd say, we anticipate that.
That same profile will continue as we look forward as well.
You made the comment that certainly price is one of the tactics, both and I would I would say it's not just concession sales is certainly is ticket price too we're very careful about both.
Because we want to make sure we don't over price.
Either ticket prices or food and beverage to the point, where somebody may not they may choose not to buy so we're careful about that but we'll go after opportunities strategically to increase prices like you kind of saw this quarter with with our ticket prices were which were up over 4%.
The.
So we'll pursue that we'll pursue more efforts to increase volume in our food and beverage as well as our general movie going attendance as well as look for as I mentioned productivity opportunities to combat those just inherent pressures that are in really all retailers operations when it comes to minimum wages and benefits increases.
That's helpful and then kind of circling back on the film rent.
No I appreciate the level of detail around.
Film concentration in the quarter going on a big uptick year over year, just to kind of maybe address some concerns that have been out there I guess.
Has there been any change in.
Yes.
Film scale agreements over the past year, I guess, when a needle and take your wants to you as you may begin to wins. The next round no scheduled for those kind of what would you spreads.
You know theres not theres not a specific round and each studio is negotiated uniquely and the length of term can be can be.
Can be able at a different length of term as well. So we don't we don't anticipate any large.
Changes in scales. It really comes down to like I had mentioned the size of the felt and and.
The biggest issue when you think about is if you look at third quarter of this year. It really performed more like second quarter of this year in regards to the concentration and so the film rental was really pretty consistent with what the second quarter was so theres theres not it theres not a big increase on the horizon and youre going to see it fluctuate.
Eight up and down slightly depending on the concentration of those big make a blockbuster pictures and Thats really what what drove the third quarter.
Further just real quick number one of the thrown in for Sean.
The I mentioned, if you go through the entire 10-Q, but on the comments on the DCP cash flow.
How much of the 20 million been.
And then if you'd be done through Q3, and then of the 30 viability expected for next year.
How should that slow quarter to quarter.
Okay.
Well for this year.
Memory serves we booked about $5 million in the first quarter and there was about $2.7 million.
This quarter in Threeq Q on just given the numbers here, so about $7.9 million.
To date.
So the remaining.
For the rest of the are you can can do the math on the rest of the EUR 7.9 per se. It here, we expect somewhere between 20 for the total year.
As far as it breaks down next year, it will be fairly level set quarter to quarter is what we anticipate in terms of how the spread of next year's distributions will will be will play out.
Perfect. Thanks, guys.
Thanks, a lot.
Your next question comes from the line of Robert Fishman with Moffettnathanson.
Hi, Good morning, I have one for Mark and one for Sean Mark Another one for you on streaming and I. Appreciate your prepared remarks, there with all the new streaming services launching this month and early next year can you just update us on your thinking for holding to the traditional exclusive theatrical window or would you be open to being a little bit more.
Our flexible for certain movies, there John Rose to help keep them. The first window for those types of movies in the theater instead of having them go exclusively to the streaming platforms like we just saw with some of the Warner brothers movies shifting exclusively to tail Max.
Robert I think that we will continue with with our what our current policy has been.
And we've been extremely well supported.
From our studio partners Disney.
Box, Sony Warner Brothers, Universal Lionsgate, Paramount and so.
We've got to.
Basically we have an agreement where.
It plays exclusively theatrical for 74 days and then typically the studio tasted into it.
Electronic sell through for two or three weeks and then they choose to go vivo de of pay television or streaming or whatever they might choose to do and I can't anticipate us, making an exception for one or two movies coming from streaming that would have effect that would would it.
In in effect.
Change our policy for all of our.
Our tried and true.
Significant studio partners, So I don't anticipate.
Any significant change of that.
In the near future.
Okay. Thank you and for Sean just a follow up can you help us think about the margin expectations for both the U.S. and international going forward.
Given all the cost discussion that we've had today and some of the initiatives that you mentioned earlier.
Sure.
I think a big part Theres lots of puts and takes obviously too.
To that but I'll I'll do my best to kind of address some of the pieces. Obviously as you know rubber our business has a highly fixed cost basis. So a big part of our margin is going to just fluctuate with attendance fluctuations I mean that will be clearly the biggest driver.
And that's that's variable quarter to quarter, but that aside certain things will be ongoing.
Impacts to the margin lease accounting as we've obviously talked a lot about is going to be an ongoing item as well as the the reduction of vps for international business overtime.
Rental obviously, that's going to fluctuate just based on we've seen how that can kind of go up and down based on the concentration of blockbusters like this quarter.
The ramp up of some of our loyalty in marketing efforts Mark mentioned in his opening remarks, the that'll have a bit of a near term effect. We think over the next few quarters, but then that should catch up as those things kind of reach more of a steady state.
On the flip side, we expect to continue to drive benefits from those DC IP distributions that are coming forward headway in our strategic initiatives that we think we'll continue to sustain.
Per cap growth and incremental attendance in viewership and in some of the productivity actions I'd say, a large part of the productivity actions that we're working on that I mentioned with regard to kind of workforce management and continuous improvement I'd say some of our early focus on that.
He is deriving.
Improvements to streamlining processes, and redeploying that time to higher value added activity.
That said overtime, we expect a good portion of that will then gravitate to more hard dollar benefits of savings. However, we're not ready to to communicate affirm number on that quite yet.
Okay. Thank you both thanks, Robert Thanks, Robert.
Our next question comes from the line of Jim Goss with Barrington Research.
Good morning.
One more.
Question related to the streaming issue and the notion that.
There could be some cross pollinization.
I recall that the Disney I think in the late Ninetys.
I had the.
Would have some theatrical hits and they would create direct to DVD or direct to whatever whatever form of.
The physical media was at the time and they would be able to do something that would satisfy additional content. The strikes me as something that could be similar in terms of addressing the windows issue and the I Wonder if there any studios are creating strategies around that concept where proof.
Hit that confirms the existing windows might be yet.
Some additional content that they can use in.
You know television.
Certain streaming content.
Jim I can't speak specifically to what the studio strategies are but I would like to just confirm what you said relative to direct to DVD and even before that it was direct to VHS.
If you go back to the the original Lion King or the original Latin there were directed Dvds at followed debt or even going back to the Disney channel, which is that was a total cross pollinization. There was a giant hit on the Disney Channel called High School musical and after a couple of Great Disney Channel move.
Actually the studio turned around and made a theatrical movie.
Hi School musical because it was so popular and generated such a buzz in television it turned into a theatrical so I don't think theres any reason or anything stopping.
Multiple studios whether it be.
What universal hasn't Peacock or or Warner brothers has with HBO, Max or Disney with Disney plus that you can't have products that go literally go both ways.
Probably there is going to be more of big theatrical movies that then get spin offs are television series I think thats the more natural way, but there could also be examples of what happened with high school musical. So this this wouldn't surprise us. It's just it's taking the same idea the same concept and transferring that concept to stream.
And instead of physical media DVD.
Okay and one other question.
Sure.
Hi.
Trickle advertising partner and CRM.
Is creating a shift and the timing of some of its ads and adding this platinum spot in your party to that I'm wondering what your thoughts are.
As to whether or not that works and whether that.
Has anything meaning any meaningful impact.
What you get from your and Sam relationship and maybe also whether you consider something similar with your own venture in Latin America.
Well in in Latin America, right now, we do something similar to that as we now do as does the rest of the world whether its Canada Asia Latin America does vary something similar what NCM really did was too.
Help themselves remain competitive and really match what their major competitor within the United States was doing in regards to.
Timing of of advertising, so we wanted to support them in doing so.
It's brand new literally it. It has just started so I think it's way too early to to make any predictions on what their successes, but we felt like it was the right thing to do and it helps them remained competitive in a very very competitive marketplace and.
So thats up that's really the log in short of it.
Okay.
Thanks, very much action.
Hi, Dan for any questions. Please press star one and your next question comes from the line at Island Gold with loop capital.
Thank you have got a few questions.
First a question on capital allocation with your debt under two times EBITDA and it sounds like your Capex should be declining as your refiners seem to fit well hit 60% by the end of this year any thoughts on how you allocate the capital going forward.
Alan I'll take this when maybe Sean will take one of your others I mean capital allocation. The first thing we always look at is where can we put this money to the best use.
To further drive cinemark business so.
I mentioned or Sean mentioned in his comments.
We have a significant amount of newbuilds, both in the us and in Latin America coming we will have will continue to do some remodels strategically as needed. So thats going to continue to be an important use of capital secondarily, we continue to invest in our food and beverage initiatives because.
They've paid such great dividends.
To us along the way and third we take we take.
Great Pride in keeping our theaters in absolute tiptop shape, so about a third of our of our.
Of our capital allocation goes to that about a third of it goes to newbuilds in about a third of it goes to other EBITDA generating.
Items as as you know we've increased the dividend in each of the last four years, we'll certainly consider doing that again next year with the advisement of our board and.
And also were interested in M&A opportunities as they might come up both.
Within the United States and outside of the United States.
We have historically been.
Very disciplined buyers and we're going to we have every intention to continue to do that.
Thank you and then second in terms of streaming.
Thank you for with you mentioned earlier I'm, assuming in Latin America, you're seeing the same impact as you're seeing in you would have the same thoughts as you have in the United States.
Yes, and also the streaming obviously the streaming timing is is.
Behind the United States, it's not near as quickly there is not near as much high speed Internet.
Installations in the home but.
We've continued to see strong admission growth.
In our stability and some growth in Latin America, even in the midst of net of Netflix rollout over the past several years. So I don't I don't think that.
Latin America would perform any differently and.
Again is particularly important in Latin America, you want to get out of the house and and go into the malls and go into the theater is still one of the great.
Affordable means of family Entertainment, So we would anticipate.
Stability and growth in Latin America in terms of admissions.
And lastly, Sean if you just tell us in dollars how much see impact was for each of the.
See a 42 and the incremental deferred revenue.
Hold on a second the.
The assay 842 impacts was about $6 million.
In the quarter.
Roughly split kind of half and half between.
Our domestic business and.
Our international business and.
Just looking I believe the.
The deferral was probably about it was about $3 million of impact.
Okay. Thanks for taking the questions. Thanks Alan.
Your final question will come from the line Meghan darkened with credit Suisse.
Hi, guys.
I wanted to dig a little bit into the merchandise sales did that you're doing how big of businesses. This now on where can it ultimately go I'm wondering if there are ways to further enhance your relationship with studios that partnering on consumer products sales I think I saw that theres, an exclusive frozen funko pop that will be available at your theaters.
Megan it's a it's a moderate part of our business I mean, we have.
We have a small merchandising displays in every one of our theaters, but just the nature of the business and the size of our lobbies will never allow us to become full on retail stores and you're absolutely right, we try and deal with with each studio.
With a release comes out the things that tend to work. The best are things that are children oriented because parents will walk out with their kids and if it's something for frozen or something for minions those tend to sell very well and then there is some bread and butter stuff like people love to buy blankets and they loved by T shirts on big movies like.
Like Star Wars.
Or a ventures end game. So it's a it's a good business, but it's a moderate business at this point and we don't see it becoming one of the big cores of our.
Of our in theater sales like.
Like.
Food and beverage.
Okay understood and then I just wanted to know.
Ever looked at the impact from the studios marketing strategies on your move the attendance I'm wondering if theres been any impact as the studios shift more of their marketing dollars away from TV and into digital in an effort to be more efficient.
Well that's interesting, we clearly have seen that and the studios continual to improve and refine their their marketing mix.
We see them spending more money on digital we see them wanting to.
Participate and cooperate with us as it relates to the data that we've accumulated in both movie club and movie fans and because we've got such good data on on millions of these customers now we know what they've seen we know what they like.
We know a lot about them. So we've done and continue to do and I'm sure, we'll expand more and more joint marketing efforts with the studios that our digital digitally related utilizing.
Some of the information that we've accumulated so.
They see us as a very important partner and we really enjoyed.
The increase of joint marketing efforts with them.
Right I'm, just wondering if you're missing some of the breadth that comes from the TV spend and the read that comes along with that well you know what they are still on big movies, there is still doing that and.
And I think Dave just they've had the studios have had to work harder and become better marketers. They clearly done that and I don't think that we've missed.
Creating an inventor sizing movies, because they've shifted some of their media into digital and social I think they've just become much more efficient.
In the expenditures of their dollars and I'd also say a lot more sophisticated two in being able to leverage multiple mediums and try to drive maximum box office data. They don't have any incentive to undermine the performance of the topline by shifting away from TV.
Net net that that would work against them. So I think if anything they've just been able to use that become a lot more sophisticated in multiple channels of marketing.
Okay. Thanks, guys good.
I will now turn the conference back over to management for any closing remarks.
Thank you all very much for joining us. This morning, we look forward to speaking with you again following our fourth quarter. Thanks again.
Ladies and gentlemen, this concludes today's call. Thank you all for joining and you may now disconnect.